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Gujarat State Fertilizers and Chemicals Equity Research

HomeCompanyGujarat State Fertilizers and Chemicals Equity Research

Date of Research – 27 January 2016

Price – Rs. 70.45

About the Company

Established in the year 1962, Gujarat State Fertilizers and Chemicals Limited (“GSFC” or the “Company”), is a leading fertilisers and industrial chemical products manufacturer. The Company is engaged in manufacturing and marketing fertilizers, petrochemicals, chemicals, industrial gases, plastics, fibers and other products.

GSFC operates in two segments: Fertilizer Products and Industrial Products. Its fertilizer products include urea, ammonium sulphate, di-ammonium phosphate, ammonium phosphate sulphate, nitrogen phosphorus and potassium (NPK) and traded fertilizer products. GSFC Industrial Products include caprolactam, nylon-6, nylon filament yarn, nylon chips, melamine, polymer products and traded industrial products. Manufacturing facilities of the Company are located at Vadodara, Surat and Jamnagar in Gujarat.

*GSFC split its equity in the ratio of 2:10 on 20 September 2012. EPS and P/E numbers are adjusted to reflect the effect of split.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 6,253.30 5,412.49 5,324.57  6,163.33  5,476.88 
Expenses 5,455.37 4,883.67 4,732.33  5,548.49  4,987.83  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 797.93 528.82 592.24  614.84  489.05  
Depreciation 132.05 145.32 100.68  100.72  103.62  
Finance Costs 36.25 45.14 18.01  30.21  64.93  
Other income 138.09 157.05 101.20  64.21  56.31  
Exceptional items –  –  – 
PBT 767.72 495.41 574.75  548.12  376.81  
Tax 249.62 153.24 173.81  168.27  (42.50)
PAT (before Minority Interest and share of Associates) 518.10 342.17 400.94  379.85  419.31  
Profit/ (loss) attributable to Minority Interest – 
Share of profit / (loss) of Associates (8.57) (7.58) (5.16) 
Consolidated Profit / (Loss) for the year 409.51 387.43 424.47  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 12.76 9.77 11.12  9.98  8.93
Net Profit Margin Ratio 8.29 6.32 7.53  6.16  7.66 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015  FY 2016
Share Capital 79.70 79.70 79.70 79.70  79.70 
Reserves & Surplus 3,437.06 3,861.92 4,110.85 4,425.69  4,707.61 
Net worth (shareholders funds) 3,516.76 3,941.61 4,190.55 4,505.38  4,787.30 
Long term borrowings 239.31 224.37 191.95  106.13 
Current liabilities 1,611.17 2,300.30 1,670.14 1,429.04  2,283.68 
Other long term liabilities and provisions 191.08 197.24 162.97 174.72  222.83 
Deferred Tax Liabilities 247.40 239.18 261.66 276.15  255.99 
Total Liabilities 5,566.40 6,917.64 6,509.69 6,577.24  7,655.93 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 1,770.67 2,052.10 2,201.30 2,219.38  2,365.64 
Noncurrent Investments 432.73 672.42 827.42 897.92  933.67 
Current assets 3,104.26 3,953.06 3,229.17 3,182.26  4,096.90 
Long term advances and other noncurrent assets 258.74 240.07 251.81 277.69  259.72 
Total assets 5,566.40 6,917.64 6,509.69 6,577.24  7,655.93 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 32.26 19.09 11.98 12.61  12.56 
ROE / RONW 21.54 13.14 8.17 8.90  7.93 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 6,253.30 5,412.49 5,324.57  6,163.33  5,476.88 
Growth (%) 17.95 % (13.45 %) (1.62 %)  15.75 %  (11.14 %) 
PAT (Rs. Cr.) 518.10 342.17 400.94  379.85  419.31  
Growth (%) (31.61 %) (33.96 %) 17.18 %  (5.26 %)  10.39 % 
Earnings Per Share – Basic (Rs. ) 13.00 8.59 10.06  9.72  10.65 
Earning Per Share – Diluted (Rs. ) 13.00 8.59 10.06  9.72  10.65 
Price to Earnings 4.50 8.65 8.28  6.65  11.64 

Dividend History

The Company has maintained an average dividend yield of 2.58 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. GSFC’s average current ratio over the last 5 financial years has been 1.49 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

GSFC’s average long term debt to equity ratio over the last 5 financial years has been 0.08 which indicates that the Company is operating with a very law level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

GSFC’s average interest coverage ratio over the last 5 financial years has been 44.55 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, GSFC reported a promoter holding of 37.84 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 35.52 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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