[T.S.R:14744] stock idea- deepak fertilizer

DEEPAK FERTILIZER LTD.

Rating: Buy around 128

CMP: 134

Target: 154

Upside Potential: 20%

Holding Period: Medium Term

Company Introduction:

Mr. C. K. Mehta set up Deepak Nitrite Ltd in 1970. In 1983, Deepak Fertilizers and Petrochemicals Corporation Limited (DFPCL) started commercial production of ammonia in technical collaboration with Fish International Engineers (USA) using natural gas as feedstock. The company undertook major expansion and diversification in 1989 to achieve forward integration of ammonia and diversification in Methanol. In July 1992, DFPCL started commercial production of Low Density Ammonium Nitrate (LDAN), Nitro Phosphate (NP), Dilute Nitric Acid (DNA), and Concentrated Nitric Acid (CNA).This has resulted in a multi-product portfolio for DFPCL consisting of chemicals, petrochemicals, fertilizers and other agri-inputs. DFPCL's business can be broadly categorised into Chemicals, Agribusiness & Speciality Retailing. The Chemical division of DFPCL manufactures Methanol, various grades of Nitric Acid and Ammonia. DFPCL is one of the largest producers of Methanol in India, DFPCL is also manufactures various concentrations of Nitric Acid (60%, 68%, 72% and 98%).DFPCL is the largest manufacturer of ammonium nitrate in India.Agri business division of DFPCL manufactures 23:23:0 prilled Nitrophosphate fertiliser under the brand name Mahadhan. DFPCL markets Mahadhan through a network of over 1000 dealers. Ishanya is India's first International Design Centre and Speciality Mall - a centre for excellence in space design and the one-stop shop for interior and exterior products

Key Investment Rationale:

Investment Rationale

Significant increase in TAN capacity by FY11

Deepak Fertilisers and Petrochemicals (DFPCL) is the market leader in the Indian Technical Ammonium Nitrate (TAN) market, with a market share of 30%. The company plans to increase its current TAN capacity of 132000MT by 300000 MT by Q3FY11 with a capex of ~Rs6.5bn.With increased capacity, DFPCL's market share in TAN is estimated to rise to ~70% in FY12 & company benefit from the increasing TAN demand on account of the growing demand for coal and limestone production.

Improved gas Availability to boost overall efficiency

DFPCL's total natural gas requirement is 0.8 mmscmd for the enhanced capacities, of which 0.73 mmscmd (90%) has already been contracted at an average landed cost of $ 6.1 per mmbtu. The balance 10% would be purchased from market at spot rate. Improved gas availability would lead to better capacity utilization of chemicals as well as fertiliser plant. With improved gas availability, the capacity utilisation of ANP & Methanol plants is expected to increase significantly DFPCL is well connected to the National Gas Grid to receive gas from multiple sources like Panna-Mukta-Tapti (PMT) gas field, Krishna-Godavari (KG)Basin and ONGC.

Valuations & Views
With the overall economic scenario improving and the industrial activity picking up momentum, we believe DFPCL would perform better in FY11E on the back of growth in its user industries – mining, cement, infrastructure and agriculture. DFPCL's new TAN facility likely to be operational in Q3FY11E will boost revenues and profitability going ahead. Also, favorable and normal monsoons will boost revenue from agribusiness. At the Rs. 128, DFPCL is trading at 4.5x its FY11E EPS of Rs 28.1. We value the stock at 5.5x its FY11 earnings to arrive at a target price of Rs. 154, which represents an upside of 20%. We thus recommend a BUY on the stock.

 

 

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