Rashtriya Chemicals & Fertilisers' (RCF) Q1FY11 results were lower than market anticipations as net sales decreased by 6.1% YoY to Rs 7.9 billion and OPM fell by 146bps to 5.4%.

Lower operating margin along with higher tax rate led net profit to de-grew by 37.8% to Rs196 million as compared to an estimation of Rs 334 million.

Lower subsidy & subdued Industrial products drag result: Switch from Naphtha to Natural gas lead to lower subsidy and inturn lower revenues. Margins for Industrial product's division declined due to pricing pressure and led overall OPM to contract by 146bps.

De-bottlenecking in progress: RCF, through de-bottleneck is increasing its Urea capacity at Thal by 0.27mn MT (linked to IPP) and reducing energy consumption by 0.4Gcal/MT of Urea for the whole unit (completely retained by RCF for five years as per current policy). Additional capacity is expected to become on-stream by Oct'11.

Potential triggers: We believe, govt. focusing on achieving self-sufficiency in Urea production over the next 5-7 years should approve gas allocation for the brownfield growth to the interested players. RCF is front runner in getting sick fertilizer divisions for recovery. RCF is also considering chances to put up Urea plant in gas rich African nation.

At current market price of Rs 84, the company is trading PER of 20.1x & 16.4x and EV/EBITDA of 10.3x & 7.8x respectively for FY11 & FY12 estimates.

De-bottlenecking and brown-field growth should produce an added EPS of Rs2.5 to Rs10.7 depending upon the international Urea prices.

The analysts have maintained 'hold' recommendation for the stock owing to high valuation.