Rashtriya Chemicals & Fertilizers OFS: The stock might witness 23% upside from CMP of 75.20

SMC | May 12, 2015, midnight


OFFER BACKGROUND


The President of India (acting through and represented by the Ministry of Chemicals & Fertilizers, Government of India) (the "Seller") announced its intention to sell up to 2,75,84,405 equity shares of the Company of face value of INR 10/- each, representing 5% of the total paid up equity share capital of the Company (the "Offer Shares"), on June 29, 2017 (for non-Retail Investors) and June 30, 2017 (for Retail Investors and for non-Retail Investors who choose to carry forward their bids) in accordance with SEBI circular no. CIR/MRD/DP/18/2012 dated July 18, 2012 regarding Comprehensive Guidelines for Offer for Sale of Shares by Promoters through the Stock Exchange Mechanism, as amended by SEBI circular no. CIR/MRD/DP/36/2016 dated February 15, 2016, SEBI circular no. CIR/MRD/DP/12/2015 dated June 26, 2015, SEBI circular no. CIR/MRD/DP/04/2013 dated January 25, 2013, SEBI circular no. CIR/MRD/DP/24/2014 dated August 8, 2014 and SEBI circular no. CIR/MRD/DP/31/2014 dated December 01, 2014. The particulars of the above offer for sale are attached to this notice. Further upto 5% of the Offer shares (over and above the number of Offer Shares) could be offered to eligible and willing employees of the company at a discount of upto 5% of the Cut-off Price subsequent to completion of the Offer.


Key Findings:


Rashtriya Chemicals and Fertilizers Limited (RCF) is one of the most revered public sector undertakings in India. A Mini Ratna company, it has two manufacturing units, one at Trombay, in Mumbai– which has completed 50 excellent years in the fertilizers and chemicals domain – and the other at Thal in the Raigad district of Maharashtra. RCF has, over the last five decades, displayed a distinctive work culture and management style, a concern for the community and the environment, and of course, an innate affection for the farmer.


The company is planning to undertake major projects by participating in the revival of closed fertilizer units, Additional Ammonia Urea project at Thal, Coal Based Fertilizer Plant at Talcher, and a Urea Plant in Iran for import of Urea to India through a JV.


It is also carrying out a number of energy conservation projects which will improve the profitability of the Company in the coming years. Moreover, according to the management , it is also looking for opportunities for long term off take agreements for procurement of fertilizers, to ensure sustained growth.


The government will sell over 2.75 crore equity shares in Rashtriya Chemicals and Fertilisers (RCF) on 29-30 June for about Rs200 crore as part of its plan to divest shares in PSUs.The government currently holds 80% stake in RCF and will offload 5% through the Offer for Sale (OFS) route.


According to crisil report, it is improving working capital position as a result of lower subsidy receivables, strong liquidity and expected improvement in operating performance over second half of fiscal 2017 and fiscal 2018. Working capital position for urea players including RCF has improved in fiscal 2017 as a result of part liquidation of past subsidy arrears. This is because of reduction in pooled gas prices that led to lowering of Government's subsidy bill as against relatively unchanged subsidy allocation for indigenous urea manufacturers for the fiscal 2017.


Comments:


The company has reported steady growth both in terms of revenue and profitability. During Q4FY17, it has reported 36% growth in bottom line with the help of 11% growth in topline on QoQ basis. Since last 2 quarters, company has reported good top line and bottom line growth. However, overall  the company has reported a reasonably good year for the fertilizer industry with overall volumes rising. The domestic production of Urea witnessed healthy growth, driven by favorable policy changes of GOI and the Gas Pooling policy (which resulted in uniform gas costs for all gas- based units).


Government of India, during the year has mandated 100% production of neem coated urea and according to management , Neem coating ensures slow release of nitrogen resulting in lower usage of urea, prevents leaching of soil nutrient and hinders diversion of urea for non-agricultural uses. This will reduce the consumption of urea by 10-15%. As far as environment is concerned, normal prilled Urea use-efficiency is 30 %( Paddy crop). The beginning of monsoon this year has been very encouraging with widespread good rains in the month of June and July. In case the normal rainfall continues during the balance monsoon period, management expects the systemic inventory levels to come down to more reasonable levels by the end of the kharif 2017 season.


Based on current P/Ex of 24.59, we expect the stock to see a price target of Rs. 92 on its FY18E EPS of 3.75. Approximately, 23% upside from the current market price of Rs.75.20/-.


The Issue Size of the company is Rs 200 crore.


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