Deepak Fertilisers

Deepak Fertilisers is generating healthy cash flows. This together with attractive dividend yield and better business prospects makes for a good long term investment

DEEPAK Fertilisers and Petrochemicals (DFPCL) is a Pune-based company with an annual turnover of Rs 1,400 crore and a market capitalisation of Rs 475 crore. The company derives over 72% of its revenues from chemicals and 25% from fertilisers. The company is generating healthy cash flows and is likely to emerge a key beneficiary of increased availability of natural gas in India over next few months. The company is placed attractively with little downside risk, healthy dividend yield and with promising growth prospects over next 12 months.

Business:

DFPCL manufactures various basic chemicals occupying high market share in most of them in India. It enjoys nearly 45% market share in nitric acid, 35% market share in ammonium nitrate, 16% in methanol and is the only producer of isopropyl alcohol (IPA) in India. However, availability of natural gas remains an ongoing concern due to which the company is forced to operate its methanol and nitrophosphate fertilisers units at lower than full-capacity.

Also the company has diversified into real estate. It has built a shopping mall Ishanya with 5.5 lakh sq feet leasable area. With around 50 stores, a little over half of total area is operational. Last year DFPCL entered into a joint venture with Yara International, a Norwegian manufacturer, to sell its specialty fertilisers in India.

GROWTH DRIVERS:

The company recently increased the capacity of its nitric acid plant by one third to 400,000 tonne per annum (TPA). It has built up ammonia storage tanks of 15,000 tonne capacity at JNPT. Once these become operational from April 2009 the company will be able to import ammonia and save natural gas, which can be diverted to increase production of other products.

The company is now firmly connected to the national natural gas grid and has access to natural gas produced anywhere in the country. With RIL commencing natural gas production, DFPCL’s chances to secure a long-term supply of natural gas at reasonable price appear bright.

The company is setting up a 140,000 TPA nitric acid plant by end of 2009 and 300,000 TPA ammonium nitrate plant near its existing plant in Taloja at a cost of Rs 650 crore in first half of FY 11.

FINANCIALS:

The net sales of DFPCL have grown at a CAGR of 21.7% over last five years while the net profits grew at 9.5%. Its debt-to-equity ratio stood at 48.6% for the year ended March 2008 with the return on capital at 17.2%.

The company posted 8.5% fall in profits during the quarter ended December 2008. However, the poor performance was due to crash in commodity prices and also due to 2-month closure of its nitric acid plant for expansion. Hence, if we look at the 12-month period ending December 2008, the company has expanded its profits by 45% to Rs 140 crore with 51% jump in net sales to Rs 1,396 crore. In the past the company has distributed almost one-third of its annual profits by way of dividends with Rs 3.5 per share in FY08.

VALUATIONS:

For FY09, we expect the company to report net profit of Rs 145 crore, which translates in a P/E of 3.2 on current market price of Rs 52.8. If the company maintains its divided payout ratio around 30% of its net profit, the dividend per share will go above Rs 4 this year. At current market price this translates in a dividend yield of 7.5%. The low P/E and attractive dividend yield limit the downside in the scrip with definite growth prospects over next 12 months
Beta 0.76
Institutional Holding 18.01%
Dividend Yield 6.5%
P/E 3.3
M Cap Rs 465.7 Cr