Fertilizers – MID CAP – 1st April 2011

Deepak Fertilizers and Chemicals Ltd as the name suggests is engaged in the manufacture and sale of Methanol, Nitric Acid, Iso Propyl Alcohol, Technical Ammonium Nitrate and Nitro-Phosphate and Sulphur Bentonite fertilisers. It also offers a basket of outsourced specialty fertilizers.

Recent developments

• The company is looking at the feasibility of setting up a 3 lakh tonne per annum Technical Ammonium Nitrate plant in Australia. The feasibility study to be conducted in FY12 will form the basis of an proposed investment of $350 million spread over FY13 and FY14. Australia is THE PLACE TO BE from mining and related companies given the rich mineral resources and proposed additional investments by global companies. Ammonium Nitrate is used as an explosive in mining and close proximity to the customer will help gain a larger part of the market. Further, present in Australia will also allow the company to cater to fast growing mining areas such as Indonesia in the Asia Pacific region. We believe that this investment will not stretch the balance sheet of the company.

• Its 300,000 tonne per annum Ammonium Nitrate plant was commissioned in 4QFY11 after initial teething problems. This plant should be able to make a meaningful contribution in FY12 will full benefit likely in FY13. Ammonium Nitrate global prices in March 2011 are 38% higher y-o-y and Deepak Fertilizer’s has raised prices by 15% in Jan-11.

• The New fertilizer based subsidy scheme revised pricing for FY12 is favourable for companies such as Deepak Fertilizers as prices of DAP and 23-23-0 complex fertilizer up by 14-15% over FY11.This will help boost sales and earnings as compared to our earlier estimates.

Valuations and View:

• Revenues and earnings are likely to rise by 33% and 24% respectively in FY12 on the back of the expanded Ammonium Nitrate plant in India. Valuations are attractive as compared to historical average P/E of 8.6x for the last 5 years. With improving ROE from 16% in FY10 to 19% in FY11, we see scope for improvement in valuations. A plant in Australia will further boost valuations over a period of time. We reiterate our BUY recommendation.

CMP (Rs.) 166
MBP (Rs.) 175
Face Value 10
Equity Shares (Mn) 88.2
52-Week Range (H/L) 212 / 102
M.Cap. (Rs b) 14.6