Company Update: GHCL - BUY - TP Rs.330 - Kotak

We recently met the management of GHCL where the company reiterated that soda ash market continues to remain balanced. The EU region likely to remain in oversupply zone with volume from Turkey. Given firm soda ash prices globally, increase in landed cost (i.e. rupee depreciation) and cost inflation, the company has taken a price hike in the range of 3-4% again in the month of Aug 2018 at an average INR/USD of 69 (last hike was taken in the month of May'18). With further depreciation of the rupee, the possibility of one more round of price increase is likely in the coming months. We believe strong operating performance from soda ash segment and improving product mix in the textile business, should help GHCL to maintain its EBITDA margin in the range of 21-22%.

Key Highlights

- The company has taken a price hike in the range of 3-4% (Rs600-650/tonne) w.e.f 16th Aug, 2018. Last hike was taken in the month of May'18. Soda ash realisation in 2QFY19 is likely to be higher by Rs400/tonne, compared to the average of Rs22,731/tonne (includes trading income as well) in 1QFY19.

- The Inorganic chemical segment performance in 1QFY19 was impacted due to the planned shutdown. After restarting in 2QFY19, the volume is back on track. We expect volume of 2.31MT in 2QFY19 v/s 2.61 in 1QFY19.

- Management expects global soda ash market to grow at 2.5% annually and demand is likely to remain strong in India (grew 11% in FY18E). China Production is expected to decline by ~7% YoY in CY18 to 25MT.

- Textile segment performance is likely to face headwinds in terms of increase in cost. However, the management is confident of reporting EBITDA of Rs0.9-1 bn with a higher single digit EBITDA margin in FY19E and 13-14% in FY20E, backed by improvement in operating efficiency and changing product mix. 1QFY19 EBITDA stood at Rs30mn.

Valuation & outlook

- Given China's stringent regulation to curb pollution, possibility of operating plant coming under scrutiny increases further, which may lead to either lower capacity utilisation or shutdowns. Besides this, there are still some soda ash plants in East, South and Central China which need to be relocated or upgraded. Both these factors will lead to decline in production in China and tightness is expected to prevail in the Industry. Besides, this exports from China is expected to decline to 1.75MT in CY18 v/s 2.5MT in CY17. Backed by strong realisation, we expect soda ash business for GHCL to continue to deliver strong performance and the recovery in textile business is expected over the medium to long term. We reiterate BUY, with a target price of Rs.330.

Key Risks

- We don't rule out any softness in future realisation, after the sharp surge, as it may attract lower capacity utilisation to increase the production globally and weigh on soda ash prices. Besides this, incremental global supply, could get dumped in India. Industry estimates, import will continue to account for 20-25% of the domestic demand.

Shares of GHCL LTD. was last trading in BSE at Rs.253.8 as compared to the previous close of Rs. 252.85. The total number of shares traded during the day was 5588 in over 72 trades.

The stock hit an intraday high of Rs. 258 and intraday low of 250.15. The net turnover during the day was Rs. 1414984.

Source : Equity Bulls

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