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Deepak Fertilisers |
Upgrade price target |
BUY
CMP: Rs 177 Target Price: Rs 250
n Q2FY11 APAT at Rs 448 mn (+23.4%yoy) was in line while EBITDA margins at 19.3% were below estimates
n Lower margins in chemical segment at 26.2% due to higher gas cost and lower production affected EBITDA margins
n Production to start at new TAN plant by Nov ’10, should start contributing to revenues and profits by Q4FY11
n Maintain BUY with revised price target of Rs 250 (from Rs 175) due to upgrade in valuation multiple from 7x to 10x
APAT growth of 23% yoy, in line with estimates
Q2FY11 results were in line with estimates with APAT of Rs 448 mn (+23.4% yoy / -
14.2% qoq) as against our estimates of Rs 469 mn. APAT is adjusted for Rs 33 mn
subsidy provisioning related to previous year resulting into reported PAT of Rs 415 mn.
Net revenues at Rs 4.1 bn (+16.7% yoy / +18.1% qoq) were ahead of estimates driven
by higher than expected revenues in both fertilisers and chemicals. EBITDA margins at
19.3% were below estimates of 22.8% due to lower margins in chemical segment.
Overall EBITDA increased by 10.9% yoy (-13.4% qoq) to Rs 800 mn.
Lower chemical segment margins affected EBITDA margins
Chemical segment margins at 26.2% (-420 bps yoy / -750 bps qoq) were below our
estimates of 30%. Chemical segment margins were affected due to- 1) higher gas cost
to US$ 9.5 / mmbtu as against US$ 7.5 / mmbtu previous year 2) pressure on IPA
realisations by ~5% and higher input cost 3) lower TAN offtake during the quarter due to
heavy monsoon. As a result chemical segment EBIT declined by 4% yoy / 21% qoq to
Rs 614 mn. Fertiliser segment margins at 8% were in line with estimates resulting into
EBIT of Rs 153 mn (+97% yoy / 4% qoq).
Commissioning of TAN plant to drive financials from Q4FY11
The company has started trial production at its new TAN (Technical Ammonium Nitrate)
plant with capacity of 300,000 mtpa and commercial production is expected by Nov’10.
It has plans to produce 60,000 mt in FY11 and 210,000 mt in FY12. However due to
lower utilization level in FY11, we expect profit contribution to remain muted in the
current financial year.
Upgrade price target, maintain BUY
We see DFPCL’s business model has witnessed significant changes between FY09-
FY12E driven by various reasons like - 1) reduced risk of volatility in earnings due to
increased gas availability 2) improvement in capacity utilization at methanol and
fertilisers plant which is likely to drive operating leverage 3) Increase in EBIT
contribution from fertilisers to ~15% from losses due to changes in fertiliser policies and
operating leverage 4) commissioning of new chemicals plant (IPA and TAN) which has
supported revenue and profit growth. These factors have resulted in improved average
EBITDA margins from 18% (FY06-08) to 22% (FY09-12E) and improvement in ROE
from average of 14% to 18%. With FY10-12E EPS growth of 26% and changes in
business dynamics, we are upgrading our target multiple from 7x to 10x and
subsequently revise our price target from Rs 175 to Rs 250 and maintain BUY.
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