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Gujarat State Fertilizers & Chemicals - Promising A Bumper Yield

| 4/5/2012 9:04 PM Thursday

Gujarat State Fertilizers & Chemicals is well regarded as a leading fertilisers and industrial chemical products manufacturer. Recent developments in the fertilisers space will prove to be greatly benefi cial for the company and for investors in the counter, says Prabhat Anantharaman.

KEY POINTS:

  • The Nutrient Based Subsidy Scheme (NBS) for complex fertilisers has not only helped in encouraging the use of complex nutrients, but has also helped to power efficient players with the ability to price their products at a global level and exercise total control on their revenues and profitability..
  • Over the past 50 years, GSFC has stemmed its position as a market leader in caprolactam, AS and melamine, and it is the second largest manufacturer of  DAP in the country, contributing nearly 10 per cent to the total demand.
  • GSFC would be a direct beneficiary of the agricultural reforms and custom duty cuts proposed in the Union Budget 2012, having chalked out a robust capex plan to expand its business activities by setting up new capacities for its DAP, urea and phosphoric acid production.
  • In light of the recent fall seen in the international prices of essential feedstock, the company’s financial fortunes are expected to improve as the benefits of  TIFERT commissioning and modernisation at the caprolactam plant help reduce cost pressures.

Investors had always been very skeptical  about the fertilisers space, citing government intervention and regulations as some of the principle negative factors affecting the growth of companies in this sector. However, this has pretty much changed over a period of time.

The Nutrient Based Subsidy Scheme (NBS) for complex fertilisers introduced in April 2010 proved to be a game changer for the industry. Under the NBS, the government decided to provide subsidies on complex fertilisers based on the amount of nutrients contained in the fertiliser sold. This not only helped in encouraging the use of complex nutrients, but has also enabled manufacturers to decide the selling prices of fertilisers and helped power efficient players with the ability to price their products at a global level and exercise total control on their revenues and profitability.

A good number of multi-baggers have emerged from this space over the past couple of years. One such stock is Gujarat State Fertilizers and Chemicals (GSFC). Since the announcement of the NBS, the scrip has yielded returns of more than 100 per cent on the bourses, while the BSE 500 was down four per cent over the same period. This robust performance of the stock has also been backed by a strong fundamental show and a consistent dividend paying history since 2005, with the latest dividend yield working out at two per cent.

Going forward, there are certain compelling factors that, we believe, would work in favour of this company and help it to continue to create wealth for its shareholders as it has done in the past. Before we dig further into the company’s growth prospects though, let us briefly glance through its business.

The Core Of Its Existence

GSFC, as its name suggests, is engaged in the manufacture of fertilisers as well as industrial chemical products. The fertilisers segment includes urea, ammonium sulphate (AS), diammonium phosphate (DAP), ammonium phosphate sulphate (APS) and other NPK nutrients. The industrial chemicals segment comprises caprolactam, nylon-6, nylon filament yarn, melamine and other polymer products. Over the past 50 years, the company has stemmed its position as a market leader in caprolactam, AS and melamine, and it is the second largest manufacturer of DAP in the country, contributing nearly 10 per cent to the total demand.

In terms of the revenue stream, GSFC generates 65 per cent of its revenues from the fertilisers segment, while 35 per cent is contributed by industrial chemicals. The company has positioned itself as a dual player, giving it the ability to not only propel further upwards at a faster clip, but also to provide itself with protection against a slowdown in any of its business segments.

 

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