Investors can avoid the offer-for-sale (OFS) issue of state-owned fertiliser producer Rashtriya Chemicals and Fertilizers (RCF) scheduled on Friday. The floor price of Rs 45 implies a 2.5 per cent premium to the stock’s closing price of Rs 43.8 on the NSE. The offer has no sheen since the exchange traded price of the stock is lower. At this price, the Government could mop up over Rs 310 crore from the disinvestment.

The floor price values the stock at 7.7 times its FY-14 earnings, translating into a 12 per cent premium to its competitor Chambal Fertilisers.

RCF, a leading urea producer, also manufactures complex fertilisers and industrial chemicals such as methanol and methylamines.

Rs 18,700-cr outlay

The company has invested over Rs 480 crore to expand urea capacity at Thal (Maharastra) by 10 per cent to 2.3 million tonnes (mt) and reduce energy consumption.

The company has also made public its expansion plans, which include a 1.27 mt brownfield urea plant at Thal, a joint venture ammonia-urea plant at Ghana and a 5 lakh tonne single super phosphate plant at Thal among others.

The total outlay for these projects is estimated at Rs 18,700 crore.

But, RCF being a PSU, firming up of these projects is contingent on timely Government approvals. Hence, benefits from the proposed investments may not accrue in the near term. Further, given the substantial quantum of capex, funding through a combination of debt and equity may squeeze the return ratios in the near term.

Urea being a highly regulated commodity, a liberal policy regime may be critical to drive up RCF’s performance.

The proposal to increase urea sale price by 10 per cent and raise the minimum fixed cost reimbursement to Rs 2,300 for a tonne of urea are yet to see the light of day. If approved, this can lead to a 20 per cent jump in the company’s FY-14 earnings.

(This article was published on March 7, 2013)
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