Buy RCF - Microsec

Rashtriya Chemicals and Fertilizers Ltd (RCF) is a leading urea player in the fertilizer industry. Urea alone contributes 46% of the top line. The company also manufactures and markets other fertilizers such as Complex Fertilizers, DAP, MOP, and SSP as well as industrial chemicals such as Methanol, Ammonia, Ammonium Nitrate Melt, Methylamines, and Ammonium bi-carbonate. Rubber, chemical, pharmaceutical, dyes, leather and real estate industries are the key customers for the industrial products.

- Capacity expansion to boost top-line growth - The ammonia and urea capacity expansion in Q1FY13 is likely to boost the company's top-line growth FY13 onwards. In addition to that, RCF has huge capacity expansion plans in urea, ammonia, nitric acid, SSP, ammonium nitrate at Thal and Talcher, which will be funded with the combination of debt and equity.

- Government divestment is likely to improve performance as well as liquidity in the stock.

- RCF is planning to do long term contract for one of the key raw material named rock phosphate to ensure uninterrupted supply, which is likely to improve margins.

- The expected urea investment policy is likely to encourage capital investment in the urea segment. This could reduce dependency on import that may decrease Govt expenditure too some extent.

- RCF has entered into Joint Venture with FACT in FY13 for manufacturing of plaster wall and panel which are sold mainly to the builders.

At the CMP of Rs.52.4, the stock discounts it's FY13E and FY14E EPS of Rs.5.43 and Rs.6.92 by 9.65x and 7.57x. Due to the expected urea investment policy, Govt divestment, capacity expansion plans and looking out for long term raw material contract, we are bullish on the company, but being a PSU company and its presence in the Govt regulated industry, the implementation of projects might get delayed. Hence, keeping in view the above factors, we have assigned a P/E multiple of 11.42x to arrive at the target price of Rs.62 for the stock. Any positive move in divestment and urea policy may change our target price in the upward direction.

Risk

- Volatility in the price of Rock Phosphate, Muriate of Potash, Mono-ammonium phosphate and natural gas and foreign currency fluctuation may impact profitability

- Irregularity of monsoon is likely to impact the top-line of the company.

- The highly regulated industry may face risk in policy front and its implementation.

Source : Equity Bulls

Keywords