Stock Pick From The Fertilizers

HERE IS WHY: 

• Value unlocking through selling of excess land. 
• Rupee appreciation may increase the profitability of the company. 
• It is a consistent profit making and dividend paying company.

The growth of Indian economy in the past underlines the importance of improving the agriculture productivity. Here’s one such company Rashtriya Chemicals and Fertilizers (RCF), which is poised to benefit from the above mentioned facts.

RCF is engaged in the business of manufacturing and marketing of fertilisers and chemicals in India. In the Urea segment, the company enjoys more than 10.7 per cent market share and sells under the brand name “Ujjwala”, while the company sells complex fertilisers (NPK) under the brand name “Suphala” with a market share of 5.4 per cent.

Government of India currently holds 80 per cent of the total stake in RCF. Previously in January 2004, when NDA was in power, they initiated proceedings to disinvest 51 per cent stake in RCF. However, as NDA lost the election in May 2004, the plan never got materialised. Now, as the NDA government achieved a strong mandate, we can expect disinvestment of its stake in the company.

RCF has total 785 acre of land at its Trombay plant near Chembur, Mumbai and its estimated worth is Rs.40000 crore. The government is expected to unlock the value of this excess land by exploring various options. Hence, the company has the option to set up a chemical park, captive expansion plan or sell the land parcel.

Indian fertiliser companies are import dependent. On an average 38 per cent of the total fertiliser raw material consumption is fulfilled through imports. There are some fertilisers like diammonium phosphate (DAP), muriate of potash (MOP), for which 90 per cent of the total demand is met through import. In case of phosphoric acid and Urea the fertiliser companies import around 60 per cent and 25 per cent respectively. As the Indian rupee (INR) is strengthening against US dollar, the fertiliser company is expected to save in considerable manner in their raw material costs. In case of RCF, it imports more than 35 per cent of the total raw material and the company’s profitability is expected to improve in future.

On valuation front, the RCF stock is trading at a TTM PE ratio of 11.6x. At current market price of Rs.53 the stock is trading 8.5 per cent below its 52 week high of Rs.58. The market cap of RCF stands at around Rs.2,700 crore. The average profit after tax for the company in the last 5 years has been around Rs.250 crore, whereas the sales is increasing at a CAGR of 6 per cent in the last three years. Further, since inception RCF was continuously paying dividend with a 5 years average dividend yield of 3 per cent. Considering the consistent financial performance, expected value unlocking of the extra land parcel and expected disinvestment in the company, we can definitely expect good traction over next one year with a price target of Rs.75.