>DEEPAK FERTILISERS AND PETROCHEMCIALS CORP LTD (GEPL)

OVERVIEW
The Indian chemical industry is all pervading, with chemicals finding applications in a variety of spheres. Having clocked around 8% CAGR growth over the last three years, it is undoubtedly one of the fastest growing sectors and is slated to double in absolute value terms in 2011 when compared to 2005.The Indian fertilizer industry, presently about 22 million tones is the third largest fertilizer producer in the world and constitutes 14% of the global production. Pick of the Week, this week is Deepak Fertilizer & Petrochemicals Corporation Limited (DFPCL), a company that is poised to cash in on the expected upswing in both these sectors. The company is one of the leading manufacturers of industrial chemicals such as methanol, ammonium nitrate, iso propyl alcohol, concentrates of nitric acid, propane liquid carbon-dioxide to mention a few. The company is one of the largest manufacturers of prilled Nitro Phosphate fertilizer and these products are marketed under the brand name Mahadhan. It has recently constructed a specialty mall Ishanya in Pune for interiors and exteriors thus bringing the architects, interior designers, manufacturers / retailers of interior / exterior products under one roof.

INVESTMENT RATIONALE
The company has an extensive product portfolio catering to an array of industries - agro-chemicals, defense, infrastructure, metal treatment mining, pharmaceuticals to mention a few. Owing to the nature of its manufacturing process, the company enjoys the operational flexibility to optimize its product mix depending on the future demand and supply scenario.. This product diversity thus gives DFPCL the flexibility to variate among its products and be in line with the market developments and de risk itself from commodity cycles. The company has technology tie ups with leading manufacturers which gives it the know-how for manufacturing some of its products like ammonia, AN, nitric acid, IPA, and bulk fertilizers. This is further supplemented with an enviable marketing and distribution network for timely supply of its wide range of products across the country. All these capabilities have endowed the company with considerable internal resilience, giving it the chance to rake in profits by concentrating its efforts on the growth opportunities, despite operating in cyclical markets.

The demand for DFPCL products have been rising but the company has not been able to match it through it’s in house capacity owing to a shortage of gas, thus leading to grossly underutilized capacity levels, forcing the company to fulfill the demand by importing (certainly more expensive when compared to producing at its own facilities) & trade (with marginal profits) in the same. This scenario is all set to turnaround hopefully by early next year – as increased domestic gas finds is expected to guarantee a continuous supply to fertilizer manufacturers, thus increasing production levels which leads to increased capacity utilization. The company is developing special crop specific and soil specific micro nutrients in order to give better yield to users. The companies umbrella brand Mahadhan, enjoys strong brand recognition & loyalty, thus enabling it to command premium over other players.

The current trend is to have a complete solution available under one roof. Identifying this opportunity particularly in respect to the office & home décor segment the company has set up a specialty mall Ishanya to take advantage of the growth expected in interiors & exteriors market. Ishanya is also expected to generate considerable income from non lease activities. Income from this venture is expected to contribute substantially in the future.

INVESTMENT CONCERNS
High volatility in input prices and uncertainty as regards to gas availability and pricing is a cause for concern. Companies trading activity (mostly fertilizers) depends on the market dynamics in the future.

VALUATIONS
At the CMP of Rs.74, DFPCL trades 4x its FY10E earnings of Rs.19. Long term investors can add more DFPCL to their portfolio.

To see full report: DFPCL