GNFC Limited

Gujarat Narmada Valley Fertilizers Company Ltd. specs are enclosed -
Share Capital - 146.48 crs
Loans - 299.08 crs
Investment - 218.05 crs
Net CA - 292.47 crs
FV - 10 rupees per share
Dividend - 3.75 rupees per share
CMP - 115.00 rupees per share
LY Profits - 224.20 crs

Examining the balance sheet and the financial statements, I find -
1. The estimated profits for this year would be 270 crs which means a fwdPE of 6.24. Consequently, the sales have been growing at 12% over LY while profits are up, 30% over LY.
2. A dividend yield of 3.16% (on current levels) would only go up this year given the increase in profits. I estimate a dividend payout of 4.5 rupees per share which will propel the dividend yield to 4.11%
3. The investments shown in the books is at 218 crs. On going through the quoted investments in the balance sheet, I found that the current value of the quoted investments alone comes to 238.27 crs. These are liquid investments and hence can be included in the NCAV also. Here's a review of the quoted investments -

4. NCAV for the scrip (excl investments) is negative 0.05. By including liquid investments (and only 70% of it; I am keeping the remaining 30% as buffer for any plausible reduction in value), then NCAV comes to 14.43 rupees per share.

Finally, news value ... the big news for the company is the merger of the company with it's subsidary, Narmada Chematur Petrochemicals Ltd. The merger proposal was cleared on 2-Mar-2006.

On first count, it seems that this merger is not likely to disturb shareholder value of GNFC. Some reasons are enclosed -

1. NCPL is a profitable company with positive and growing profits QonQ.

2. Amazingly, the current dividend yield and the P/E ratio of this subsidary are better than GNFC (4.26%, 7.21)

3. A consolidated picture would thus be something like -

a) The GNFC share capital would increase by 20.54 crs to 167.02 crs

b) PAT for this year for the combined corporation would close at 300 crs. Thus the fwdPE would be 6.40.

It's a buy from my end with a stop loss at 100 rupees. But also look at NCPL ... seems to be some kind of arbitrage here ...

An arbitrage opportunity :

For every 3 NCPL share, one gets 1 GNFC share. Now GNFC is at 115 rupees and NCPL is at 35 rupees. Which means, if I purchase 3 shares of NCPL at 35 rupees each, my purchase cost would be 105 rupees. And when it gets converted to 1 share of GNFC, the same 105 would be worth 115 rupees. There are many a caveat to this ... but on the face of it, it's almost risk-free.