DEEPAK FERTILISERS: Lots In The Pipeline

Deepak Fert & Petrochem’s revenues will rise once it secures additional supply of natural gas. Investors with an 18-24 month horizon can consider the stock

DEEPAK FERTILISERS and Petrochemicals (DFPCL) has an annual turnover of Rs 950 crore. It derives over 72% of its revenue from chemicals and 28% from fertilisers. Successful commissioning of Dahej-Uran pipeline (DUPL) may provide upside once the company secures additional natural gas. Investors with an 18-24 month horizon can consider the stock.

BUSINESS:

DFPCL manufactures various chemicals. It enjoys 45% market share in nitric acid, 35% in ammonium nitrate and 16% in methanol. It is the only producer of isopropyl alcohol (IPA) in India. It also trades in some chemicals and fertilisers. But the lack of availability of sufficient natural gas remains a key problem. DFPCL recently diversified into the realty sector and has built a specialty shopping mall ‘Ishanya’ with 5.5 lakh sq ft leasable area in Pune. DFPCL also entered into a JV with Yara International, a global manufacturer of ammonium nitrate and specialty fertilisers. The JV will invest in the 300,000-tonne ammonium nitrate plant the company plans to set up at Paradip at a cost of Rs 400 crore. At current prices, this plant will generate annual revenue of over Rs 300 crore. The company is building storage tanks to facilitate imports of ammonia that will free up natural gas for other products. It also plans to reduce greenhouse emissions from its factories.

GROWTH DRIVERS:

After completion of DUPL, the company has drawn a test quantity of natural gas and seeks to finalise a firm supply for future use. Higher availability of natural gas will not only help it to operate its facilities at full utilisation levels, but will also enable it to save on high-cost naphtha. Volume growth from IPA business and revenues from ‘Ishanya’ will drive DFPCL’s profitability. At current lease rates, ‘Ishanya’ may add 10% to its operating profit.

FINANCIALS:

The company’s net sales saw a CAGR of 20.5% over the past four years, while net profit rose 10.1%. During the quarter ended December ’07, net profit fell 1% to Rs 24.5 crore, while revenue rose 13% to Rs 274 crore.

VALUATIONS:

The company’s EPS for trailing 12 months stood at Rs 11. The CMP of Rs 130.75is 11.9x this EPS. Supply of natural gas may boost its revenues by Rs 200 crore on a full-year basis. In addition to the savings on naphtha, this can boost its annual operating profit by Rs 45 crore. Although the company appears fairly valued at current price, the potential benefits from additional gas supplies have not being taken into account. It has consistently paid dividends. The stock can generate value for investors.

CONCERNS:

DFPCL has faced delays in project execution. Its future growth may suffer if it is unable to secure additional supply of natural gas in time