Gujarat State Fertilizers and Chemicals Q3FY12 Earnings Review

The Gujarat government-promoted Gujarat State Fertilizers & Chemicals (GSFC) has reported a 24 per cent (YoY) decline in its net profit for the quarter ended December 2011 at Rs 172.33 crore as against Rs 228.62 crore in the corresponding period of the previous year. The profitability of the company was heavily impacted due to a rise in the input costs and higher employee expenditure. While the increase in input cost has been felt all across the fertiliser space, the higher employee cost can be attributed to a provisioning done on account of wage revision.

The topline performance wasn’t too encouraging either. On a YoY basis the topline grew marginally by 3 per cent to Rs 1,300 crore as against Rs 1,265.14 crore in the corresponding period of the previous year. Both the segments i.e. fertilisers as well as chemicals reported muted topline growth during the December quarter.
 
In our previous analysis (‘GSFC Well Ahead Of Its Competitors’ dated December 19, 2011) we had predicted that the industrial segment results would come under pressure as a result of the falling Caprolactam (used primarily in the manufacture of synthetic fibers) prices, following a weak and bearish macro economic outlook. The impact of this sluggishness can be felt at the EBIT levels of the industrial segment which has not only seen a 30 per cent decline on a YoY basis but has also witnessed massive margin erosion.

As for the fertiliser segment, due to successful procurement of phosphoric acid the company has been able to shore up its DAP production and bring it back on track, which was seen lagging in the previous quarter. This is evident from the 12 per cent (QoQ) rise in revenues and 14 per cent (QoQ) rise in EBIT from the fertiliser segment. In fact the margins have also shown some slight improvement on a quarterly basis. 

Moving on, the company’s overall EBIDTA margins have also seen a drop of 672 bps and currently stand at 22.2 per cent. The PAT margins have dropped by 475 points to 13.26 per cent. It must be noted that even at such margins the company is well ahead of it peers. On the valuation front, at its CMP of Rs 388.4 the counter is trading at a PE multiple of 4.4x its annualised EPS of Rs 88.21.On a P/BV basis it is trading at 0.95x its book value of Rs 355 per share, which looks attractive.

In conclusion, by the initial look at the numbers it seems that the company seems to be facing some headwinds in the industrial segment, while the fertiliser segment looks to be back on track. However, we would be able to take a comprehensive call on the future of the company only post our interaction with the management.