Updated: Apr 14
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Deepak Fertilizers and Petrochemicals is among India’s leading producers of fertilizers and industrial chemicals. Set up in 1979 as an ammonia manufacturer, the company’s product portfolio includes technical ammonium nitrate, industrial chemicals, bulk, and specialty fertilizers. Deepak Fertilizers has always focused on products with potential for import substitution.
High Profile clients for the technical ammonium nitrate include Coal India, Adani, Tata steel, Balco, Hindustan Zinc, ACC, UltraTech, and Ambuja. The company also supplies ammonium nitrate to explosive manufacturers Solar Industries, IDL, GOCL, and Salvo Explosives. As for nitric acid, key customers include Aarti Industries and Kutch Chemical Industries.
The company is currently in the midst of aggressive capex cycle. Investment in the Ammonia project is a backward integration initiative to ensure a consistent supply of ammonia and associated raw materials. As for the Ammonium Nitrate project, it is expected to cut the country’s import bill by 4,500 crore rupees per annum over the first decade of operations.
In terms of products, the company is now attempting to move up the value chain with specialty products. Further, to make operations more efficient and nimbler, Deepak Fertilizers has moved fertilizer and ammonium nitrate businesses into a wholly-owned subsidiary. The 2 businesses have been clubbed together because they have the same raw material requirements and manufacturing processes.
Deepak Fertilizers continues to benefit from Market leadership in most of the products. The implementation of backward integration to protect against raw material price fluctuations has also significantly benefitted the company. The lack of supply in target markets of Deepak Fertilizers allows the company to grow.
A focus on products that are higher up the value chain is helping to expand margins. However, a key contributor to higher margins has also been a spurt in IPA prices due to the pandemic, which is likely to come back to pre-pandemic levels in the future. IPA is a key component of hand sanitizer.
So, what is our view on company valuation?
The company’s stock price moved from about 78 rupees on 28 May 2020 to the current price of 560 rupees and so the pressure on prices in the short term due to profit booking cannot be ruled out. Deepak Fertilizers is trading at EV/EBITDA (TTM) ratio of approximately 8 times and Price to Earnings (TTM) ratio of approximately 13 times.
Even though a decline in IPA prices could result in lower profitability and a fall in share price, a Price to Earnings ratio of 13 times seems attractive in the long run as Deepak Fertilizers shall benefit from its capacity expansion from Fiscal Year 2024.
As for the risks to this analysis, the company sources ammonia from the Middle East. Till such time its own ammonia plant expansion becomes live, it continues to be exposed to escalation in prices of ammonia.
So, would you invest in Deepak Fertilizers?
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