Stock pick of the week: Why analysts are saying GSFC is on good growth trajectory
Impressive volume and net profit growth, commissioning of newer plants that will boost revenue and product diversification has made GSFC analysts’ top pick.
Another factor that negatively impacted revenue was the lower government subsidy for ammonia due to the decline in gas prices, which fell due to the fall in the cost of production. However, lower raw material prices helped GSFC improve its margin on earnings before interest, tax, depreciation and amortisation (EBITDA). And boosted by tax write back, its net profit zoomed 474% y-o-y. Even after adjusting for this one-time event, GSFC’s net profit grew 192% y-o-y.
The company’s fertiliser business is expected to do well in 2017-18 because, according to weather forecasts, this year too the monsoon will be normal. GSFC’s chemical division should also continue to fare well in 2017-18 because the spread between caprolactam and benzene is still in the range of $900-1,000 / tonne, despite the recent correction— higher than average spread during 2016-17. Benzene is used to manufacture caprolactam.
Most of GSFC’s growth will now come from expansions. The company has already commissioned its nylon plant and, at full capacity, this plant should fetch a revenue of Rs 200 crore. Removal of bottlenecks at its Sikka plant should add Rs 150 crore in revenue in 2017-18. GSFC’s other capex projects—melamine plant that is expected to be commissioned by September 2019 and expansion of caprolactam plant that is expected to be commissioned by December 2017—are progressing smoothly.
GSFC has diversified its industrial product segment and its entry into nylon and steps to increase melamine plant capacity will derisk this segment from fluctuations in caprolactam-benzene spread. GSFC’s cost reduction efforts—containing energy cost, rationalising logistic expenses, etc.—are also yielding fruit and this should help it to maintain its high margin in 2017-18. The ammonium sulphate subsidy of `950 crore, earlier withheld by the government, is expected to be released in September 2017 and can be used for funding its 2017-18 capex or for reducing debt—`750 crore as of March 2017.
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