>DEEPAK FERTILIZERS & PETROCHEMICALS CORP (RELIGARE)

Margins improved on fall in raw material and fuel costs

■ Topline flattish as expected: Deepak Fertilisers & Petrochemicals Corp (DFPCL) reported 1.2% YoY decline in revenues to Rs 3.3bn in Q4FY09, which was inline with our estimate of Rs 3.4bn. The revenues were flattish, primarily due to lower revenues from the chemicals business, which stood at Rs 1,674mn in Q4FY09, registering 31% YoY decline.

The subdued performance in the chemicals segment was driven by lower revenues from traded chemicals, which stood at only Rs 17mn in Q4FY09 as against Rs 417mn in Q4FY08. Revenues from manufactured chemicals also witnessed 17% YoY decline on the back of lower realisations due to fall in chemical prices. However, the fertiliser segment registered strong performance
with 78% YoY growth aided mostly by better realisations in speciality fertilisers.

■ Significant improvement in margins: DFPCL registered significant improvement in EBITDA margins, which improved 152bps YoY and 653bps QoQ to 20.4% in Q4FY09, better than our expectation of 16.9% for the quarter. This was primarily because of lower raw material and fuel costs. Among the raw materials phosphoric acid prices declined 32% YoY, whereas the company has saved ~Rs 320mn on fuel cost due to ~53% YoY decline in naphtha prices.

■ Strong bottom line growth: DFPCL’s net profit improved 27% YoY to Rs 396mn, above our expectation of Rs 345mn. This was despite a 91% YoY increase in financing costs, which increased because of issued of debentures, driven by improvement in operating performance as well as a 155% YoY increase in other income during the quarter.

■ Capacity expansion projects on track: The company is currently implementing three growth projects. The 15,000tpa shore-based ammonia storage tank at JNPT has been competed in Q4FY09 and will now give the company the advantage of make-or-buy option in ammonia. This storage tank will reduce the company’s reliance on natural gas as feedstock. DFPCL is also coming up with a 150,000tpa expansion of its existing 300,000tpa nitric acid plant, which will be commissioned by H1FY10. In addition, it is expanding its ammonium nitrate facility at Taloja by 300,000tpa, which will come on-stream by the end of Q2FY11.

■ Valuations attractive at 6x FY10E earnings: Currently, the stock is trading at a P/E multiple of 5.4x on FY10E. We valued the company at a P/E multiple of 6x its FY10E and provide a target price of Rs 110. The stock has appreciated almost 50% over the past one week and leave lower potential upside from current level. Therefore, we maintain our Hold rating on the stock.

To see full report: DEEPAK FERTILIZERS