Faced with high raw material cost and grim market conditions, Gujarat State Fertilizers and Chemicals (GSFC) is set to see pressure on its margins in the coming quarters.
The price of caprolactam, a chemical mainly used in the downstream nylon industry, has touched a three-year low of $2,185 a tonne. On the other hand, benzene, the key raw material for making caprolactam, has seen a spike in prices to an all-time high of $1,467 a tonne, due to tight supply in the US and Europe. Also, another major business, fertiliser, is facing slower demand this season. Kharif sowing was late and this has delayed sowing for rabi.
GSFC is already experiencing stressed margins; these developments add to the pressure and it has cut production. “The present condition is not so good, as raw material costs are high. In such a situation, reduced prices of our products would hurt. For GSFC, demand is not an issue. What we manufacture, we are able to sell. But we are not operating at full capacity,” said a senior GSFC official, requesting anonymity.
Caprolactam and other industrial chemicals generate about 31 per cent of the total revenue of GSFC. “We expect caprolactam prices to recover after December, when things will be clearer for the consuming industry as a whole,” said the official. However, according to a recent report by Espírito Santo Investment Bank Research, “The outlook for caprolactam remains weak, due to a slowdown in the downstream nylon industry and concerns of oversupply, following announcements of more capacities being added globally.”
According to analysts, this market has been more sluggish than initially estimated, as demand for its application in nylon fibres for apparel and automobiles remains low.
“We expect a challenging near-term outlook for GSFC, given it generates over 50 per cent of its bottom line from the industrial chemicals segment, of which caprolactam is a major part,” stated Espírito Santo.
The company has already witnessed an impact on stock valuations over the past quarter. GSFC shares have lost a little over 10 per cent since October 1. On Thursday, these closed at Rs 71.45, up 0.42 per cent from the previous close on the Bombay Stock Exchange.