Re: {LONGTERMINVESTORS} Deepak Fertilizers - Thread

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RAJESH DESAI

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Aug 30, 2012, 12:23:32 AM8/30/12

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DEEPAK FERTILISERS & PETROCHEMICALS CORP: The company's planned $350-mln ammonium nitrate manufacturing project in South Australia has been cancelled due to technical and environmental issues

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CA. Rajesh Desai

Rajesh Desai

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Jan 25, 2013, 4:02:20 AM1/25/13

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Deepak Fertilisers & Petrochemicals Corporation - SHAREKHAN
Recommendation: Book out
Current market price: Rs117

Book out

Result highlights

Results disappoint; much below expectation: Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL)'s revenues were up marginally by 4% year on year (YoY) to Rs623.4 crore, which was much below our expectation. The operating profit margin (OPM) declined sharply by 540 basis points to 11.2% due to input cost pressure (mainly ammonia) and negligible production of methanol during the quarter, resulting in a sharp decline of 37% at the profit after tax (PAT) level.

We are dropping our coverage on DFPCL as the company is facing issues in most of its business segments and its financial performance would continue to remain weak over the next few quarters. Some of the reasons for our negative stance are as follows:

Proposed increase in the domestic gas prices: The recent news of a possible sharp increase in the price of domestic gas from $4.2/mmbtu to $8-9/mmbtu would severely impact the company's profitability. We do not believe that the company would be able to pass on the entire increase in the cost to the consumers. Also, its margin in the fertiliser segment would be under pressure.

Labour unrest to dent performance and eventually result in higher wages: The company is facing a labour unrest at one of its key manufacturing facilities based at Taloja since the beginning of this year. The management doesn't sound confident of quickly solving the workers' grievances, which would impact the financial performance in Q4FY2013. We suspect that the employee cost would increase as the company would have to renegotiate wage agreement with the labour unions.

Valuation undemanding but instability in margin and weak performance would limit any re-rating of the stock: The company's margin in the key products such as technical ammonium nitrate (TAN), methanol and ammonium nitrate phosphate (ANP) is getting affected by a steep increase in price of the key raw materials (ammonia and gas). On the other hand, the reality business is yet to pick-up in its real estate division. The business is incurring huge losses quarter on quarter due to a low occupancy and a slowdown in the reality sector. As a result of the aforementioned risks, such as overall lacklustre demand environment, margin pressure and risk for future growth of its key products (such as methanol and TAN), we are discontinuing our coverage on DFPCL despite undemanding valuation. We prefer Tata Chemicals and United Phosphorus in the agri inputs space.