Deepak Fertilisers - Q3FY14 Result Update - Phillip Capital

Higher realizations, fall in feed costs helps the beat: Deepak Fertilisers reported a strong beat in Ebitda, largely helped by higher chemical division profitability, whilst a 30% fall in interest outgo qoq and lower tax rate than assumed helped the PAT beat. The results were largely helped by higher product prices across categories and fall in feed ammonia costs, which propped up margins. Overall revenues at Rs 10 bn up 63% yoy was largely helped by volume growth in chemicals and fertilizers (fertiliser division revenues grew 78%; whilst Chemicals grew 57%). Ebitda almost doubled to Rs 1.38 bn, about 6% ahead. Ebit/mt for fertilizers improved 33% yoy to Rs 6900/mt and that for chemicals by 5% yoy and 25% qoq to Rs 5437/mt. Interest outgo has been steadily declining, down 31% qoq to Rs 200 mn. Lower tax further helped the PAT of Rs 721 mn up 130% yoy and ahead of our estimate of Rs 610. The exceptional charge of Rs 111 mn is on account on VRS spends and that has been adjusted for comparison.

Chemicals division: Higher realizations fall in feed costs props up margins: The revenues for chemicals division have improved by 13% qoq to Rs 6.51 bn (5% volumes and 4% realization growth). Higher manufacturing (+9% qoq) & slightly higher trading (+33% qoq) overall helped the topline growth. The higher realizations (+4% qoq) and methanol sales (on the back of lower gas price and higher methanol price realizations) after a long period too supported the growth. Helped by easing of ammonia prices, EBIT/MT improved by 25% qoq to Rs 5,437/mt.

Fertiliser division: Fall in feed costs helps prop up margins: The revenues for the division degrew by 11% qoq, as a result of lower trading -22% qoq and higher revenues from manufacturing (+3% qoq). The easy availability of phosphoric acid helped Nitro Phosphate volumes improve by 5%. However, speciality fertiliser sales volumes declined 36% qoq. EBIT for the division came at Rs 551 mn (+14% qoq); with OPM margins improving by about 300 bps to 14% qoq.

Valuation & Price Target: More than doubling of domestic gas price and a sustained increase in diesel retail price (freight costs to go up) with this any further subsidy cut in phosphatic fertilizer threatens the fertilizer divisions competitive positioning/outlook. Although all P&K producers that use domestic gas for P&K production have indicated to pass on part of the cost increase, we remain circumspect at present and shall review post April'14. Besides the gas price headwind, we also see mopping up of excess profits made on P&K fertilizers for earlier years an impending risk. Apart of this, we certainly see core operating profit improving led by fall in feed costs (ammonia, phosphoric acid, stable rupee) and higher utilization rate across product categories. The recent stricter regulation on import/transport of ammonia nitrate, should lower imports and restore pricing power to Deepak Fertilisers. Attractive yield (5.6%), Investment in Mangalore Chemicals (Rs 16/sh) and inexpensive valuations (on FY15E 4.2x PE, 0.6x PBV & 3.7x EV/EBIDTA) limits investment downside. We value the stock at Rs 120 and retain Neutral.

Source : Equity Bulls

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