Deepak Fertilisers and Petrochemicals – Specialist in fertilizers and industrial chemicals

Updated: Mar 25


Company Name – Deepak Fertilisers and Petrochemicals Corporation Ltd. (DFPCL)


Current Share Price – INR 560 (February 17, 2022)


Market Cap – INR 6,758 cr


 

1. What is interesting about the stock?

“Top gear Sanju!”. Are you familiar with this movie dialogue? If not, take out time to watch the movie ‘Jo Jeeta Wohi Sikandar” and enjoy one of the finest underdog hero movies. If you have, you’ll probably be able to equate Sanju and DFPCL. Both always had high potential, but really kicked on in to top gear after years of taking it easy.


Deepak Fertilisers and Petrochemicals Corporation Ltd. (DFPCL) is among India’s leading producers of fertilizers and industrial chemicals. Set up in 1979 as an ammonia manufacturer, Company’s product portfolio includes technical ammonium nitrate (TAN), industrial chemicals, bulk and specialty fertilizers, farming diagnostics and solutions and fresh produce. DFPCL has always focused on products with potential for import substitution. For e.g., a large part of India’s total Isopropyl alcohol (IPA) consumption of 200,000 tpa is still imported. The company has a ~42% market share in TAN, 30-70% shares across various grades of nitric acid, and ~85% share in IPA. DFPCL has manufacturing facilities in Taloja (Maharashtra), Srikakulam (A.P.), Panipat (Haryana) and Dahej (Gujarat).


Clientele for its TAN business include large corporates such as Coal India, Adani, Tata steel, Balco, Hindustan Zinc, ACC, UltraTech and Ambuja. Company also supplies TAN to explosives makers like Solar Industries, IDL, GOCL and Salvo Explosives. In nitric acid, customers include Aarti Industries, Kutch Chemical Industries, Ordnance Factory Board, Jindal Steel, Rudraksh Chemicals and Nuclear Fuel Complex. Dr Reddy’s Laboratories, Aurobindo Pharma, Mylan Laboratories, Hetero Drugs, Divis Laboratories and Asian Paints are key customers for IPA.


The company is currently in the midst of aggressive capacity enhancement implementation, which is expected to bolster revenues and safeguard raw material sourcing in the future. Projected increase in capacities are as mentioned in the table below:


As of 30 September 2021, capex details for Ammonia and TAN capacity enhancements were:


  • Total cost incurred in Ammonia project: INR 1,797 cr; Pending investment: INR 2,553 cr

  • Total cost incurred in TAN Project: INR 349 cr; Pending investment: INR 700 - 900 cr

Investment in the Ammonia project is a backward integration initiative to ensure consistent supply of ammonia and associated raw materials. On the other hand, the TAN project is expected to cut the country’s import bill by INR 4,500 cr 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, DFPCL has implemented a corporate rejig involving moving the fertilizer and TAN businesses in to a wholly-owned subsidiary of DFPCL - Smartchem Technologies Ltd. The two businesses enjoy synergies such as common raw material requirements and select manufacturing processes and hence have been clubbed together. The remaining businesses - industrial chemicals and a retail mall continue to be in DFPCL.


Key competitive advantages of the Company are:

  • Key products cater to a market where supply by Indian manufacturers is well short of demand in the country.

  • Market leadership in most of the products that the company manufactures.

  • Implementation of backward integration to protect against raw material price fluctuations.

2. Key Historical Financials

  • Historically, DFPCL witnessed revenue growth but declining profits due to shrinking margins. In FY10, the company had a PAT of INR 165 cr on revenues of INR 1,328 cr. In FY18, it had pretty much the same PAT despite revenues having grown to INR 5,995 cr.

  • A focus on products that are higher on the value chain is again expanding margins. In FY21 and TTM, PAT margin has increased to a respectable ~7% from under 2% in FY19 and FY20. However, a key contributor to higher margins has also been spurt in IPA prices due to the pandemic, which is likely come back to pre-pandemic levels in the future. IPA is a key component of hand sanitizer.

3. What is my view on company valuation?


The company’s stock price moved from about INR 78 on 28 May 2020 to current price of INR 560 and so pressure on prices in the short term due to profit booking cannot be ruled out. DFPCL is trading at EV/EBITDA (TTM) ratio of c. 7.7x and P/E (TTM) ratio of c. 13.2x.


Even though decline in IPA prices could result in lower profitability and a fall in share price, a P/E of 13x seems attractive in the long run as DFPCL shall benefit from its capacity utilization in FY24. While the capex is funded significantly by debt, low D/E ratio means the company has bandwidth for increase in leverage. Investors can evaluate investing at 25%-30% lower than the current prices which would provide margin of safety from the falling profitability.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • The company sources ammonia from the Middle East. Till such time its own ammonia plant expansion is live, it continues to be exposed to escalation in prices of ammonia.

  • Delay in the payment of subsidies by the government could impact the company’s working capital cycle.

 

About the Author


I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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