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Gujarat State Fertilizers: Profits surge - Views on News from Equitymaster

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Gujarat State Fertilizers: Profits surge

Jun 11, 2014

Gujarat State Fertilizer & Chemicals Ltd (GSFC) has announced the fourth quarter results of financial year 2013-2014 (4QFY14). The company has reported around 10.5% YoY decline in sales while net profits have grown by 129.4% YoY during the quarter.

Performance summary
  • Sales decline by 10.5% YoY during 4QFY14. Revenues from the fertilizer division declined by 30.3% YoY while that from the industrial products division increased by 37.4% YoY.
  • Operating profits increased 55.5% YoY during the quarter.
  • Net profits increased 129.4% YoY due to an almost two-fold rise in other income and fall in interest expenses. Other income increased by 175.7% YoY while interest expenses fell by 62.9% YoY during the quarter.
  • The board of directors declared a dividend of Rs 2 per share for the fiscal under consideration.
  • The debt/equity ratio of the company stood at 0.18x at the end of the year.
  • GSFC commissioned its 29.4 MW wind power project during the quarter.

Standalone financial snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 16,960 15,181 -10.5% 62,533  54,125 -13.4%
Expenditure 15,689 13,204 -15.8% 54,554 48,837 -10.5%
Operating profit (EBDITA) 1,271 1,977 55.5% 7,979 5,288 -33.7%
Operating profit margin (%) 7.5% 13.0%   12.8% 9.8%  
Other income 180 496 175.7% 1381 1,571 13.7%
Interest 127  47 -62.9% 363 451 24.5%
Depreciation 340 381 12.0% 1321 1,453 10.0%
Profit before tax 984 2,045 107.7% 7,677 4,954 -35.5%
Tax 400 704 75.9% 2496 1,532 -38.6%
Profit after tax/(loss) 584 1,341 129.4% 5,181 3,422 -34.0%
Net profit margin (%) 3.4% 8.8%   8.3% 6.3%  
No. of shares (m)         398.5  
Basic earnings per share (Rs)         8.6  
P/E ratio (x) *         9.0  
* On trailing 12 month basis

What has driven performance in 4QFY14?
  • Topline declined by 10.5% YoY in 4QFY14. For the full year revenues declined 13.4% YoY. Decline in revenues from the fertilizer segment (30.3% YoY in 4QFY14 and 26.9% YoY in FY14) impacted overall sales growth. However, revenues from the industrial products segment increased 37.4% YoY in 4QFY14 and 15.8% YoY in FY14. Revenues from the fertilizer segment were down due to lower volumes.

  • Operating profits increased 55.5% YoY during the quarter despite poor performance at the top line level due to a fall in expenditure. Total expenses declined 15.8% YoY during the quarter. However, margins registered a strong improvement and increased from 7.5% in 4QFY13 to 13.0% in 4QFY14. This was mainly due to decline in raw material cost (-19.1% YoY) during the quarter. Employee cost also declined by 74.4% YoY. It may be noted that the employee cost of 4QFY13 was abnormally higher due to provisioning on account of wage revision.

    Segment-wise performance (Standalone)
      4QFY13 4QFY14 Change FY13 FY14 Change
    Fertilizer Products 
    Revenue (Rs m) 12,003   8,368 -30.3% 42,791 31,267 -26.9%
    % share  70.8% 55.1%   68.4% 57.8%  
    PBIT margin 8.6% 7.5%   10.1% 5.7%  
    Industrial Products 
    Revenue (Rs m) 4,958   6,813 37.4% 19,742 22,858 15.8%
    % share  29.2% 44.9%   31.6% 42.2%  
    PBIT margin 3.4% 20.7%   15.4% 12.7%  
    Total*
    Revenue (Rs m) 16,960 15,181 -10.5% 62,533 54,125 -13.4%
    PBIT margin 7.1% 13.4%   11.8% 8.7%  
    *Excluding inter-segment revenues

  • The net profits increased 129.4% YoY on the back of 175.7% YoY growth in other income and 62.9% YoY fall in interest expenses. However, after adjusting for forex gains and losses the profits increased by 90.9% YoY.
What to expect?
At the current price of Rs 77 the stock is trading at a multiple of 9x its trailing 12 month (TTM) earnings. The company continues to remain a strong player in the caprolactam market. Though the industrial products segment had slowed down a bit amidst slowing capex cycle of corporates, the 4QFY14 results were encouraging on both topline and margin front. Further, it may be noted that the company has already taken steps to reduce its power cost by making significant investments in windmill capacities. With the company commissioning 29.4MW of wind power project in the current quarter the power cost are likely to decline in future. This is likely to support margins. Thus, overall the margin profile and growth prospects continue to remain intact.

Since our April 2014 Buy recommendation on the stock it has gone up by 42%. We continue to maintain our HOLD view on the stock. However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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