Monday, July 30, 2012

>Deepak Fertilisers & Petrochemicals Corporation

Recommendation: Buy
Price target: Rs179
Current market price: Rs129
Price target revised to Rs179
Result highlights
  • Margin pressure severe than expected: For Q1FY2013 Deepak Fertilizers and Petrochemicals Corporation Ltd (DFPCL) reported a revenue growth of 33.8% to Rs634 crore, which was marginally lower than expected mainly on account of a lower than expected growth in the fertiliser segment. However, the major disappointment was on the margin front?the margin declined sharply by 770 basis points to 16.1% on account of higher prices of the inputs especially ammonia (a major raw material) and propane. 
  • Surge in interest burden pulls down earnings: The interest cost went up by 109.6% year on year (YoY) to Rs26.6 crore due an increase in the working capital requirement with the delayed receipt of the subsidy from the government and the full capitalisation of the new TAN plant (with effect from Q2FY2012). The reported profit after tax (PAT) for Q1FY2013 shows a decline of 28.8% at Rs45.5 crore, which is lower than our estimate of Rs49.7 crore. 
  • Demand in chemical segment remains buoyant: Despite the prevailing slowdown in the economy, the company reported a fairly healthy volume growth of 14.7% in its chemical segment (products such as IPA, CAN etc). A better utilisation of the TAN plant also boosted the volume growth by 19.5% in Q1FY2013. However, the volume growth in the fertiliser segment declined marginally as the lower availability of phosphoric acid resulted in a lower production.
  • Outlook and valuation: Though the volume growth continues to be robust for the key products in the chemical segment, but we have revised downwards our earnings estimates for FY2013 and FY2014 by 8% and 6% respectively to factor in the higher than expected pressure on the margins. However, the valuations are supportive and we maintain our Buy rating on the stock with a revised price target of Rs179. At the current market price of Rs129, the stock trades at very attractive valuations of 4.9 and 4.3x its FY2013E and FY2014E earnings respectively.