GNFC: Chemicals Overtakes Fertilizers
|Date||Tipwala Reco||Timeframe||CMP||Target||Exit Decision|
|4-Sep-2016||Buy GNFC||6 Months||Rs. 150||Rs. 200||Time Frame or Target|
Company Background: GNFC is engaged in manufacturing of fertilizers and chemicals. The company also has a small business in the Information technology that supports various government departments. The company reports revenues in 3 of below segments:
- Fertilizer: This includes manufacturing of Urea and imported Urea.
- Chemicals: This includes Methanol, Formic Acid, Nitric Acid, Ethyl Acetate and TDI among others.
- Others Segment: This includes Information Technology business (n-Code)
GNFC has 2 plants in Bharuch and Dahej. The company has evolved from a pure play fertilizer company by forward integrating gas and ammonia used for urea production to manufacture other high margin chemicals. Urea fertilizer business is regulated by government.
Triggers for the Stock:
1. Normalization of Fertiliser Business: GNFC fertilizer has been showing profits except for losses in very few quarters like it did in Q1FY17. This was mainly due to shifting of partial orders in the next quarter (Q2FY17) due to delayed rains in Gujarat. The likelihood of GNFC showing a reasonable profit in fertilizer is high for FY17.
2. Growth from Chemical Business: The chemical business of GNFC is doing well as can be seen from increasing contribution from Chemical business. The share of chemical business increased from 39% in FY12 to 53% in FY16. The trend is likely to be maintained making GNFC more of a chemical company rather than pure play fertilizer company.
3. Improvement in Profitability of TDI Plant: The chemical business of GNFC is doing very well except for the losses from a chemical named TDI from Dahej plant. The TDI plant was envisaged when TDI prices were at multi-year high. By the time, the plant got operational, it faced losses coming instability in operation due to plant level issues and TDI prices in market fell by more than 50% leading to large losses for GNFC from this product. As a result, TDI Dahej faced losses of Rs. 770 crores in FY15 and Rs. 352 crores in FY16.
However, the loss from TDI Dahej in Q1FY17 reduced to only Rs. 34 crores for the quarter. The TDI Dahej plant is now running at 110% capacity utilisation as against 13% capacity utilisation in FY15 and 53% capacity utilisation in FY16. The market price of TDI has also stabilised from its low of Rs. 90 per kg to Rs. 160 per Kg. The prices have only recently improved from Rs. 125 per kg in April2016 to Rs. 150 in July2016 and further increased to Rs. 161 in Aug2016.
This makes a strong case for TDI Dahej plant to achieve a break-even and potentially aid in profitability instead of contributing negatively to the chemical business.
In spite of losses to the tune of Rs. 350 crores from TDI Dahej, the chemical business posted a profit of Rs. 270 crores in FY16. With TDI Dahej now set to contribute positively, there can be huge change in profitability in GNFC chemicals business.
4. Improvement in Profits from Information Technology Business: The IT business of GNFC did a sales of Rs. 146 crores in FY16 giving the highest ever operating contribution of Rs. 37 crores. The management has indicated a further growth of more than 30% coming from this business and therefore will lead to much higher profits in IT segment in FY17.
Valuation: GNFC has a market cap of Rs. 2324 crores with FY16 profit before tax of Rs. 226 crores. If not because of the losses of TDI plant, the profits would be surely more than 500 crores against its current market cap of Rs. 2324 crores. Now that the TDI business seems to be turning to the positive territory, GNFC seems to be entering a phase of positive times. We recommend a buy in GNFC with a target of Rs. 200. This being a part of Trading Idea, the decision to exit is either the completion of time frame of 6 months or the achievement of target price.
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