The Hindu Business Line : GNFC: Buy (High Risk)

INVESTORS with a high-risk appetite may consider taking exposures in the GNFC stock. The recent moves towards a free marketing regime for urea and reviving demand for petrochemicals, suggests that there is scope for a ramp-up in the company's earnings. The stock has moved up from Rs 34 to Rs 41 levels over the past month and now trades at a price-earnings multiple of around seven times its 2002-03 earnings.

These valuations are on a par with those with those of frontline fertiliser and chemical producers. It exposes the stock to some downside risk. However, given the scope for earnings growth, investors can consider allocating a small part of their portfolio to the GNFC stock.

GNFC is diversified, with two main areas of business — fertilisers (mainly nitrogenous) and chemicals. The company also has a small presence in the IT sector. It provides infrastructure facilities to IT companies (it owns an IT complex-InfoTower in Ahmedabad), offers ISP services and manufactures printed circuit boards. GNFC's prospects, both in the fertiliser and chemicals businesses appear bright. But investments in IT have proved to be a drag on earnings.

In fertilisers, urea producers have recently moved from a unit-wise subsidy to one which reimburses a group of units at a flat rate, depending on feedstock use.

The transition has cut back output from high-cost producers. But as the lowest cost producer of urea within its group (fuel oils), GNFC may actually benefit from the widening demand-supply gap.

The company has managed to sharply improve the profits from fertiliser operations both in 2002-03 and in the first quarter of 2003-04.

In industrial chemicals, GNFC is a leading supplier of acetic acid, methanol and formic acid, which go mainly into the manufacture of polyester intermediates and specialty chemicals.

Offtake for these products was healthy, on the back of robust production and price trends. GNFC has operated its chemicals units at utilisation rates of over 140 per cent over the past two years. The company has been supplementing its own production of chemicals with trading activities over the past couple of years.

But an expansion exercise at its chemical units could increase the proportion of manufactured products and improve the margin profile of the chemicals business.

The risks attached to the GNFC stock stem from its attempts at diversification. In 2002-03, while both fertilisers and chemicals delivered higher profits, GNFC's `other' businesses notched up losses of Rs 65 crore.

With the IT investment represented by infrastructure facilities, it is difficult to predict when the business will turn around.

However, given the company's recently-declared intention of focussing on chemicals and fertilisers, losses from this source may remain within manageable limits for now.

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