>DEEPAK FERTILIZERS & PETROCHEMICALS CORPORATION LIMITED (INDSEC SECURITIES)

We are initiating coverage on DFPCL, which has traditionally been perceived as a fertilizer company. However, DFPCL, which was incorporated in 1979 as an ammonia manufacturer and is today a multiproduct company with 2 major business segments, viz. Industrial Chemicals & Fertilizers. DFPCL is a dominant player in the industrial chemical segment which drives almost 70% of its revenues. With further Ammonium Nitrate capacity additions, DFPCL will undergo a re-rating from being a fertilizer company to an integrated industrial chemical manufacturer.

Investment Rationale:
• Of DFPCL’s total natural gas requirement of 0.8 mmscmd for the enhanced capacities, about 0.728 mmscmd (90%) has already been contracted at a landed cost of $ 6.1 per mmbtu. For the balance 10% the company plans to buy gas in the spot market, which will meet DFPCL’s entire gas requirement and help the company streamline its manufacturing activity and keep the volatile raw material cost under control. DFPCL has also set up a new 15,000 MT Ammonia storage tank at JNPT to ensure a steady supply of Ammonia.

• Recently, DFPCL augmented capacities at most of its plants, anticipating higher demand for -
Ammonia (90,000 TPA to 125,400 TPA), Ammonium Nitrate (90,000 TPA to 132,000 TPA) and DNA (297,000 TPA to 445,500 TPA). DFPCL will further increase its Ammonium Nitrate capacity by 300,000 TPA by Q3-FY11, at an investment of Rs. 6550 mn. with a view of fulfilling the rising demand from the infrastructure and mining sectors, which will drive future growth.

• Strong technology tie-ups with international players have enabled DFPCL in controlling production costs, leading to steady increase in margins.

• On the retailing front, the company has successfully leased out about 55% of the entire 550,000 sq. ft. of area at rentals of Rs. 35 per sq. ft. per month and plans to increase the rental to about Rs. 40 per sq. ft. per month by the end of this fiscal, targeting a revenue of Rs. 120 to 140 mn. in the current fiscal.

Valuation:
Based on DCF valuation with a terminal growth rate of 1%, risk free rate at 8% and WACC of 14.6% we arrive at a fair value of Rs. 156 per share resulting into 64% upside form the CMP of Rs. 90.85 per share. Hence, we recommend a BUY on DFPCL.

To see full report: DFPCL