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GSFC: Profits surge on low base effect - Views on News from Equitymaster

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GSFC: Profits surge on low base effect
Sep 8, 2014

Gujarat State Fertilizer & Chemicals Ltd (GSFC) has announced the first quarter results of financial year 2014-2015 (1QFY15). The company has reported around 22.1% YoY growth in sales while net profits have surged substantially during the quarter.

Performance summary
  • Sales increase by 22.1% YoY during 1QFY15. Revenues from the fertilizer division increased by 31.3% YoY while that from the industrial products division increased by 12.5% YoY.
  • Operating profits increased 285.2% YoY during the quarter.
  • Net profits increased 1,853.6% YoY due to strong performance at the operating level and fall in interest (-74.3% YoY) and depreciation (-18.1% YoY) expenses.

Standalone performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Income from operations 10,180 12,432 22.1%
Expenditure  9,767 10,841 11.0%
Operating profit (EBDITA) 413 1,591 285.2%
Operating profit margin (%) 4.1% 12.8%  
Other income 140  256 83.4%
Interest 140 36 -74.3%
Depreciation 333  273 -18.1%
Profit before tax 79.3 1,538 1839.8%
Tax 24 456 1807.9%
Profit after tax/(loss) 55 1,082 1853.6%
Net profit margin (%) 0.5% 8.7%  
No. of shares (m)   398.5  
Basic earnings per share (Rs)    2.7  
P/E ratio (x) *    6.4  
*On a trailing 12 month basis

What has driven performance in 1QFY15?
  • Topline increased by 22.1% YoY in 1QFY15. Revenues from both fertilizer and industrial products rose sharply by 31.3% YoY and 12.5% YoY respectively due to base effect. While caprolactam prices declined on a QoQ basis, benzene prices were stable.

  • Operating profits increased 285.2% YoY during the quarter due to strong performance at the top line level. Total expenses increased 11.0% YoY during the quarter, slower than the growth in topline, bolstering profits. Margins registered a strong improvement and increased from 4.1% in 1QFY14 to 12.8% in 1QFY15. Employee cost declined by 2.5% YoY. Segmental profits of both the fertilizer and industrial products division registered huge jump during the quarter.

  • The net profits increased 1853.6% YoY on the back of strong operating performance, decline in interest & depreciation expenses and low base effect. It may be noted that all the four quarters of previous fiscal were weak due to fall in prices of Di-Ammonium Phosphate (DAP) and higher power cost (impacted margins) due to poor availability of gas (forms about 12-14% of the overall input cost) from Reliance Industries Ltd. Hence, profits and sales growth appears to be high in 1QFY15. However, on a QoQ basis, both sales and profits were down by 18.1% YoY and 19.3% YoY respectively.
What to expect?
At the current price of Rs 71, the stock is trading at a multiple of 6.4x its trailing 12 month (TTM) earnings. The company continues to remain a strong player in the caprolactam market. In the current quarter, profitability from both the industrial and fertilizer segment reported sharp jump on a YoY basis due to low base effect. EBIT of the fertilizer segment stood at Rs 931.3 m in 1QFY15 up from Rs 272.9 m in 1QFY14 while that of the industrial product segment stood at Rs 540.1 m in 1QFY15 from a paltry Rs 65 m in 1QFY14. However, as stated earlier this was due to effect. On a QoQ basis, profitability from the industrial segment eroded signifying cost inflation worries. Going forward, fall in prices of benzene, phosphoric acid and gas will be a key for the upliftment of the margin profile.

Further, movement in the DAP pipeline inventory (a higher inventory creates price war), power availability and subsidy allocations from the government will be key triggers for the company. 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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