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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.

, ET Bureau|
Jun 27, 2017, 05.00 AM IST
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Margins should remain firm due the likely good monsoon and better caprolactam-benzene spread.
Gujarat State Fertilisers and Chemicals (GSFC), a mid-cap fertiliser company promoted by the Gujarat government, continues to report decent numbers. GSFC’s sales volume grew 9% year-on-year (y-o-y) during the fourth quarter of 2016-17 due to the good monsoon last year, and the resultant increase in fertiliser demand—volume growth for the fertiliser segment stood at 12%. However, GSFC’s revenue fell 6% y-o-y in the fourth quarter because of fall in prices of key fertilizers like Urea and DAP.

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.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.

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