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Company Update: GHCL – Buy – TP Rs.330
Publish date: 29th June, 2018
We recently met the management of GHCL and the company reiterated to remain focused on maintaining growth momentum based on capacity expansion, launching of new products and enhancing operating efficiency to improve profitability. Given the share spurt in soda ash prices globally and increase in costs, the company has taken a price hike in the range of 3-4% in the month of May 2018. We believe strong operating performance from soda ash segment and improving product mix in the textile business, will help GHCL to maintain its EBITDA margin in the range of 20-21%.
Key Highlights
The Inorganic chemical segment recorded highest ever operating performance, driven by an improvement in operating efficiency and firm realisation, but the benefit of the same was partially offset by weak textile performance.
Given the strong demand, the company is further increasing its soda ash capacity by undertaking Brownfield expansion (Phase III) of 1.25LT at an estimated cost of Rs3 bn and is likely to come on stream by end of 3QFY20.
Management expects global soda ash market to grow at 2.5% annually and demand likely to remain strong in India (grew 11% in FY18E).
Various headwinds impacted textile segment performance, resulting into the sharp fall in EBITDA margin to 4.7% in FY18 and EBIT loss of Rs36 mn. To overcome the challenges, the company is focusing on improvement its operating efficiency and changing product mix.
Valuation & outlook
Given the environmental issues in China (as there are still some soda ash plants in East, South and Central China which need to be relocated or upgraded), the industry expects the soda ash production to decline in China and tightness to prevail in the Industry. Backed by higher volume and strong realisation, we expect soda ash business to continue to deliver strong performance and the recovery in textile business is expected over the medium to long term. In the near term, we believe the strong performance from the spinning segment (low cost cotton inventory) shall support the textile segment performance. We marginally tweak our estimates for FY19E and FY20E to Rs36.8 (earlier Rs36.2) and Rs41.6 (earlier Rs41.1). Maintain BUY rating, with a target price of Rs330.
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