Deepak Fertilizers & Petrochemicals Corporation
Fertile prospects
Increased availability of gas will significantly improve its prospects
| Buy | Deepak Fertilizers & Petrochemicals Corporation |
| BSE Code | 500645 |
| NSE Code | DEEPAKFERT |
| Bloomberg | DFPC@IN |
| Reuter | DPFE.BO |
| 52-week High/Low | Rs 178 / 78 |
| Current Price | Rs 101 (as on 9th April 2008) |
Deepak Fertilizers & Petrochemicals Corporation (DFPCL) is a major player in bulk chemicals manufacturing with integrated manufacturing facilities at Taloja, Pune. The presence throughout the nitrogen-based bulk chemicals segment has given the company flexibility to alter the product mix and give consistent results on the profitability front despite facing a perennial shortage on the raw material (natural gas) front. DFPCL has further consolidated its existence in the sector with the acquisition of Smartchem Technologies Limited (STL), a manufacturer of ammonium nitrate (with a capacity of 35,900MTPA) in FY2004. STL is a 100% subsidiary of DFPCL.
Its Chemical Division its current basket of chemicals viz. Methanol, Iso Propyl Alcohol (IPA), various grades of Nitric Acids, Hydrogen and Carbon Dioxide provide the company with considerable product flexibility to manage commodity market cycles efficiently. In Fertilizers business, it is the largest manufacturer of nitro phosphate, it current capacity is around 2,30,000 MT per year, company makes 23:23:0 prilled nitrate phosphate, containing nitrogen in both nitrate and ammonium form, which are used as fertilizers. It also manufacture DAP, MOP and SSP. The company also sells fertilizer under the brand name of Mahadaan and Bhoodhan. Different Fertiliser includes Complex fertilizer (Mahadan power & chetak), potassic fertiliser (Mahadan potash), and Mixture fertiliser (Bhoodhan).
The company has also forayed in to retailing.
Availability of gas should substantially improve its prospects
Presently DFPCL get gas from GAIL under the administered price mechanism (APM) but availability is limited to 0.6-0.7 mmbtu as against its total requirement of approx 1 mmbtu. Inadequate gas availability has led to underutilization of plants like methanol, ammonium nitrate phosphate (ANP), DNA etc.
The Dahej Uran Pipeline (DUPL) pipeline has been commissioned and the company has bought small quantity of LNG from Shell to test the pipeline. The company is looking for tying up long term supply of gas with major players in order to increase production. The company expects that the Reliance gas would be available through this pipeline to its Uran and Taloja plant during the current year. This gas is expected to be sourced at a price of US$ 5-US$ 6 per mbtu.
Additional supply of natural gas will benefit the company in a number of ways. Firstly, the company will be able to increase its capacity utilization (currently there is significant underutilisation due to lack of gas) boosting topline as well as bottomline especially due to better economies of scale. Moreover cost of natural gas will be lower than naphtha, presently being used as fuel, which will boost margins on current sales also.
Bulk chemicals--industri
Methanol
DFPCL is one of the largest producers of methanol in India with an installed capacity of 100,000 tonne per year. Methanol finds usage in industries like paints, dyes, drugs and pharmaceuticals and fertilisers.
The annual demand for methanol in India is estimated to be 750,000 metric tonne per annum (MTPA) and the domestic supply is only 380,000MTPA and the rest of the demand is met through imports. DFPCL has 26.3% of the total domestic manufacturing capacity with Gujarat Narmada Valley Fertilisers Corporation (GNFC) being the only major competitor. However, DFPCL is a more efficient manufacturer of methanol as it uses gas as feedstock unlike GNFC, which uses naphtha and fuel oil as feedstock.
Nitric acid
DFPCL is one of the largest producers of dilute nitric acid in India with an installed capacity of 297,000 tonne per year and also produces concentrated nitric acid (98%) with an installed capacity 79,200 tonne per year. The annual demand for nitric acid in India is estimated to be 760,000 tonne per annum and the domestic supply is 800,000 tonne per annum. DFPCL has 43.7% of the total domestic manufacturing capacity with Rashtriya Chemicals and Fertilisers (RCF) being the only major competitor.
Ammonium nitrate
DFPCL is one of the largest manufacturers of ammonium nitrate (AN) in India and the only producer of prilled AN in India (rest make the chemical in granule form), which is easier and safer to transport. DFPCL has an installed capacity of 125,000 tonne (which includes 35,900 tonne of its 100% subsidiary Smartchem Technologies)
AN prills are used in making commercial explosives and are vital in all types of mining activities like blasting coal; other minerals like iron ore (for steel manufacture)
The explosives made from DFPCL's AN are also used in the construction of dams, hydro-electric projects and expressways/
The mining of coal, which saw very moderate activity in the last five-year plan, is about to pick-up. Coal mining is expected to pick-up by 4.5% in the Tenth Five-Year Plan as the demand from user industries like power and steel increases. Along with that, the mining of metal ores is also expected to increase as more and more investment is committed to ferrous and non-ferrous sectors.
Yara tie up is positive
Norway-based Yara International, a $14 billion fertiliser and specialty chemicals company, has entered an agreement with DFPCL to establish a joint venture (JV) to produce and market ammonium nitrate and specialty fertilisers in India. DFPCL will own 51 per cent of the JV, while Yara will own the balance 49 per cent. The JV will also invest in Deepak Fertiliser's 300,000 million tonne (MT) per annum ammonium nitrate plant, which is recently under construction at Paradip, Orissa. Ammonium Nitrate is mainly used to produce explosives for the mining industry and in coal production. Currently, Deepak Fertilisers is the only major domestic producer of ammonium nitrate, with an installed capacity of 140,000 tonne. The rest of Indian demand is covered mainly by imports. The JV will be value-accretive to DFPCL and will benefit its long-term strategy in nutrient management through specialty fertilisers and value-added mining products and services. India has the world's third biggest coal reserves and Yara has proven strengths in safety, production, logistics and expertise in the use of technical ammonium nitrate for explosives (TAN). The heads of agreement would be converted into a final agreement after a due diligence and the necessary company and regulatory approvals
Ammonia storage tank expected to be ready in 2008-09
The work on the new 15,000 MT ammonia storage tank is well underway and the tank is expected to be ready in 2008-09. The Company is also well positioned to take on further capacity enhancements in the Nitric Acid segment.
Ishanya progressing well
DFPCL has set up a specialty mall ‘Ishanya’ on its surplus land in Pune. The project is spread over 10 acres of land with built up area of about 5.5 lakh square feet. It will feature end-to-end product ranges from white to brown goods, offices for architects, interior designers and consultants apart from banks and financial institutions. At full capacity, this project will generate around Rs 30 crore of revenues annually.
Ishanya has now opened over 200,000 square feet of retail space with key anchors Home Town, @home and Croma, besides key stores like F&F, Ecoscapes and Bella Casa now open to customers. More openings are expected in the coming weeks with approximately another 50,000 sq.ft. opened in end February 2008.
Other long term growth triggers
The company is setting up an ammonium nitrate plant in Paradip in Orissa on the eastern coast of India. The company will also be setting up import terminal and storage facility for ammonia at Paradip as an integral part of this project, which is expected to commission by second half of FY2008-09. Similarly, the company has around 7–8 acres of surplus land in Pune and is considering options for developing the same. DFPCL is also expanding its agribusiness initiatives with the launch of three ‘Mahadhan Saarrthie’ centers to provide integrated nutrient management services and solutions to the farmers. All these initiatives will secure company’s profitability in the long-term future.
The company’s Chemical Complex project at Paradip in Orissa for Ammonium Nitrate is progressing well and the company has already placed orders for machinery and technology. This plant is expected to start production by the forth quarter of the financial year 2010.
Valuation
In FY 2008, we expect the company to register sales and net profit of Rs 949.51 crore and Rs 96.30 crore respectively. On equity of Rs 88.36 crore and face value of Rs 10 per share, EPS works out to Rs 10.9. This EPS is likely to rise to Rs 13.3 in FY 2009 assuming availability of increased gas supplies from the later part of FY 2009. The share price trades at Rs 101. P/E on FY 2009 EPS works out to 7.6.
| | 0503(12) | 0603 (12) | 0703(12) | 0803 (12P) | 0903 (12P) |
| Income | 478.17 | 562.86 | 833.13 | 949.51 | 1095.74 |
| OPM (%) | 26.1 | 18.3 | 17.3 | 17.1 | 18.5 |
| OP | 124.99 | 103.15 | 144.24 | 162.17 | 203.15 |
| Other inc. | 22.78 | 45.76 | 36.30 | 44.07 | 46.27 |
| PBIDT | 147.77 | 148.91 | 180.54 | 206.24 | 249.42 |
| Interest | 8.65 | 5.65 | 11.49 | 17.00 | 20.40 |
| PBDT | 139.12 | 143.26 | 169.05 | 189.23 | 229.02 |
| Dep. | 31.11 | 31.56 | 39.08 | 45.20 | 53.33 |
| PBT before EO | 108.01 | 111.70 | 129.97 | 144.04 | 175.68 |
| EO | 4.45 | 11.06 | 1.58 | 0.33 | 0.00 |
| PBT after EO | 112.46 | 100.64 | 128.39 | 143.71 | 175.68 |
| Tax | 32.71 | 31.93 | 35.46 | 47.41 | 57.98 |
| PAT | 79.75 | 68.71 | 92.93 | 96.30 | 117.71 |
| EPS (Rs)* | 8.7 | 7.8 | 10.5 | 10.9 | 13.3 |
| * Annualised on current equity of Rs 88.36 crore. | |||||
| Deepak Fertilizers & Petrochemicals Corporation: Result |
| | 0712 (3) | 0612 (3) | Var. (%) | 0712 (09) | 0612 (09) | Var. (%) | 0703(12) | 0603 (12) | Var. (%) |
| Income | 273.99 | 243.29 | 13 | 710.68 | 622.52 | 14 | 833.13 | 562.86 | 48 |
| OPM (%) | 16.5 | 16.7 | | 16.3 | 16.6 | | 17.3 | 18.3 | |
| OP | 45.08 | 40.60 | 11 | 115.98 | 103.26 | 12 | 144.24 | 103.15 | 40 |
| Other inc. | 6.38 | 7.27 | -12 | 31.88 | 23.47 | 36 | 36.30 | 45.76 | -21 |
| PBIDT | 51.46 | 47.87 | 7 | 147.86 | 126.73 | 17 | 180.54 | 148.91 | 21 |
| Interest | 3.76 | 2.43 | 55 | 11.81 | 7.78 | 52 | 11.49 | 5.65 | 103 |
| PBDT | 47.70 | 45.44 | 5 | 136.05 | 118.95 | 14 | 169.05 | 143.26 | 18 |
| Dep. | 11.35 | 11.02 | 3 | 32.80 | 27.81 | 18 | 39.08 | 31.56 | 24 |
| PBT before EO | 36.35 | 34.42 | 6 | 103.25 | 91.14 | 13 | 129.97 | 111.70 | 16 |
| EO | 0.11 | 0.11 | 0 | 0.33 | 1.47 | -78 | 1.58 | 11.06 | -86 |
| PBT after EO | 36.24 | 34.31 | 6 | 102.92 | 89.67 | 15 | 128.39 | 100.64 | 28 |
| Tax | 11.27 | 3.91 | 188 | 35.21 | 11.78 | 199 | 17.31 | 33.87 | -49 |
| Deferred Tax | 0.29 | 5.48 | -95 | -1.85 | 12.15 | -115 | 17.46 | -2.76 | -733 |
| FBT | 0.21 | 0.18 | 17 | 0.63 | 0.51 | 24 | 0.69 | 0.82 | -16 |
| PAT | 24.47 | 24.74 | -1 | 68.93 | 65.23 | 6 | 92.93 | 68.71 | 35 |
| EPS (Rs)* | 11.1 | 11.2 | | 10.4 | 9.8 | | 10.5 | 7.8 | |
| * Annualised on current equity of Rs 88.36 crore. | |||||||||
| Deepak Fertilizers & Petrochemicals Corporation: Segment result |
| | 0712 (3) | 0612 (3) | % of total | Var. (%) | 0712(09) | 0612 (09) | % of total | Var. (%) | 0703(12) |
| a) Chemicals | | | | | | | | | |
| Manufactured | 172.36 | 132.1 | | 30 | 453.93 | 319.29 | | 42 | 467.55 |
| Traded | 39.2 | 33.68 | | 16 | 65.49 | 76.88 | | -15 | 91.56 |
| Total | 211.56 | 165.78 | 75 | 28 | 519.42 | 396.17 | 71 | 31 | 559.11 |
| b) Fertilizers | | | | | | | | | |
| Manufactured | 18.32 | 19.69 | | -7 | 34.86 | 58.02 | | -40 | 72.1 |
| Traded | 49.95 | 64.85 | | -23 | 172.74 | 192.07 | | -10 | 230.56 |
| Total | 68.27 | 84.54 | 24 | -19 | 207.6 | 250.09 | 28 | -17 | 302.66 |
| c) Others | 0.61 | 0.26 | | 135 | 2.74 | 0.28 | | 879 | 0.74 |
| Total | 280.44 | 250.58 | | 12 | 729.76 | 646.54 | | 13 | 862.51 |
| Less:-Inter segment revenue | 4.62 | 4.87 | | | 8.58 | 14.24 | | | 18.09 |
| Net sales | 275.82 | 245.71 | | | 721.18 | 632.3 | | | 844.42 |
| | | | | | | | | | |
| Segment Results | | | | | | | | | |
| Chemicals | 52.43 | 53.2 | 117 | -1 | 130.58 | 134.38 | 111 | -3 | 178.35 |
| Fertilizers | -5.51 | -13.5 | -12 | -59 | -9.72 | -25.66 | -8 | -62 | -27.07 |
| Others | -2.09 | -0.77 | -5 | 171 | -2.95 | -1.9 | -3 | 55 | -3.37 |
| Total | 44.83 | 38.93 | | 15 | 117.91 | 106.82 | | 10 | 147.91 |
| Less:-Interest | 3.76 | 2.43 | | | 11.81 | 7.78 | | | 11.49 |
| Less:-Other unallocable exp | 4.72 | 2.08 | | | 2.85 | 7.9 | | | 6.45 |
| PBT | 36.35 | 34.42 | | | 103.25 | 91.14 | | | 129.97 |
| | | | | | | | | | |
| Capital Employed | | | | | | | | | |
| Chemicals | 533.35 | 451.06 | 49 | 18 | 533.35 | 451.06 | 49 | 18 | 471.41 |
| Fertilizers | 89.64 | 93.44 | 8 | -4 | 89.64 | 93.44 | 8 | -4 | 104.33 |
| Others (including capital WIP) | 210.6 | 155.35 | 19 | 36 | 210.6 | 155.35 | 19 | 36 | 162.82 |
| Unallocated | 247.39 | 256.9 | 23 | -4 | 247.39 | 256.9 | 23 | -4 | 286.12 |
| Total | 1080.98 | 956.75 | | 13 | 1080.98 | 956.75 | | 13 | 1024.68 |
| Figures in Rs crore | |||||||||
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