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Research
Buy Deepak Fertilizers and Chemicals - Motilal Oswal
Posted On : 2010-09-01 10:18:36( TIMEZONE : IST )
GROWTH DRIVERS
Ammonium Nitrate Capacity addition: Ammonium Nitrate, an input for explosives used in mining, has a 400,000-450,000 tonnes of market growing in line with the mining industry at 9% p.a. Domestic production is close to 270,000 tonnes with 140,000 tonnes by Deepak Fertilizers and its subsidiary. The company is expanding capacity by 300,000 tonnes at a cost of Rs 655 crores. Sales volumes from the new plant to be commissioned in Sept'10Oct'10 are likely to be 50000 tonnes in FY11E and around 240,000 tonnes in FY12 with exports of 50,000 tonnes in FY12. This will help drive revenues.
Margins in the new plant are likely to be around 25% as it will use imported ammonia. Margins in the current plant stand at 32%, which includes margins on ammonia manufactured in-house from natural gas. This new plant is expected to add Rs 90 cr to operating profits in FY12 i.e 25%+ growth over FY10 EBITDA.
Iso-Propyl Alcohol revenues to rise in line with Pharmaceutical market sale: At ~Rs 300 cr, Iso-Propyl Alcohol (IPA) was the highest revenue contributor in FY10. Revenue from IPA is likely to see 12-15% growth p.a. over the next 2 years in line with the expected growth in the Pharmaceuticals market. This is likely to add 5% of FY10 profits over the next two years.
Increased gas availaibility to drive fertilizer revenues: Deepak Fertilizer manufactures NitroPhosphate and markets Muriate of Potash, Di-Ammonium Phosphate and other fertilizers. Fertilizers contributed Rs 440 cr to sales and only Rs 16cr to EBIT in FY10. Manufactured fertilizer production and revenue were depressed by low gas availability. Gas availaibility improved in 1QFY11 and is likely to drive fertilizer sales over FY10-FY12E by 15% compounded average growth rate.
Further, manufactured fertilizer sales will improve and these fertilizers have a steady-state margin of 12-15%. As a result, fertilizer profits are likely to improve by more than the growth in revenues.
Valuations & View: Revenues are likely to rise over FY10-FY12E at 24% CAGR with ROE likely to be improve to 19%. However, lower margins, additional interest and depreciation from new capacity are estimated to restrict earnings growth is to 21% CAGR. Fertilizer revenues will improve with gas availability, but the chemicals segment with added capacity will drive earnings over the next 3 years.
Valuations are currently attractive at 6xFY12E earnings and a 3% dividend yield for FY11E. We recommend BUY with a target of Rs 200 valuing the company at 8.5XFY12E earnings.
