Bright agricultural, industrial outlook make Deepak Fertilisers a good buy

With rains being good this year, the agricultural sector is all set to complement the heightened industrial activities in infrastructure and construction sectors which would help Indian economy to grow at over 8% in coming years. Deepak Fertilisers and Petrochemicals Corporation Limited (DFPCL), one of the leading manufacturers of industrial chemicals and nitro phosphate fertilisers would benefit from increased agricultural and industrial activities.

Business
The company’s business can be divided into three verticals:
Industrial chemicals: This segment contributes almost two thirds to the company’s consolidated revenues and about 85-90% to the bottom line. DFPCL is market leader for chemicals like isopropyl alcohol (with 75% market share) and nitric acid apart from being one of the largest producers of methanol and liquid carbon dioxide in India. These chemicals are extensively used by companies in pharmaceuticals, textiles, pesticides, resins, fertilisers, rubber, petrochemicals, fibres and polyester sectors. It is also the largest manufacturer for ammonium nitrate which is used extensively as an explosive in mining and construction industry.

Agri business: This segment contributes to around one third to the topline and about 10-15% to net profits. DFPCL manufactures nitrophosphate, potassic fertilisers, mixture fertilisers and complex fertilisers apart from engaging in trade of bulk fertilisers, micronutrients and agri products like fruits, vegetables etc.
Specialty retail: DFPCL owns and operates a specialty mall ‘Ishanya’ in Pune which caters to consumers shopping for space design, interior and exterior products. With 5,50,000 square feet of retail and services space, it currently houses well known retailers like @Home, Croma, Fabindia, Hometown, etc. Though the segment is currently loss making, the company is looking at the expanded format ‘High Street Ishanya’ for turnaround.
The company is expanding its basket of offerings to include lifestyle, fashion, entertainment and food sections, thereby increasing occupancy.

Investment rationale
The company in its industrial chemicals segment has recently completed commissioning of the new 0.30 million tonnes per annum (mtpa) technical ammonium nitrate (TAN) plant at Taloja. This would raise its production capacity from 0.132 mtpa to 0.432 mtpa, adding close to `500 crore to its topline as the company plans to achieve 95-100% utilisation levels at the new plant by 2013.  

In the industrial chemicals segment the company derives higher operating profits of around 25-30% as these are niche products used in various industries. Therefore increased sales in this sector would lift the bottomline as well.

The fertiliser segment is set to benefit from improved natural gas availability from this year leading to higher plant capacity utilisations. Also with recent changes in fertiliser policy which included ‘nutrient based subsidy’ effective from April 2010, companies now get some flexibility in fixing prices and also receive subsidies faster, and this has lead to increased focus on this segment.

Concerns
Any adverse rise in crude prices or ammonia would increase the firm’s raw material costs thereby impacting its profitability. Any delays in ramping up of capacities at the new TAN plant or lower capacity utilisation at its existing facilities due to technical issues may also affect the revenues and profits. The company also faces currency and regulatory risks related to government’s stance on fertiliser policy.

Valuations
Improving capacity utilisations on back of improved gas availability and recent conducive changes in fertiliser policy apart from higher volumes from the new TAN plant would drive revenue growth in coming years. The revenues are expected to grow at a CAGR of 24% over fiscal 2010-2012 while the net profits are likely to rise at a CAGR of 19% during the same period. At the current market price of `182, the stock trades at a price to earnings ratio of 8.77 times its expected consolidated fiscal 2011 earnings and 6.92 times its fiscal 2012 expected consolidated earnings respectively. The firm being a direct play on industrial and agricultural growth, one can consider entering the stock on corrections with a long term perspective.

Disclaimer: The writer does not hold any shares in the company