>GUJARAT STATE FERTILIZERS & CHEMICALS (ICICI SECURITIES)

Fairly valued

GSFC saw 245% rise in Q4FY09 PAT to ~Rs984mn vis-à-vis ~Rs286mn in Q4FY08, higher than I-Sec estimates. This was owing to: i) benefit of ~Rs548mn in fertiliser division, pertaining to prior period and ii) Rs580mn excise reversal on GSFC winning an old litigation. Adjusting for these one-time items, overall results were inline with our estimates. Caprolactum division saw loss for a consecutive quarter, of ~Rs209mn, mainly owing to weak demand, given global slowdown in auto industry. DAP business significantly gained from the change in fertiliser policy in FY09, which allows import parity pricing. GSFC saw ~109% rise in FY09 PAT to ~Rs5bn, which is unlikely to sustain. We downgrade our earning estimates owing to: i) considerable fall in international DAP prices that would impact revenues ii) loss in caprolactum business iii) inventory- & high raw material costrelated pain impacting DAP business in H1FY10. Our SOTP evaluates GSFC at Rs163/share (Rs168/share earlier) based on: i) core business valued at Rs132/share, assuming FY10E P/E of 7x on adjusted EPS & ii) investments at Rs31/share. The stock has already outperformed and risen 128% since January’09 that we believe fairly valued; downgrade to hold.

■ GSFC may require contributing 30% PBT for social development fund from FY10. Although GSFC has not yet contributed the required 30% PBT towards Gujarat government’s social development fund in FY09; this may happen FY10 onward

■ Pain in DAP business expected in H1FY10. We expect FY10 revenues to decline, in line with fall in international DAP prices. Inventory write-down and temporary price mismatch may lead to pain in H1FY10 in DAP business.

■ Caprolactum business may not revive in short term. Uncertainty in the global auto industry has made an impact on caprolactum business demand; however, cheaper input prices have helped the company limit losses.

■ Stock outperforms – 128% returns since January ’09; downgrade to HOLD. We downgrade our FY10E EPS ~18% owing to issues in the DAP and caprolactum businesses. We value core business at FY10E P/E of 7x on adjusted EPS and investments at Rs31/share based on market value. The stock has outperformed since January ’09 and, we believe, is fairly valued at current market price. Downgrade to HOLD. Key upside risk to our call is GSFC not requiring 30&% PBT contribution to the social development fund.

To see full report: GSFC