- Zero maintenance charges
- Zero fees for demat account opening
- Volume based brokerage
Read More >
-
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.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
We offer our research services to clients as well as our prospects.
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
"A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
In case you require any clarification or have any concern, kindly write to us at below email ids:
● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
Also read
- Read our latest stock recommendations
- Check out market strategy research
- Live insights about stock markets
- HDFC Bank Q1 result: Key highlights
- How to attain financial freedom
Don't have an account? Click here to open an account
