Years Net sales EBITDA Net Profit EPS P/E

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1 GUJARAT STATE FERTILIZERS & CHEMICALS LTD Result Update: Q4 FY 11 C.M.P : Rs Target Price : Rs Date : 23 rd June 2011 BUY Stock Data: Sector: Face Value Rs. Fertilizers Rs wk. High/Low (Rs.) / Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) Share Holding Pattern 1 Year Comparative Graph Gujarat State Fertilisers & Chemicals Ltd BSE SENSEX SYNOPSIS Gujarat State Fertilisers & Chemicals (GSFC) incorporated in 1962, is engaged in manufacturing of fertilizers and industrial products. It was earlier known as Gujarat State Fertilizer Company (GSFC) which was joint sector enterprise set up by the Government of Gujarat. GSFC's incessant strive for product diversification and value addition has created a product mix ranging from more than 24 brands of fertilizers to petrochemicals, chemicals, industrial gases, plastics, fibers and other products. The Company has marketing network spread across India in states like Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Karnataka,MadhyaPradesh, Maharashtra, Punjab, Rajasthan, Daman and Uttar Pradesh. Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 61% over 2010 to 2013E respectively. During the quarter, the company has reported Net Profit increased to Rs million from Rs million in previous year same quarter. Years Net sales EBITDA Net Profit EPS P/E FY FY 12E FY 13E

2 Peer Group Comparison Name of the company CMP(Rs.) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Gujarat State Fert National Fert Coromandel Intl Zuari Inds Investment Highlights Q4 FY11 Results Update Gujarat State Fertilizers & Chemicals Ltd disclosed results for the quarter ended March Net sales for the quarter moved up 43% to Rs million as compared to Rs million during the corresponding quarter last year. During the quarter, the company has reported PAT increased to Rs million from Rs million in previous year same quarter. The Basic EPS of the company stood at Rs for the quarter ended March Quarterly Results - Standalone (Rs in mn) As At March-11 March-10 %change Net sales PAT Basic EPS

3 Basic EPS of the company stood at Rs

4 Break up of Expenditure Expenditure for the quarter stood at Rs mn, which is around 12% higher than the corresponding period of the previous year. Consumption of Raw Material cost of the company for the quarter accounts for 52% of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year. Other Expenditure cost increased 5%YoY to Rs.1172mn from Rs mn and accounts for 10% of the revenue of the company for the quarter. OPM and NPM for the quarter stood at 31% and 18% respectively from 13% and 5% respectively of the same period of the last year. 4

5 FY11 Performance Net profit of the company has increased at 194% yoy Rs mn from Rs mn of same period of last year. Total revenue for the year stood at Rs mn from Rs which is 18% increased than that of a year ago. EPS for the year stood at Rs per equity share of Rs each. Operating profit of the company stood at Rs mn. OPM for the year stood at 26.76%. Expenditure of the company increased 0.34% YoY to Rs mn. Interest expenses for the year stood at Rs mn. Segment Revenue 5

6 Board recommends Dividend Gujarat State Fertilizers & Chemicals Ltd has recommended a dividend of Rs per Equity Share of Rs. 10/- each (70%). Company Profile With a market presence exceeding 45 years GSFC has carved out an irreplaceable image for itself on the Indian marketing scene. Integration of technologies and brilliant innovative research ensures that the products touch all walks of life. From household consumer to core industrial consumer, GSFC continuously fulfils multi-fold needs of the market. GSFC's incessant strive for product diversification and value addition has created a product mix ranging from more than 24 brands of fertilizers to petrochemicals, chemicals, industrial gases, plastics, fibers and other products. Gujarat State Fertilizers & Chemicals (GSFC) incorporated in 1962, is engaged in manufacturing of fertilizers and industrial products. It was earlier known as Gujarat State Fertilizer Company (GSFC) which was joint sector enterprise set up by the Government of Gujarat. Earlier the equity structure consisted of 49% of State Government and the rest of public and financial institutions. Currently, the State Government has reduced its equity participation to 38.4%. The motive behind formation of this organisation was to support farmers. 6

7 Manufacturing units The company s manufacturing units is located at Kosamba, Sikka and Nandesari. It has marketing network spread across India in states like Andhra Pradesh, Chhatisgarh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Daman and Uttar Pradesh. GSFC has set up several companies such as Gujarat Narmada Valley Fertilizers Company, Gujarat Industries Power Company, Gujarat Green Revolution Company, GSFC Investment and Leasing Company, GSFC-Polymer Unit and GSFC - Fiber Unit. Products GSFC has created more than 24 brands of Fertilizers, Petrochemicals, Chemicals, Industrial gases, Plastics, Fibers and Other products. 7

8 Industrial Products- Under this it manufactures Anhydrous Ammonia, Argon Gas, Caprolactam, Melamine, Methyl Ethyl Ketoxime, Nylon-6, Oleum and Sulphuric Acid. Agro products- In this segment the company manufactures a range of Fertiliser, Bio-fuels and Seeds. Biotech products- The Company manufactures range of biotech products under various brands such as Sardargib, Sardar Eco Green, Sardarvam, Sardartrap and Sardarlures, Sardarneem, Sardaramin and Sardaramin Granules. 8

9 Financial Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in million) FY10A FY11A FY12E FY13E 12m 12m 12m 12m Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value(Rs.) EPS *A=Actual, *E=Estimated 9

10 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in million) 30-Sep Dec Mar Jun-11 3m(A) 3m(A) 3m(A) 3m(E) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Face Value(Rs.) EPS *A=Actual, *E=Estimated 10

11 Key Ratio Particulars FY10 FY11 FY12E FY13E EPS (Rs.) EBITDA Margin (%) 13.95% 26.76% 29.03% 29.00% PAT Margin (%) 6.33% 15.76% 17.51% 17.47% P/E Ratio (x) ROE (%) 11.87% 26.49% 25.12% 21.92% ROCE (%) 14.82% 31.72% 31.34% 28.28% EV/EBITDA (x) Debt-Equity Ratio Book Value (Rs.) P/BV Charts: 11

12 12

13 13

14 Outlook and Conclusion At the current market price of Rs , the stock is trading at 2.87 x FY12E and 2.57 x FY13E respectively. Price to Book Value of the stock is expected to be at 0.72 x and 0.56 x respectively for FY12E and FY13E. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs and Rs respectively. The Company has marketing network spread across India in states like Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Karnataka,MadhyaPradesh, Maharashtra, Punjab, Rajasthan, Daman and Uttar Pradesh. Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 61% over 2010 to 2013E respectively. During the quarter, the company has reported Net Profit increased to Rs million from Rs million in previous year same quarter. On the basis of EV/EBITDA, the stock trades at 1.73 x for FY12E and 1.55 x for FY13E. 14

15 We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. Industry Overview The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first large sized -fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve self-sufficiency in food grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India. The seventies and eighties then witnessed a significant addition to the fertilizer production capacity. Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self sufficiency in food grains as well as in rapid and sustained agriculture growth. India is the third largest producer and consumer of fertilizers in the world after China and the United States. The growth of the Indian fertilizer industry has been largely determined by the policies pursued by the government. The government exercised extensive controls on the pricing, distribution and movement of fertilizers. The industry is capital intensive and the production process energy intensive with the combined cost of feedstock and fuel accounting for anywhere between 55 and 80 per cent of cost of production, depending on the type of fertilizers. 15

16 Determinants of Fertilize Demand Rainfall and irrigation facilities Relative prices of fertilizers Cropping pattern Government policies Rising demand for fertilizers There has been significant growth in the consumption of fertilizers in last three years due to overall good monsoon. The growth in NPK consumption was 9.50% in , % in and 8.40% per cent in Against the robust growth in consumption, domestic fertilizer production has remained range bound in the last decades. The surge in fertilizers demand and stagnant to modest increase in production has widened the gap between consumption and production causing larger dependence on imports. Therefore, the rising demand for fertilizers is providing ample scope for the companies in this sector to increase their production capacity and volumes thereby, driving the growth of fertilizer sector. The installed capacity as on has reached a level of lakh MT of nitrogen (inclusive of an installed capacity of lakh MT of urea after reassessment of capacity) and lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favorable policy environment facilitating large investments in the public, cooperative and private sectors. Presently, there are 57 large sized fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS), Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous 16

17 fertilizers. Besides, there are about 64 medium and small-scale units in operation producing SSP The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilizers in the world. India s production in terms of nutrients (N & P) reached a level of 155 lakh MT in from 0.39 lakh MT in Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in to nearly 184 lakh MT in The Indian Fertilizer industry, given its strategic importance in ensuring self sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/ concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. Burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. The financial year began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers. Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers 17

18 is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favoring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilisers in the world. India s production in terms of nutrients (N & P) reached a level of 155 lakh MT in from 0.39 lakh MT in Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in to nearly 184 lakh MT in The Indian Fertilizer industry, given its strategic importance in ensuring self sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. With the burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. For instance, the financial year began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers. 18

19 Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favouring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. Similarly, in the case of phosphates, on account of the limited availability of phosphoric acid and rock phosphate in the country, domestic units are dependent to a large extent on imports. In view of the limited availability of the main feedstock within the country, fertiliser companies today are exploring the possibility of setting up joint ventures abroad to tie up their feedstock requirements. Though a few joint venture agreements have been signed with respect to supply of phosphoric acid, only a couple of joint ventures have been established with respect to urea. Domestic players have also not been able to enter into long term gas supply agreements primarily due to differences over pricing. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 19

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