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Stock Recommendation | GHCL – ACCUMULATE – Target Price : 270
Publish date: JANUARY 23, 2019
GHCL’s Q3FY19 numbers were above our estimates in all parameters. Soda Ash segment continued with its strong performance, supported by higher realisation. This, coupled with, improvement in home textile segment due to changes in customer mix and higher spread in spinning business, resulted in outperformance.
■ The Inorganic chemical segment (excluding trading sales) reported 35.7% EBITDA margin vs 21.5% in 2QFY19 and 33.9% in 3QFY18. The sequential jump in operating performance was driven by Rs638/tonne sequential improvement in realisation.
■ Textile segment continued with the sequential improvement in operating performance for the second consecutive quarter, backed by change in customer mix, higher spreads in spinning supported by better pricing and favorable dollar rate. EBITDA margin expanded marginally from 10.1% in 2QFY19 to 10.5% in 3QFY19.
■ Domestic soda ash market to witness higher supply to the tune of 3-4LT in FY20E from RSPL, GHCL and Nirma, which can weigh on soda ash prices. RSPL has already started commercial production of its 5LT.
GHCL is confident about the prospects for the Soda Ash segment, underpinned by healthy demand from India, which is likely to sustain over the next year. We expect soda ash business to deliver strong performance going ahead, backed by 1.25LT brownfield expansion. However, benefit of the same might get partly offset by subdued realisation due to incremental supply. The recovery in textile business is expected over the medium to long term, shall support the earnings. At CMP, the stock is trading at 7.1x/6.2x FY19E/FY20E earnings. Due to limited upside we recommend ACCUMULATE (earlier Buy), with an unchanged target price of Rs270, valuing it at 6.5x FY20E earnings.
Soda Ash business margin during the quarter (excluding trading sales) improved to 35.7%, supported by higher realisation and improvement in an operating efficiency, which offset the impact of rise in input costs. Trading sales during the quarter was Rs530 mn. The realisation during the quarter was higher, as the company had taken the price hike of Rs775/tonne in the month of Oct’18. Realisation during the quarter was up ~4% QoQ. Sales volume during the quarter stood at 2.3LT. Both these factors led to 18% jump in EBITDA to Rs1.76 bn, with an EBITDA margin of 31.9% (including trading sales). The soda ash volume likely to be higher in Q4FY19, supported by ~20kt of inventory liquidation and incremental volume from 1.25LT brownfield expansion from 3QFY19 onwards and ~20kt of inventory liquidation.
Management stated that close to 3-4LT of incremental supply from RSPL, GHCL and Nirma likely to hit the market in FY20E, which might weigh on soda ash prices in the domestic market. RSPL has already started commercial production of its 5LT soda ash facility. The Industry likely to focus on the export market (current export volume stands at 1LT annually) in the coming year to supply excess volume overseas or substitute imports in the domestic market, which is in the range of 9-9.5LT annually. In both the cases, the possibility of earnings current margin of ~30% seems difficult due to lower prices or transportation cost, we opine. However, management indicated that, despite the incremental supply, the company would continue to report ~30% EBITDA margin.
Revenue from the textile segment grew 6.3% QoQ to Rs3.24 bn, supported by the higher volume and better pricing. Pricing during the quarter was also supported by favorable dollar rate, EBITDA margin improved sequentially by 40bps to 10.5%. Going ahead, we believe that, an improvement in product mix and higher capacity utilisation, textile segment EBITDA margin is expected to remain in the range of 9-10%. We expect spinning segment to witness margin compression due to lower spreads between cotton and yarn, but the same can be beneficial for home textile segment.
GHCL is one of the leading producers of soda ash in India, with an installed capacity of 980,000 tonnes of Soda Ash, operating at 97% capacity utilisation (highest in the industry), with a market share of ~25% of annual domestic requirements. Driven by the backward integration, the company enjoys a higher EBITDA margin in the range of over 30%. The company has undertaken another brownfield (phase III) capex of Rs3bn, to increase capacity by 1.25 lakh tonnes by end of FY20E and the benefit for the same would accrue from FY21 onwards. From the long term perspective, the company is also setting up a Greenfield project of 5LT.
GHCL is one of the leading manufacturers of soda ash with 25% domestic market share. There are two main business verticals, i.e., Inorganic Chemicals and Textiles. Inorganic chemicals mainly produce Soda Ash which caters to detergent & glass industries whereas Textile vertical is well integrated and covers right from spinning of fiber, weaving, dyeing and printing till the finished products for exports. The company exports its product mix portfolio to US, Europe, Australia, etc. GHCL has one Soda Ash plant in Gujarat and one salt refinery in Tamil Nadu. It has three textile manufacturing plants- two in Tamil Nadu and one in Gujarat.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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