Gujarat State Fertilizers and Chemicals
Fertile prospects
Better capacity utilisations facilitated by expected improvement in fertiliser policy and gas availability will help the company realise its full potential
| Buy | Gujarat State Fertilizers and Chemicals |
| BSE Code | 500690 |
| NSE Code | GSFC |
| Bloomberg | GSFC@IN |
| Reuter | GSFC.BO |
| 52-week High/Low | Rs 370 / Rs 141 |
| Current Price | Rs 160 (as on 04th June 2008) |
Agriculture is not only an important driver of macro economic performance; it is an essential element of the strategy to make growth more inclusive. The Eleventh Five Year Plan emphasized that a reversal of the deceleration in agricultural growth is a must for the economy's vibrancy. It suggested the road map to achieve 4% agricultural growth target during plan period. Increasing productivity per unit of land, effective use of improved technology, efficient & sustainable use of soil nutrients and water, favorable terms of trade for the farmers, better access to credit and more investment in agriculture should be the major focus areas to achieve the sustainable growth in agriculture. The urgent thrust on increasing the area under irrigation, soil analysis and application of fertilizers as per the soil report and the use of the customized fertilizers will help in removing the stagnation in agricultural production & sluggishness in agricultural growth.
Global food grain demand is expected to outpace supply. The Prices of base crops are increasing and limited land along with increasing population are seeing the demand for fertilizers rising rapidly.
However, rising international fertilizer prices and higher volume of imports would result in a subsidy burden, which is estimated to be USD 22 bn for FY09 by the government. Fertilizer imports are rising due to regulated policy regime wherein farmer pays a fraction of the market price for the fertilizer. Domestic supply also has not kept pace due to lack of feedstocks and highly regulated regime.
India is the third largest producer and consumer of fertilizers in the world and has about 12% share in the Global consumption.
Fertilizer industry has been classified as the priority industry for gas availability
The catalyst for new investment in the sector is expected huge supply of natural gas, which is the most critical input required by the fertilizer companies is Natural Gas.
Reliance Industries is expected to start the supply of KG Basin gas during the second half of calendar year 2008 which will be initially of 40 mmscmd of gas which can be increased to 80 mmscmd at peak level (thus doubling the gas production in India from around 80 mmscmd in FY 2008 to around 160 mmscmd by FY 2010), within one year from the date of commercial production.
Increased availability of natural gas is likely to ensure uninterrupted supply of natural gas for fertilizer companies. This will help them increase capacity utilizations and avail of incentives associated with higher capacity utilizations.
Gujarat State Fertilizers and Chemicals (GSFC) is one of the companies, which will benefit from the same.
Gas will help increase GSFC’s fertilizer production
Fertilizers constitute around 65% of GSFC’s total sales, the rest comes from the industrial products division. Within the fertilizer division, Urea constitutes around 20% of production, DAP around 60% and the rest comes from Ammonium Sulphate, Ammonium Sulphate Phosphate etc.
The company has a production capacity to produce urea to the extent of 364000 tons per day (1123 tons per day), and the ammonia plant has a capacity to produce around 1350 tons per day of ammonia.
The company presently consumes gas of around 1.25 mmscmd. This includes 0.75 mmscmd of APM gas, which is used to produce Urea (the company produced 265000 tons of urea in 2007 depending upon the availability of gas at APM price) and the rest at market determined rate (based on long term contracts, rates may be around US $6-8 per mBtu) to produce ammonia, which are used to produce DAP, Ammonium Sulphate, Ammonium Sulphate Phosphate, Caprolactum, melamine etc.
However, based on the current capacity, the company needs total of 1.5 mmscmd of gas for the optimum production of Urea and DAP. Once the KG Basin gas becomes available, the company can increase production of urea by 30% and DAP by 15%. This will bring additional revenues and profits in line with volume growth. Profitability of fertilizer division can even improve as higher capacity utilizations can help earn higher incentives. Moreover no fresh investments or infrastructure is required on the part of GSFC as it is already using gas, only the availability is below the required level.
Thus, the increase in supply of gas will lead to increase in production of Urea and DAP and improve cash flows for the company.
Phosphoric acid supply and prices were the other concern areas
The company has two plants to produce DAP, one at Baroda (1 lakh tons p.a) and other at Sikka unit (9.5 lakh tons p.a). At its Baroda unit, the company uses Rock Phosphate and Sulphuric acids to produce DAP. The company produces sulphur at its Baroda plant and from sulphur, it manufactures sulphuric acid which in turn is mixed with Rock phosphate to produce Phosphoric acid, which inturn is used to produce DAP.
For its Sikka unit, the company directly imports phosphoric acid to produce DAP from countries like Jordan, Morroco and other South African countries. (as it does not manufacture sufficient sulphur for which gas is required).
However phosphoric acid availability and high price is a big issue for the industry. The prices have increased from around US $350 per ton to US $ 465-470 per ton. As a result of which the company is not able to produce DAP at optimum capacity. In fact, during, Q4 FY’08, the fertilizer segment sales was down by 7% to Rs 477.96 crore, while PBT stood at loss of Rs 24.41 crore as against profit of Rs 2.65 crore in the corresponding previous quarter. High phosphoric acid prices, led to the loss as the company cannot increase the prices of DAP, which is fixed by the government.
The supply is tied up to resolve the availability issue
In order to ensure there is a steady and consistent supply of phosphoric acid and at reasonable price, the company has formed a JV company named Tunisian Indian Fertilizer (TIFERT) to set up a phosphoric acid plant in Tunisia. The country Tunisia is rich with rock phosphate. GCT and CPG from Tunisia and GSFC and Coromandel Fertilizers from India are the promoters of TIFERT. Indian promoters have 15% stake each at Rs 120 crore each while the Tunisian companies hold the balance. The plant capacity will be of around 360000 tons p.a of phosphoric acid and will be equally be divided between GSFC and Coromandel Fertilizer. This will ensure availability of 180000 tons p.a of Phosphoric acid.
The Urea and DAP policy likely to be announced by Government soon
Keeping in view the fact that there has been no significant investment in fertilizer sector for the last 10 years especially in urea due to poor and uncertain return regime, the Department of Fertilizers has been continuously engaging itself with various stake holders including the industry to finalize the structure of new investment policy for the urea sector.
The draft proposal for the new policy was placed before the Group of Ministers for its consideration in Jan/Feb’08. It was decided to form a Committee under Prof. Abhijit Sen, Member (Agri.) Planning Commission to consider all options for attracting investment in urea sector including linkage to import prices.
The final report of the Committee is expected soon. Following this, the new investment policy is likely to be notified with the approval of Government in the near term. This new fertilizer investment policy will assure better prices for the brownfield expansion and increased capacity utilisations of existing plants. For GSFC, better availability of gas and phosphoric acid in future will help it take advantage of this policy.
Chemical division is icing on the cake
The company has a highly profitable chemicals business, with operating margins in the 20-40% range, due to its presence in the value-added downstream products, including caprolactam, MEK-Oxime, Nylon-6 chips and sulphuric acid.
Within Industrial product segment Caprolactum constitutes more than 65% of the total industrial products sales. The company also has ventured into forward integration of caprolacturm and manufactures Nylon 6, NFY, Nylon Tyre cord etc.
The company purchases benzene, the key raw material for Caprolactum from Reliance. Over the past years, the Benzene prices has moved from on an average of around 40000 per ton to more than 52000 per ton, increase of 30%. During this same time, Caprolactum prices increased from 95000 per ton to around 112000 per ton, an increase of 18%. Hence the company faced margin pressure at caprolactum end.
However according to the management, it takes time for the rise in Benzene prices to get fully reflected in Caprolactum prices. Also the prices of Benzene are expected to remain steady and the management expects the Caprolactum margins to reach the previous levels of 25%, if not 30%. Further if the company is able to debottleneck the capacity, for which it is working with the Mitsubishi Group of India, then additional advantage of economies of scale will accrue. The company also has plans to set up a green field expansion for caprolactum project. It is negotiating with various technical collaborators for the supply of latest caprolactum production technology.
Putting up a gas based Methanol Plant, which will be highly profitable
The company has lined up plans to produce methanol from natural gas. Initially, the company aims to produce around 525 tons per day of methanol at a capex of Rs 260 crore, for which they would require additional 0.5 mmscmd of gas. Also the company aims to produce various natural gas products like synthesis gas for which additional 0.25 mmsmcd of gas is required. Overall, around 2.25 mmscmd of gas will be required by the company from April’10, as against current availability of around 1.25 mmscmd of gas.
According to the company, the current demand supply situation for methanol is very favorable as huge supply gap is present, which is met thorough imports. Methanol produced through gas, will also generate high margins for the company. Presently methanol is sold at around Rs 22000 per ton. In India the total demand stands around 500000 tons of methanol as against production of around 240000 tons of methanol domestically. The rest is imported.
Valuable strategic investments
GSFC has investments worth Rs 688.13 crore in shares of various companies like GNFC (current value Rs 449.99 crore), GIPCO (current value Rs 180.01 crore), Guj. Alkalis (current value Rs 19.40 crore). It has other small stakes in Gruh Finance, Gujarat State Finance, IDBI and Mangalore Chemicals. The current market value of these investments works out to Rs 658 crore against the investment cost of Rs 99.47 crore. The current value is worth Rs 83 per share of GSFC.
Financial performance
For the quarter ended Mar’08, the net sales was down by 5% largely due to fall in sales from fertilizer segment. The OPM was down by 20 basis points to 10.3% leading to 7% fall in OP to Rs 81.82 crore. The other income was down by 58% to Rs 8.24 crore. There was an income of around Rs 15 crore of write back of provisions. The interest was up by 3% to Rs 8.71 crore. This will come down going forward as, the cash flow of the company improves and it may not require any more working capital loans. The depreciation was down by 1% to Rs 35.70 crore. The PBT was down by 10% to Rs 45.65 crore. There was a one-time tax rebate in Q4 FY’07 of Rs 19 crore and as a result of which the PAT for Mar’08 looks lower by 44% to Rs 28.56 crore.
For the year ended Mar’08, the net sales were up by 7% to Rs 3557.69 crore. The margins was down by 120 basis points to 13.1% which lead the OP down by 2% to Rs 465.49 crore. The other income was down by 15% to Rs 80.11 crore. The interest cost was down by 25% and depreciation remained unchanged. PBT was lower by 2% to Rs 358.3 crore. After providing tax of Rs 119.85 crore, up by 39%, the PAT was further down by 11% to Rs 238.45 crore.
Valuation
For FY’09, we expect the company to report net sales of Rs 3920.57 crore and PAT of Rs 271.88 crore up by 10 % and 14 % respectively. For FY’10, we expect further improvements in net sales and PAT to Rs 4443.29 crore and Rs 318.67 crore, up by 13 % and 21% respectively. This will give an EPS of Rs 34.1 and Rs 40.0 for FY’09 and FY’10 respectively. At current market price of Rs 160, the scrip is available at P/E of 4.7 times its FY’09 earnings and 3.9 times its FY’10 earnings. Expected better policy regime for fertiliser sector and improvement in availability of gas should help rerate the sector as well as the company.
| | 0403 (12) | 0503 (12) | 0603 (12) | 0703 (12) | 0803(12) | 0903(12P) | 1003(12P) |
| Sales | 2102.49 | 2604.87 | 2832.66 | 3318.72 | 3557.69 | 3920.57 | 4443.29 |
| OPM (%) | 12.1 | 17.0 | 19.6 | 14.3 | 13.1 | 13.0 | 13.2 |
| OP | 253.59 | 441.90 | 554.65 | 473.49 | 465.29 | 509.76 | 586.22 |
| Other income | 77.13 | 63.84 | 109.81 | 93.92 | 80.11 | 85.00 | 91.00 |
| PBIDT | 330.72 | 505.74 | 664.46 | 567.41 | 545.40 | 594.76 | 677.22 |
| Interest | 143.00 | 110.42 | 86.01 | 59.78 | 44.68 | 42.00 | 38.00 |
| PBDT | 187.72 | 395.32 | 578.45 | 507.63 | 500.72 | 552.76 | 639.22 |
| Depreciation | 145.33 | 143.28 | 141.55 | 142.52 | 142.42 | 143.92 | 146.42 |
| PBT | 42.39 | 252.04 | 436.90 | 365.11 | 358.30 | 408.84 | 492.80 |
| EO | 0.00 | 0.00 | 0.00 | 12.00 | 0.00 | 0.00 | 0.00 |
| PBT after EO | 42.39 | 252.04 | 436.90 | 353.11 | 358.30 | 408.84 | 492.80 |
| Tax | -131.78 | 113.97 | 143.10 | 86.20 | 119.85 | 136.96 | 164.10 |
| PAT | 174.27 | 138.07 | 293.80 | 266.91 | 238.45 | 271.88 | 328.70 |
| EPS* | 21.9 | 17.3 | 36.9 | 33.0 | 29.9 | 34.1 | 41.2 |
| *Annualised on current equity of Rs 79.70 of face value of Rs 10 each | |||||||
| Gujarat State Fertilizers Chemicals:- Results |
| | 0803(03) | 0703(03) | Var % | 0803(12) | 0703(12) | Var % |
| Sales | 797.91 | 836.19 | -5 | 3557.69 | 3318.72 | 7 |
| OPM % | 10.3 | 10.5 | | 13.1 | 14.3 | |
| OP | 81.82 | 87.98 | -7 | 465.29 | 473.49 | -2 |
| Other Income | 8.24 | 19.68 | -58 | 80.11 | 93.92 | -15 |
| PBIDT | 90.06 | 107.66 | -16 | 545.4 | 567.41 | -4 |
| Interest | 8.71 | 8.98 | -3 | 44.68 | 59.78 | -25 |
| PBDT | 81.35 | 98.68 | -18 | 500.72 | 507.63 | -1 |
| Depreciation | 35.7 | 36.09 | -1 | 142.42 | 142.52 | 0 |
| PBT | 45.65 | 62.59 | -27 | 358.3 | 365.11 | -2 |
| EO | 0 | 12 | -100 | 0 | 12 | -100 |
| PBT after EO | 45.65 | 50.59 | -10 | 358.3 | 353.11 | 1 |
| Tax | 17.09 | -0.62 | PL | 119.85 | 86.2 | 39 |
| PAT | 28.56 | 51.21 | -44 | 238.45 | 266.91 | -11 |
| EPS* | 14.3 | 23.7 | | 29.9 | 33.0 | |
| *Annualised on current equity of Rs 75.70 crore of face value of Rs 10 each | ||||||
| Gujarat State Fertilizers Chemicals: Segment Revenue |
| Segmental Revenues | 0803(03) | 0703(03) | % of total | Var. (%) | 0803(12) | 0703(12) | % of total | Var. (%) |
| (A) Fertilizers | 477.96 | 512.95 | 60% | -7 | 2360.06 | 2129.55 | 66% | 11 |
| (B) Industrial products | 319.95 | 323.24 | 40% | -1 | 1198.00 | 1189.15 | 34% | 1 |
| Total | 797.91 | 836.19 | 100% | -5 | 3558.06 | 3318.70 | 100% | 7 |
| Segment Results (PBIT) | | | | | | | | |
| (A) Fertilizers | -24.41 | 2.65 | -40% | PL | 145.64 | 156.21 | 37% | -7 |
| (B) Industrial products | 85.05 | 75.09 | 140% | 13 | 243.00 | 244.7 | 63% | -1 |
| Total | 60.64 | 77.74 | 100% | -22 | 388.64 | 400.91 | 100% | -3 |
| Less: Interest | 8.71 | 4.98 | | | 71.78 | 81.68 | | |
| Less: Unallocable expenses | 6.28 | 22.17 | | | -23.98 | -35.7 | | |
| PBT | 45.65 | 50.59 | | -10 | 353.11 | 436.93 | | -19 |
| Figures in Rs crore | ||||||||
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