Gujarat Narmada Valley Fertilisers

With the last couple of years’ failures fairly priced in, GNFC shares can be considered for a long-term investment

AFTER more than two years of stagnation, the woes are finally getting over for Gujarat Narmada Valley Fertilisers (GNFC). The company has increased its profits in the past consecutive four quarters and has a series of new projects to be commissioned by the end of 2010. The company’s current valuations are likely to fully discount the failures of the past couple of years, which give a fair scope of recovery in the coming months. Long-term investors can hope for a sustained revival in the company’s fortunes going ahead.

BUSINESS: The Gujarat government-owned fertiliser and chemical company is India’s largest producer of basic chemicals, such as acetic acid and methanol and also produces value-added products such as toluene di-isocynate (TDI), calcium ammonium nitrate (CAN) and ammonium nitro phosphate (ANP).

The company has built a 6-storey building with 130,000 sq ft leasable area named ‘InfoTower’ with necessary infrastructure targeting software companies. The company also operates in the IT space through its division named (n)Code Solutions, which provides e-procurement services, designs and builds world-class data centres, offers managed IT services including security services and e-governance solutions.

After a better performance in FY08, the company has been stagnating. Apart from the economic recession of FY09, its revenues and profits were hit by plant breakdowns. Recently, on February 10, 2010, the company had another accident, damaging some of its critical equipment that have stalled its ammonia production that can be resumed only after another couple of months. The company has undertaken a comprehensive plan to be implemented over the next three years to prevent any such future failures.

GROWTH DRIVERS: The company has outlined a capex programme of Rs 4,000 crore for upgradation and expansion of its manufacturing facilities. Under this programme, the company’s nitric acid (WNA) capacity will go up by 37.5% and concentrated nitric acid (CAN) capacity by 50% while it adds a 35 MW captive power plant and 50,000 TPA ethyl acetate unit.

While these projects are scheduled to be completed by December 2010, two more projects will take 2-3 years to finish. The company is expanding its TDI capacity from the current 10,000 TPA to 60,000 TPA by the end of 2011 while the liquid fuel-based urea plant will be converted to natural gas by the end of 2012.

The company has also entered into a joint venture with other Gujarat government companies, such as GSFC and Gujarat Alkalis to set up a specialty chemicals complex at Dahej. A feasibility study is under way for the same

FINANCIALS: The company’s net sales have grown at a cumulative annualised growth rate (CAGR) of 20% between FY03 and FY08 while the net profit grew at 13.8%. However, since then, the profits have nearly halved for the year ended December 2009 while sales fell 23%. The company has steadily reduced its debt burden over the past five years to bring down the debt-equity ratio to 0.17 by the end of FY09 from 0.61 of FY05. During this period, the return on capital employed (RoCE) has consistently remained above 25% except in FY09, when it fell to 16.9%. The company has a strong history of cash flows from operations. Between FY01 and FY08, the operating cash flows were consistently higher than the cash used in investments, which reversed in FY09 with the company progressing ahead with its investment plans.

VALUATIONS: At the current market price, GNFC is trading at a price-to-earnings multiple (P/E) of 9.8 based on its profits for the trailing 12 months. The share price has fallen below its book value of FY09. The current price fairly discounts the company’s failures of the past couple of years.