Rashtriya Chemicals & Fertilisers Ltd. Investment Research Report

Rashtriya Chemicals and Fertilisers Ltd.

A Brief Value Investing Research Report
20^th January, 2017
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Company history and business:

Rashtriya Chemicals & Fertilizers Ltd. (RCF), incorporated in the year 1978, is a Mid Cap company (having a market cap of  3213.58 Cr.) operating in Fertilisers sector.

Rashtriya Chemicals and Fertilizers Limited (RCF) a Government of India Undertaking is a leading fertilizer and chemical manufacturing company with about 80% of its equity held by the Government of India. It has two operating units, one at Trombay in Mumbai and the other at Thal, Raigad district, about 100 KM from Mumbai. Government of India has accorded "Mini-Ratna" status to RCF.

RCF is one of the earliest units set up in the country for fertilizer production. It manufactures Urea, Complex Fertilizers, Bio-fertilizers, Micro-nutrients, 100 per cent water soluble fertilizers, soil conditioners and a wide range of Industrial Chemicals. It produces 23 lac MT Urea, 6.5 lac MT Complex fertilizers and 1.6 lac MT of Industrial Chemicals every year. The company is a household name in rural India with brands "Ujjwala" (urea) and "Suphala" (complex fertilizers) which carry a high brand equity. RCF has countrywide marketing network in all major states. Apart from the own manufactured products, the Company is also engaged in marketing of SSP and imported fertilizer inputs like, DAP, MOP & NPK fertilizers. Besides fertilizer products, RCF also produces almost twenty industrial chemicals that are important for the manufacture of dyes, solvents, leather, pharmaceuticals and a host of other industrial products.

RCF’s key Products/Revenue Segments include Subsidy which contributed  4574.00 Cr to Sales Value (52.02 % of Total Sales), Neem Coated Urea which contributed  1276.47 Cr to Sales Value (14.51 % of Total Sales), Suphala 15:15:15 which contributed 1041.35 Cr to Sales Value (11.84 % of Total Sales), other products contributed the balance.

RCF's bag of fertilizer, "Saphala

Basic Filtering Criteria:

Rashtriya Chemicals & Fertilisers Ltd Share's market Snapshot

	(Rs. Crore/ Rs. 10 million)	Minimum Required	Actual	Result
1	Turnover	1000	8,649	Pass
2	Market Capitalization	1000	3213	Pass
3	Price to Earnings Ratio	Less than 15	20.25	Fail
4	Price to Book Value	Less than 1.5	1.09	Pass
5	Dividend Yield	4-5%	1.96%	Fail

As per basic value investing filtering criteria Rashtriya Chemicals’s share can be taken up as it passes three out of the five filtering criteria.

Rashtriya Chemicals & Fertilisers Ltd's Factory Panoramic View 

A. Company Performance

Profitability Analysis

Rashtriya Chemicals & Fertilizers Ltd. Profit & Loss Account                                   (Rs. Crore/ Rs. 10 million)	Mar ' 16	Mar ' 15	Mar ' 14
Income:
Operating income	8,649.43	7,713.45	6,587.60
Expenses:
Material consumed	4,185.71	3,691.05	3,289.44
Manufacturing expenses	2,380.21	1,576.37	1,318.92
Personnel expenses	492.44	526.24	442
Adminstrative expenses	1,124.73	1,109.45	970.92
Cost of sales	8,183.09	6,903.11	6,021.28
Operating profit (EBDITA)	466.34	810.34	566.32
Financial expenses	142.32	116.95	131.29
Depreciation	145.13	258.12	141.75
Other income	112.21	74.36	74.04
PBT	291.1	509.63	367.32
Tax charges	99.87	187.57	117.43
PAT	191.23	322.06	249.89
EBDITA % to Sales	5.39%	10.51%	8.60%
EBT % to Sales	2.07%	5.64%	4.45%
Interest Cost as % of Sales	1.65%	1.52%	1.99%
PBT % to Sales	3.37%	6.61%	5.58%
PAT % to Sales	2.21%	4.18%	3.79%

Highlights:

1. Over 50% of sales revenues comprise of subsidy from government, making the companies profitability and cash flows dependent and vulnerable.
2. P&L Account reveals very low profitability margins though there are no losses.
3. Interest cost constitutes a significant proportion of already weak profitability margin.

On profitability parameter the company’s performance appears poor.

Balance Sheet Analysis

Rashtriya Chemicals Ltd. Balance Sheet                                  (Rs. Crore/ Rs. 10 million)	Mar ' 16	Mar ' 15	Mar ' 14
Sources of funds
Equity share capital	551.69	551.69	551.69
Reserves & surplus	2277.43	2159.24	1956.70
Net Worth ( C )	2829.12	2710.93	2508.39
Secured loans	1289.61	964.82	1128.68
Unsecured loans	1466.43	919.63	538.41
Total Loan Funds (A)	2756.04	1884.45	1667.09
Current liabilities & provisions (B)	2100.86	1644.42	1439.37
Total Liabilities	7686.02	6239.80	5614.85
Uses of funds
Fixed assets
Net block	1496.56	1501.04	1619.67
Capital work-in-progress	149.97	61.16	77.19
Total Fixed Assets	1646.53	1562.20	1696.86
Investments	0.19	0.17	17.86
Current assets, loans & advances	6039.30	4677.43	3900.13
Miscellaneous expenses not written off (D)	0.00	0.00	0.00
Total Assets	7686.02	6239.80	5614.85
Total Outside Liabilities (TOL) = A+B	4856.90	3528.87	3106.46
Tangible Net Woth (TNW) (C-D)	2829.12	2710.93	2508.39
Current Ratio	2.87	2.84	2.71
Long Term Debt Equity Ratio	0.97	0.70	0.66
Total Outside Liabilities/ Tangible Net Worth TOL/ TNW	1.72	1.30	1.24

Highlights:

1. Current Ratio is strong at 2.87 but only a marginal improvement over last year, indicating low profits unable to improve liquidity significantly.
2. Debt equity ratio declined from 0.66 in FY 2013-14 to 0.97 in FY 2015-16.
3. TOL/ TNW Ratio too has deteriorated from 1.24 to.

Overall, the Balance Sheet of Rashtriya Chemicals though strong is depicting deterioration.

Fortified entrance to one of RCF's Facilities

Cash Flow Analysis:

Cash Flow Statement                               (Rs. Crore/ Rs. 10 million)	Mar ' 16	Mar ' 15	Mar ' 14	Mar ' 13	Mar ' 12
Profit before tax	291.1	509.63	367.32	380.12	374.46
Net cash flow-operating activity	-635.65	228.05	313.73	-587.68	-155.53
Net cash used in investing activity	-260.14	-216.41	-81.88	229.07	-786.94
Net cash used in fin. activity	813.92	2.87	-208.25	307.07	620.5
Net inc/dec in cash and equivalent	-81.87	14.51	23.6	-51.54	-321.97
Cash and equivalent begin of year	83.23	68.72	45.63	97.17	419.14
Cash and equivalent end of year	1.36	83.23	69.23	45.63	97.17

Highlights:

1. Net Cash Flow from operating activities or free cash flow, which is the backbone of the company’s health are negative (in the red ) in three out of five years.
2. Positive figures in Net Cash used in financing activity indicate borrowings. In those three years of negative operating cash flows the company resorted to heavy borrowing.

Overall RCF’s cash flows show fundamental structural weakness.

Dividend Track Record

Year	Dividend (%) of Face Value of Shares
2016	11
2015	18
2014	15
2013	15
2012	14
2011	11
2010	11
2009	12
2008	10
2007	10
2006	10
2005	17
2004	17
2002	2
2001	4
2000	2
1999	6
1998	5
1997	2

Highlights:

Company’s uninterrupted dividend paying track record is very strong. At least for 19 long years the company has paid dividends without break!

On this parameter the company’s performance is Excellent.

Dividend Pay-out Ratio

	Mar ' 16	Mar ' 15	Mar ' 14	Mar ' 13	Mar ' 12
Profit After Tax (PAT)	191.23	322.06	249.89	280.9	249.24
Equity dividend	48.34	79.08	68.71	68.69	64.71
Dividend tax	12.35	20.22	14.04	14.06	12.53
Total Dividend Pay-out	60.69	99.3	82.75	82.75	77.24
Dividend Pay-out Ratio	31.74%	30.83%	33.11%	29.46%	30.99%

Highlights:

1. It is quite evident from the above that the company is distributing a good portion of its profits as dividends.
2. Unfortunately in an effort to maintain this reputation and in the face of negative operating cash flows, the company is borrowing heavily – in short dividends are paid from borrowed money. This is certainly not good for either the company or the investors in the long run.

On this parameter the company’s track record is excellent, but harmful for the company and its investors.

B. Market Conditions:

Price to Earnings Ratio:

A PE Ratio of 20.25 is not favorable.

Market condition on this parameter is not favorable.

Price to Book Value per Share: With a price to book value ratio at 1.09 the market condition is below the maximum permitted 1.5 and therefore is favorable. Of course the assets are not available on a discount – they are just available at their full value with a slight premium attached.

Market condition on this parameter is favorable.

Dividend Yield:

Dividend yield of 1.96 is poor. The low dividend is caused by low profits. Company has to be praised for shelling out over 30% of profits towards dividends.

Market condition on this parameter is unfavorable, but the company can be forgiven.

Distance from 52 week high: The share price is far away from the 52 week low and very near the 52 week high.

Market condition on this parameter is unfavorable.

Five-year price graph:

Five years price graph of RCF Ltd.'s Share

The price graph clearly shows that after falling steeply for about two and a half years from middle of 2012 again the price climbed steeply from middle 2014, seesawing thereafter.

Therefore current market condition is not very favourable.

Five-year share price return:

Rashtriya Chemicals Share Five Year Returns

Table shows that even though the share price of RCF has appreciated over 34% in the last one year, 78% in the last three years and about 8% lower than what it was five years ago – which means that you are able to buy the share below what was prevailing five years back. But we must understand that the EPS of RCF’s share was 23% more at Rs.4.52 compared to the FY-2015-16’s Rs.3.47.

On this parameter the market condition is not favourable.

C. Final Conclusions:

1. Rashtriya Chemicals Ltd. is a good company but operates in a wrong sector  - agriculture. Receiving government subsidy and erratic weather are two adverse environmental factors inherent to the business model.
2. Profits are low.
3. Operating cash flows have been negative in three out of five years in the past. Company is borrowing to bridge the gap, further eroding profitability margins.
4. Balance sheet ratios though is strong zone are declining continuously.
5. Market conditions are not very favourable either.

D. Final Investment Advice:

Avoid investing in this company.

Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.

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