Stock Pick - Deepak Fertilizers

Deepak Fertilisers & Petrochemicals Corporation

Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs86
Current market price: Rs58

Price target revised to Rs86

Result highlights

• Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) has reported a strong set of numbers for Q2FY2009 on the back of significant improvement in the realisations in both its business segments. 
• The company’s total income from operations increased by 67.4% year on year (yoy) to Rs375.1 crore in Q2FY2009 owing to a robust increase in the realisations in both the chemical and fertiliser segments. 
  
  

  Chemical segment: The revenues from the chemical segment increased by 62.9% yoy to Rs253.9 crore in Q2FY2009 from Rs155.8 crore in Q2FY2008. The revenues saw a high growth during the quarter primarily because of significant improvement in the realisations of isopropyl alcohol (IPA) and ammonium nitrate (AN).  Fertiliser segment: The revenues from the fertiliser segment rose by 71.4% yoy to Rs121.2 crore in Q2FY2009 from Rs70.7 crore in Q2FY2008 due to manifold increase in the manufacturing activity.  Realty: During the quarter, the company’s specialty mall for interiors and exteriors, Ishanya, earned revenues of Rs4.0 crore, which was higher compared with Rs3.1 crore earned in Q1FY2009.

• The other income declined by 30.2% to Rs4.7 crore in Q2FY2009 from Rs6.8 crore in Q2FY2008 on account of a drop in the interest income. The interest income fell due to non-availability of surplus funds during the quarter. 
• The operating profit grew by 112.8% yoy to Rs83.8 crore as its operating profit margin (OPM) came in at 22.3%, marking an increase of over 470 basis points compared with 17.6% in Q2FY2008. However, the earnings before interest, tax, depreciation and amortisation (EDITDA) increased by 91.7% yoy to Rs88.5 crore due to a 30% decline in the other income. 
  • Chemical segment: The profit before interest and tax (PBIT) of the chemical segment almost doubled to Rs74.9 crore in Q2FY2009 from Rs37.3 crore in Q2FY2008 with the PBIT margin increasing by 550 basis points to 29.5% in Q2FY2009 from 24.0% in Q2FY2008. However, sequentially the PBIT margin declined from 34.7% in Q1FY2009. 
  • Fertiliser segment: The fertiliser segment registered a segmental profit of Rs9.5 crore during the quarter as against a loss of Rs1.5 crore in Q2FY2008 and a profit of Rs4.0 crore in Q1FY2009. 
• During the quarter the company booked a foreign exchange (forex) loss of Rs13.0 crore on account of an outstanding external commercial borrowing of $15 million. Cumulatively, the total forex loss for H1FY2009 stood at Rs32 crore. 
• During the quarter the company booked an extraordinary loss of Rs1.6 crore; of this Rs1.45 crore was towards the expenditure incurred for brand launching activity and Rs0.16 crore was towards voluntary retirement scheme compensation. 
• Consequently, the reported profit after tax for the quarter jumped up by 91.0% yoy to Rs41.8 crore as compared with Rs21.9 crore in Q2FY2008.
• The recent spike seen in the industrial chemical prices globally is unsustainable and most of them have cooled off from their recent peaks. The demand outlook for the chemicals business remains under clouds, as a slowdown in the overall industrial activity has led to languishing demand, resulting in further softening of chemical prices. This is likely to affect the realisations in this business segment and impact the overall profitability of the company. 
• Accordingly, we are revising our earnings estimate upwards by 13.7% for FY2009 factoring in the higher than expected performance during H1FY2009. We are revising our FY2010 earnings estimate downwards by 26.10% in view of a weaker demand outlook and likely decline in the realisations for the chemical segment next year. We are also lowering our target valuation multiple in view of slower earnings growth going forward.
• At the current market price of Rs58, the stock is trading at 3.7x its FY2009E earnings per share (EPS) and 4.4x its FY2010E EPS. We are valuing the stock at 5x its FY2010E EPS and valuing company’s specialty mall business at Rs20.8 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs86