Gujarat State Fertilizers And Chemicals Conference Call Update

On January 27, 2012, Gujarat State Fertilizers and Chemicals (GSFC) had announced it Q3FY12 results. Due to rising input costs and higher employee expenditure, the company reported a 24 per cent (YoY) decline in its net profits. The topline performance wasn’t too encouraging either with the company registering a muted growth of 3 per cent (YoY). While the industrial segment was expected to underperform as a result of the steep fall in the prices of Caprolactam, it was a positive surprise to see the fertilizer business coming back on track.
 
At the time of writing the earnings’ review (Gujarat State Fertilizers and Chemicals Q3FY12 Earnings Review – dated January 27, 2012), we had mentioned that we would take a comprehensive call on the counter post our interaction with the management. Consequently, we attended the GSFC conference call held on February 1, 2012 to discuss further on the December quarter results and the outlook going forward.

As per our interaction with the management, the company has achieved 9MFY12 sales of 1.1 MT (urea, DAP and other complex fertilisers), of which DAP sales were 0.42 MT and other complex fertilisers were 0.43 MT. The commissioning of TIFERT (Tunisian Indian Fertilizers), a JV with two Tunisian companies and Coromandel International, is expected to happen in Q1FY13. This would enable the company secure a regular supply of phosphoric acid for its DAP and other complex fertilisers’ production.

Moving on, contrary to media reports stating that the government may roll back the subsidy on nutrient-based fertilisers (DAP and other complex fertilisers) in its Union Budget 2012-13, the management perceives such a move to be highly unlikely. They have also refuted the possibility that the government may discontinue the supply of cheaper gas from the KG Basin for the production of complex fertilisers.

The recent media reports regarding the fertiliser ministry revoking the subsidy on GSFC’s ammonium sulphate have also been falsified by the management. In short, the management has come out and cleared the air over all the controversies that were impacting the industry and the counter in particular.

Going forward, the company has maintained a buoyant outlook for its industrial products’ segment. With the global Caprolactam prices rebounding in the month of January 2012 from their lows of December 2011, the management has guided that the prices would continue to hold their current range, resulting in an improvement in the margins. Industry experts also believe that the Caprolactam market is to remain bullish due to an optimistic outlook.

As for the fertiliser business, the management remains optimistic about clearing out its current inventory pile-up in anticipation of a pick-up in demand for complex fertilisers. However, here is where the only downside risk for the counter persists. Any sort of inability to clear its fertiliser inventory due to weak demand will lead into an over-supply situation and put pressure on the margins.

In conclusion, keeping in mind its leadership position in both industrial and fertiliser (DAP) segment, we believe that the company will be able to wade through any turmoil in the business environment. With expectations of the industrial segment coming back on track and incremental benefits from the commissioning of TIFERT expected soon, we advise investors to continue holding the counter for higher returns.