Emkay Global Financial Services is bullish on Gujarat State Fertilizers Company (GSFC) and has recommended buy rating on the stock with a target of Rs 530 in its September 28, 2011 research report.
“Gujarat State Fertilizers Company (GSFC), Caprolactam-benzene spreads bounced back & reached all time high of $2465/mt in the first half of Sep’11, surpassing its previous peak of $2390/mt achieved in Mar 2011. Tightening caprolactam supply situation succeeded in pushing caprolactam prices to all time high of $3580/mt while benzene prices remained rangebound resulting in increase in spreads.”
“We believe current all time high spreads are likely to sustain in the near term driven by tightening caporolactam supply situation & recent stabilization in benzene (raw material) prices. Globally, few of the caprolactam plants have announced maintenance shutdown in Oct comprising of 13% (50,000mt) of global capacity which is likely to impact production and squeeze caprolactam supply. GSFC’s chemicals business contributed 31% to revenues and 46% to EBIT in FY11. Key chemicals - Caprolactam and Nylon account for 70% of GSFC’s chemicals revenues. We believe GSFC is likely to benefit from current all time high caprolactam-benzene spreads while backward integration in the nylon - caprolactam chain will also be beneficial for the company.”
“We have upgraded our est by 15% to Rs 84.6 to reflect higher caprolactam prices & subsequent increase in caprolactam-benzene spreads. Driven by strong margins in chemicals & improved fert performance, cumulative operating cash generated (after working cap changes) will increase to Rs 36bn during FY09-13E compared to Rs 18bn from FY04-08. At the end of FY11, GSFC held cash of Rs 6.1bn in its books implying cash/share of Rs 77 which is likely to increase to Rs 15bn (cash/share of Rs 186) in FY13E. GSFC also held liquid investments to the tune of Rs 4.2bn (Rs 53/share) in its books at end of FY11. With 45% of cmp in cash and equivalents and FY12 EV/EBITDA of 2.2x, P/E of 5x, we believe that the stock offers attractive investment opportunity based on compelling valuations. We re-iterate BUY with TP of Rs 530,” says Emkay Global Financial Services research report.
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