Rashtriya Chemicals and Fertilisers (RCF)

 

 

Gas From KG D6 Basin Will Cut Production Costs, Increase Operating Margins

 

THE shares of state-owned fertiliser manufacturer Rashtriya Chemicals and Fertilisers (RCF) jumped to its monthly high of Rs 102.7 before closing at Rs 90.50 on Monday, registering a gain of 5.7% against a 0.1% fall in the Bombay Stock Exchange Sensex.

   News that the company had opened its 300-acre residential colony for redevelopment brought the lustre back to an otherwise insipid stock. Over the past one year, the company had underperformed the market, gaining just 11% against the 23% rise in Sensex.

   RCF put up a satisfactory performance last year as it improved profits in spite of a decline in revenues. The company's topline for FY10 fell 33% to Rs 5,667 crore against the previous year primarily because of the lower fertiliser prices globally, lower imports of urea by government of India and discontinuance of costly feed stock of naphtha, leading to lower subsidy realisation. The net profit, however, surged 11% to Rs 235 crore. The reduction of Rs 55 crore in interest cost to Rs 20 crore proved to be the key growth driver.

   In the past, RCF had to rely on high-price naphtha as the main feedstock for its Thal urea manufacturing plant due to the shortage of natural gas. Moreover, the chemical markets have been down globally. This led to higher production costs that hit the company's operating margin, which has remained more or less stagnant at 6% over the past three years. However, with improving availability of gas the scene is changing for the better .

   In FY11, the company has lined up a capex of Rs 4,400 crore for its ammonia plant at Thal, spread over a period of three years to expand capacity to 3.2 million tonnes (mt) from current 2 mt. Also, the company plans a Rs 500-crore expenditure towards revamping its existing Thal plant. RCF's debt-to-equity position is expected to stand at 3:1. Furthermore, the company is planning to set up urea plants in African countries such as Ghana and Mozambique.

   RCF has a number of projects in the pipeline including the Rapid Wall Project and Clean Development Mechanism (CDM) project. Considering the high 92.5% government stake holding, RCF could approach the capital market again with a follow-on public offer during the year. With a dividend of Rs 1.1 per share, the dividend yield works out to be 1.28% at the current market price. The company is valued at around 22 times its trailing 12-month earnings per share and is one of most expensive stocks in the sector.