NEW DELHI: Shares of GHCL have consistently offered multibagger returns to investors, having rallied 160% in the last one year alone. Analysts at Arihant Capital said the dynamics in the soda ash industry, tightness in underlying prices and capacity expansion potential of the company can offer further upside for the stock as they initiated coverage on the stock with a BUY rating.
The brokerage in its report pegged the stock target at Rs 898, implying an upside of 51 per cent from its Monday's close of Rs 592 on the BSE. No other brokerage covers the stock.
The Gujarat-based company, which is the largest single location manufacturer of soda ash, is likely to benefit from price and volume growth, the brokerage said.
(Source: Stock Edge) "The global and domestic soda ash market is witnessing supply-demand imbalance. Additionally, about 10% of imports are contributed by Russia, Ukraine and the CIS region. Due to the ongoing Ukraine-Russia conflict, the domestic market has further tightened. This will benefit the local soda ash manufacturers like GHCL by supporting price growth," analysts at Arihant said.
Furthermore, the company has completed its brownfield expansion, which according to the brokerage will boost incremental volumes in the soda ash segment. Additionally, the company will be undertaking a greenfield project to expand capacity by 5 lac tons by FY26 which will improve its operating leverage in the medium term, it added.
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"Normally, greenfield projects take 4-6 years for commissioning due to acquisition and clearance issues, but GHCL has already acquired about 70% of the land required and is, therefore, ahead in the race to set up a greenfield project. The company will also gain from raw material security and sustainable margins as the chemical major has captive mines for limestone and lignite (raw materials used for manufacturing soda ash) and sources about 30%-40% of salt internally," the brokerage said.
The company had a low debt to equity ratio of 0.2x in Q3FY22. The brokerage believes that improving sales realization and increasing Ebitda per ton will yield higher and sustainable cash flow from operations which would limit its financial leverage and facilitate future capital expenditure programs.
GHCL completed the divestment of its home textile business to Indo Count Industries for Rs 608 crore at the beginning of this month. The transaction is complete and the cash proceeds will be redeployed into core business areas of the company.
The company has a market cap of Rs 5,479 crore, and hit its fresh 52-week high last week. The latest shareholding data suggests that mutual funds increased their holdings in the stock from 15.11% to 15.55% in the March quarter while FPIs reduced their stake to 15.42% from 16.31%.
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GHCL's top clients include heavyweights like Hindustan Unilever, Procter & Gamble, Fena, Patanjali, Hindustan Zinc, Piramal Glass and Jyothy Laboratories. "Strong balance sheets of these clients will help GHCL to receive timely payments and facilitate its working capital cycle," said Arihant Capital.
GHCL has outperformed peers including Deepak Nitrite, which gained over 44.6%, and Tata Chemicals, which added 28.7%, in the last year. The major players in the Indian soda ash industry are Nirma, GHCL and Tata Chemicals. Nirma utilizes a sizable portion of its production in-house in its detergent manufacturing. GHCL, meanwhile, has the second-largest market share domestically and caters to about one-fourth of the industry.
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Valuation & Outlook The stock is trading at a P/E multiple of 8.6x/7.9x its FY23E/FY24E EPS of Rs 63.7/Rs 69.3, respectively.
The brokerage values the overall company on a SOTP basis, factoring its chemical and textile business. "We appraise the base business of chemicals on EV/EBITDA multiple of 7x its FY24E EBITDA and arrive at a fair value of Rs 800 per share. The textile business is valued by applying 25% discount to its replacement cost, yielding per share value of Rs 98. Accordingly, we have a target price of Rs 898/share for GHCL and recommend a BUY rating on the shares of the company," it said.
