Phosphoric Acid, Phosphates & Fertilizers Experts

For State owned Gujarat Narmada Valley Fertilizers and Chemicals, best is yet to come

Gujarat State owned fertilizer and chemical company, GNFC’s March quarter financial performance was much better than expected. With the strong last quarter of the fiscal, the company ended FY17 with an adjusted operating profit or EBIDTA of Rs 940 crore, a 63% jump year-on-year. Strong recovery in the prices of its speciality chemical TDI (Toluene diisocyanate) helped despite the chemical plants being shut for 4 months of the year.

FY18 EBIDTA could be much higher, by over 40% say analysts with all its plants fully operational now. TDI prices have held up well. The company is selling the chemical at Rs 225-230 presently told the management to ET and anti-dumping duty introduced in the end of March by the government will provide good support. Lowering interest expense from faster than anticipated repayment of debt will lead to much higher growth at the net profit level. Total debt of the company declined by Rs 750 crore to Rs 1606 crore in the end FY17.

GNFC’s stock has gained 7% after the clarity occurred over some one-off items in its March quarter results. The company reversed an impairment loss provision of Rs 292 crore and derecognized Rs 189 crore on account of change in estimation for measurement of subsidiary. The street was not sure if these items are one –offs or would be recurring. But the company told ET that both the items are non-recurring.

“The amount of Rs 189 crore is adjusted in the subsidy income.”, said the company’s spokeperson. This amount has been deducted from the March quarter’s income reported by the company.

Also the power and fuel cost increased substantially to Rs 315.6 crore from Rs 180.2 crore in the previous March quarter. “The increase in the power cost is mainly due to the fact that all gases need to be part of urea and hence the high cost gas is transferred from Urea back to co-gen utility. Effectively it is a transfer from feed to fuel.”, said the spokesperson. To make it simple, part of raw material cost has been now accounted under the power category in the March quarter. The ratio of combined cost of raw material and power to net sales has remained the same – 62% in March 16 and 60% in March 17(after adjusting for one-offs in the sale).

Earnings estimates
Adjusted EBIDTA for the March quarter was Rs 314 crore (PBT of Rs 21.5 plus one time derecognized amount of Rs189 crore less Rs 292 crore of one time reversal of impairment loss provision plus Rs 103.6 interest and depreciation).

The company managed to achieve this with its TDI plant operational only for 41 days. Incase of TDI plant operational for the entire 90 days, incremental EBIDTA would have been around Rs 55 crore at TDI price of Rs 210 per kg. (TDI production capacity is 200 tonnes per day and break-even is at Rs 150 per kg).

On these assumptions the company could easily do Rs 350 crore EBIDTA for the June quarter and Rs 1400 crore EBIDTA for the entire year on annualisation. At the net profit level, analysts expect Rs 650-Rs 700 crore in FY18.

The company is also positive on the potential realisation of Rs 225 crore subsidy that may get added to the income.

Valuations
Based on these assumptions, the stock at its current price of Rs 300 is trading at a near 7 times its expected FY18 earnings and at one time its expected FY18 book value. Stocks of other speciality chemical companies such as Atul, SRF and Aarti Industries trade in the range of 15 to 20 times.

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