Buy Deepak Fertilizers & Petrochemicals Corp. Ltd.
CMP Rs 88
PRICE TARGET Rs 156
Deepak Fertilizers & Petrochemicals Ltd (DFPCL), is operating in the business of chemicals, fertilizers & specialty retailing. After the expansion of its technical grade ammonium nitrate (TAN) facility by 300000 tonnes, it will be one of thelargest producers of TAN in the world
- Key Investment Highlights
TAN plant to be the growth driver over the next few years.
With the proposed 300,000 MT expansion of its TAN facility at Taloja, DFPCL will be able to produce 472,000 TPA by FY2011. This Rs. 655 crore expansion, which is being put up at half the cost of comparable international facilities, is on schedule for completion by November 2011 and benefit the company from economies of scale.
Increased gas availability to boost chemical & fertilizer production
The recent multi source gas tie ups (up to 0.9 million scm per day) will reduce the erstwhile gas shortages and help in better utilization of capacities. Accordingly, Ammonium nitrate phosphate (retrofitted for 290000 tpa) production should get ramped up to 145000 tpa in FY2010 and 220000 tpa in FY2011 from the current 57000 tpa. The APM gas supply (cost of $3.2 / mmbtu) of 0.39 scm will be used for the production of the ANP and Sulphur bentonite
New foray in agri exports to ramp up, while the worst is over at Ishanya
Having tasted initial success in its foray into agri exports, the company is investing Rs.60 crore in warehousing and logistics. We expect the turnover from this high margin business to grow to Rs. 8 crore in 2010 and Rs. 22 crore in FY2011.
Ishanya’s conversion to a multi format store and inclusion of a state of the art entertainment centre and a multi cuisine mega food court is expected to increase footfalls & drive utilization levels to upwards of 65% (currently 55%) and average rentals to rise to Rs. 42 per square foot (Rs. 33 per square foot) with some incremental income from revenue sharing.
- Valuations & Recommendations:- At CMP of Rs 88, the stock is trading at 4.91x & 4.21x its FY10 & FY11 estimated earnings of Rs 17.42 & Rs 21.48 respectively and dividend yield of 4.61%. With the enhanced availability of gas and increased production, stabilization of product prices in the international markets and the 300,000 tpa TAN expansion well on track for completion in Q3FY2011, we recommend a strong BUY on the stock for a target price of Rs.156 over the next 18 months, representing an upside of ~77% from the current levels.
- Company Background
Deepak Fertilizers & Petrochemicals Ltd (DFPCL) started commercial production of Ammonia in 1979 in technology collaboration with Fish International Engineers (USA) using natural gas as feed stock. At that time it was India’s only merchant ammonia manufacturer. Currently the company has a diversified product portfolio of chemicals, fertilizers and other agricommodities
Despite the fact that the chemical and fertilizer prices are very volatile and cyclical, DFPCL’s diversified product portfolio and its flexible manufacturing process enables the company to optimize its product mix and augment its margins.
Apart from manufacturing, the company also has a vibrant trading business (30-35% of total sales) which involves bulk & specialty fertilizers, chemicals and export of agri commodities.DFPCL has successfully completed the following projects and it will be reflected in the current year’s workings.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 5.28 | 10/11/09 |
| EPS (Rs) | 16.86 | Mar, 09 |
| Sales (Rs crore) | 354.92 | Sep, 09 |
| Face Value (Rs) | 10 | |
| Net profit margin (%) | 10.28 | Mar, 09 |
| Last dividend (%) | 40 | 20/05/09 |
| Return on average equity | 18.52 | Mar, 09 |
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