RCF offer: Subscribe only for long-term gains

Stock has gained on good monsoon hope; seems fairly priced at current levels

The government is selling a 5 per cent stake in Rashtriya Chemicals and Fertilisers (RCF), a mini-ratna company, through an offer for sale (OFS), in which retail investors can participate on Friday, June 30. Of the 27.58 million shares of a Rs 10 face value on offer, 20 per cent are reserved for retail investors, who will also get a 5 per cent discount on the cut-off price. The floor price has been set at Rs 74.25, which was around 7 per cent lower than RCF’s closing price of Rs 79.90 on Wednesday. Hence, it is not surprising that the stock corrected by 6 per cent to Rs 75.10 levels on Thursday. So, should one subscribe to the OFS?

The company, which has two operating units in Trombay and Thal in Maharashtra, derives most of its revenue from selling nitrogenous fertilisers (mainly urea). It has also expanded its revenue stream and product portfolio through sales of di-ammonium phosphate and muriate of potash. Fertiliser sales accounted for 83.5 per cent of its revenues in FY17. RCF also produces industrial chemicals used in industries such as pharmaceuticals, dyes and pesticides. The segment contributed about 12 per cent to sales in FY17. 

The company’s strength in the urea segment bodes well, looking at a strong demand and the existing deficit in the country. RCF will also benefit from urea reforms and policy initiatives by the government as lower gas prices accrue benefits. Further, the capacity expansions being undertaken, such as the coal gasification-based fertiliser and chemical complex at Talcher in Odisha, expected to be commissioned by 2020, and another Urea project in Iran, will drive growth. However, the operations in the regulated sector have their limitations on execution as well as policies getting delayed, say analysts.

Delays in subsidy payments and reliance on working capital borrowings to fund subsidy receivables as well as foreign exchange fluctuations that affect the cost of imports tend to impact profitability. Thus, despite the decent monsoon last year, operating profits declined 17 per cent in FY17 (largely due to the fertiliser business). 

The monsoon remains an important factor for fertiliser companies like RCF. Expectations of a good monsoon this year have seen the RCF stock almost double from its 52-week low of Rs 40.50 in November, even after considering the recent correction. However, a lot would depend on how the monsoon pans out, its regional distribution, and duration. Hence, market experts such as G Chokkalingam of Equinomics Research say the stock is fairly priced. 

Though growth opportunities exist, there are risks also and hence, only those investors with a longer-term investment horizon may consider the stock, which is trading at over 20 times its FY17 earnings.