GNFC - Turnaround Taking Hold

(insanemaverick) #42

Hey buddy, thanks for actually digging out the specific numbers and presenting it here in such a coherent manner. I am just extremely lazy with these things. I like to write more in a story format. So, at the outset I would like to thank you for doing all the grunt work. Appreciate it. If somebody reads my your post after mine, that is pretty much all he/she needs to know to understand the pros and cons of this story. Brings a much better perspective to the discussion.

Coming to the points raised by you, the company presents its financial numbers in a certain way. What I have observed is that in good quarters, they book all the balance sheet provisions and sort of expense it. This results in improved balance sheet strength and ensures that they don’t have to take this hit during a bad quarter. Now what this does is that optically reduces their profits (with correspondingly lower impact on cash flows because most of these are non cash items). Similarly, in the bad quarters, they book these one off gains, which sort of results in consistency of results across quarters. I personally like these kind of managements as it gives me some predictability into their future numbers. For example, I am quite confident that they won’t report any loss quarter for at least the next 6-8 quarters, because of the capital subsidy and contingent gains due which they will book if at all they have a terrible quarter. If not, this will be sufficient to wipe off their long term debt.

Regarding the point of why they don’t want to do capex and want to pay off their debts first, I am fully convinced and I am in the management’s camp here because of 2 reasons. The first is as somebody who manages a business myself, I can completely identify with them when they say that the scars of 2013 and 2014 are too recent to forget. When I have two bad years like that, I would first like to make my balance sheet debt free. That is what any prudent businessman would do. Like you said, the chemical prices may be at their peak. We don’t know. But in any commodity industry, it is always a bad idea to capex at the peak of the cycle. This is the prefect recipe for disaster.

So, despite concurring with you on most of your observations, why am I still a buyer here? Simple, because cash flow is fact, profit is an opinion. Even if you knock off Rs.500 Crores from the cash flow as unsustainable, you are still left with Rs.1500 Cores of cash flow and cash flow / market cap ratio of 4, which is extremely low in my view for a company which has such a strong market position in most of its verticals.

Finally, regarding the sustainability of chemical prices, that you may very well turn to be right. But who knows. Many of us had the same view 2 quarters back. But, the story just keeps on getting better. Think about it this way- Suppose you are a global chemical/auto/plastics/ pharma giant who sources these speciality chemicals.Before getting into a sourcing agreement with any factory in any country, there is a long process of due diligence and approvals and this takes anywhere between 4-6 months at least. Now if you have complete dependency on China and suddenly their government decides to close these factories abruptly, what would be your reaction. To mitigate your risks, you will first of all look for backup agreements with suppliers in other geographies/ countries to reduce the concentration risk. That is exactly why the Indian manufacturers of key speciality chemicals are looking at potentially very large market opportunity even if China comes back gradually into the market. Its a credibility issue end of the day.

You know investing is all bout milking and learning from past mistakes. I was an early investor in Avanti Feeds as I had quite a few connects in the industry. i bought in at 300, sold it at 1500. A potential 50x (as of LTP Friday EOD) reduced to just 5x because of similar fears about how long will the shrimp prices sustain if the other competing countries come back into the market after recovering from the disease related issues in their backyard. These countries are yet to get back to normal last I checked. Avanti Feeds and Bajaj Finance are the two biggest blunders in my life, wherein, in my own intellectual wisdom I decided to question the power of a large economic and business trends. The amount of capital that I had invested in these 2 companies in 2012, If I would have just sat quiet till today, I would have retired to somewhere in Carribean island and not been writing this post at 1pm in the night.:sleepy::sleepy: Anyway, the point is I have learnt to not question these long term economic and business trends as they are very powerful. When an entire industry gets disrupted in a particular country, it becomes extremely difficult for the original guys to come back into the game meaningfully. And the beneficiaries of this disruption improve their balance sheet to such an extent that it becomes difficult to dislodge them. Who knows, I may be completely wrong. But this is my view at this point of time. As they say, beauty lies in the eyes of the beholder. If you can name me 3,4 companies of similar size as GNFC trading at Market Cap/ Cash Flow of 3-4x, without any management issues and a reasonable moat, I would love to buy them too.

P.S: On a side note, the sustainability of specialty chemical prices is an issue for all the other speciality chemical players in the industry too. I also think there is at least an arbitrage opportunity here for valuation catch up with all other speciality chemical and fertilizer players. Let’s see the market’s opinion this. I think if the re-rating has to happen it will be done in the next 2 months. So we should get a confirmation soon. Like I said, my humble view is that this company deserves a valuation of Rs.15,000 crores. I loved the way you presented your views though. Would look forward to reading your posts in the future. Thanks.

(suhagpatel) #43

@maverickroger @Mridul As i understand they use Natural gas as input for fertilizers now as per Govt mandate. Currently natural gas is not under GST. There were some talks recently to bring natural gas under GST as companies are not able to claim input credit on that since its out of GST. What are the chances that natural gas will be brought under GST in near future and how much that can have an impact on fertilizer companies in general?


(Mridul) #44

That’s anyone’s guess.

Guys, regarding methanol, i think GNFC does have ~2,50,000 MTPA capacity, which was not being used, as Methanol production was unviable in India (due to cost and RM availability reasons)? I think they discussed about this in one of the concalls. (correct me if i am wrong here)

Government is forming a policy for Methanol blending with Petrol pretty soon. I know Deepak Fertilizers and RCF are major players in Methanol. Does anyone understand the dynamics of Methanol business and how this policy can benefit GNFC?

(suhagpatel) #45

Policy to be announced during winter session starting 15th December as per CNBC Awaaz today morning.


(suhagpatel) #46

GNFC CMD giving useful information on current state of affairs on TDI and how the company is doing so far.

Few queries on Methanol also answered. Crisp and clear info.


(rahulshares) #47

Co CMD looks like a salesperson and the channel is helping him sell. Why give such a overly optimistic picture… Let results do the talking.

(suhagpatel) #48

I don’t see anything wrong in CMD coming and appraising about the company. In fact, all managements do that.

Coming back to CMD as salesperson, if you have gone through their concalls, you would realize that GNFC has got one of the most conservative managements on the street. In fact, in the above posted video, its the CMD who is asking the anchor to be cautious and not get carried away by the euphoria of high chemical prices. He clearly mentions that they have many divisions of business and street should not be excited only for one division while factoring in the growth of the company as sometimes other divisions play spoilsport.

Disc: Initiated a tracking position.


(rahulshares) #49

Yes he adds word of caution in the end. But the management is overly optimistic in this video. Interviewer asks about TDI, he goes on to add about other chemicals and Fertilizers without even the question being about that. I find no need for managements to be giving such bytes to news channels. He even mentioned once - Results have not yet been declared so cannot say. It was funny as even qtr is not over yet.

Concall was quite helpful though, balanced.

(suhagpatel) #50

He is constantly reminding everyone that GNFC cannot be rated only based on TDI. Market was overenthusiastic on TDI in recent past and i found CMD absolutely spot on when he said that its not a TDI company as it has more than TDI which is contributing to its top and bottom line.


(suhagpatel) #51

As guided by the CMD, GNFC doing record productions in Chemicals.

Highest Monthly production in Fomic Acid and Methyl Formate. Highest ever daily sales of Urea. Term Debt of Rs. 217 Cr has also been prepaid.


(Raj A A) #52

It is a known fact that their TDI plant has not stabilised fully and hence they are skirting the questions pertaining to TDI. Re rating of GNFC is possible only when TDI plant has come out of all their troubles and started contributing to their bottomline. It is a welcome change that we are getting regular mails regarding the performance of the company.

Discl: Invested and trimmed the position after Q2 results.

(Mridul) #53

There has been significant slowdown in domestic values for Acetic Acid in domestic market. Since past few prices surged up due to limited supply on back of winter season issues. Now the market has suddenly changed its position. Last few weeks prices were hovering in the range of Rs.50-52/Kg for Kandla and Mumbai port.

Yesterday prices declined to the level of Rs.47/Kg for both ports, reduced by Rs.5/Kg for bulk quantity.

***Cannot predict future cash flows in chemical companies as one cannot predict chemical prices. Things were looking very rosy till last week for Acetic Acid, and now within a span of one week, price has corrected 10%.

(nkabra) #54


Thank you for your post about the decline in prices. Do we have some data to share how much impact this can have on GNFC margins…

GNFC CEO has been a lot on TV talking about Neem plant which can be 500 cr. business. Anyone has idea when this will be operational and the basis for these numbers.

The price had gone up two months ago to 540+ and now it is moving sideways around 480.
Does anyone have better knowledge based on talks with management

(Krishnendu) #55

Does anyone know how much Methanol story proposed by the Govt will going to play for GNFC ?

(hemtan100) #56

TDI prices down from a peak of 3.05 lakh per tonne in November to 2.75 lakh now.

(nkabra) #57

GNFC results will be out next Tuesday. The stock moved up 55 Rs. today. Any updates on analyst concalls

(suhagpatel) #58

You can check BSE/NSE for details. GNFC hiked TDI prices by 8% or Rs 26/Kg effective today. That triggered the move in the script.


(jajushobhit) #59

TDI-II has been shut indefinitely due to leakage.

(lineofequity) #60

I am also watching this counter from Methanol perspective after having read the presentation by NITI Ayog

(nkabra) #61

I assume one TDI plant TDI-I is functioning. The TDI-II plant has been shutdown indefinitely. Does anyone have insights on how much will it impact the sales and revenue margins in the current quarter.