BUY Deepak Fertilisers Q3FY11; Strong performance of chemical segment; Target: Rs 250 : Emkay

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Deepak Fertilisers

Strong performance of chemical segment continues

BUY

CMP: Rs 157                                       Target Price: Rs 250

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n     Q3FY11 APAT at Rs 446 mn (+28%yoy) was in line with estimates. APAT is adjusted for asset restructuring cost

n     Chemical EBIT margins at 30% were driven by higher chemical prices - Methanol prices up 40% qoq, IPA and TAN also remain strong

n     Fertiliser margins at 3% were adversely affected due to lower raw material availability

n     Maintain healthy outlook on chemical segment margins in the near future. New TAN plant to drive revenues / profits in FY12. Reiterate BUY

APAT growth of 28% yoy, in line with estimates

Q3FY11 results were in line with estimates with APAT of Rs 446 mn (+28% yoy / flat

qoq) as against our expectation of Rs 456 mn. APAT is adjusted for Rs 34 mn on

account of asset restructuring cost incurred in the real estate business (Ishanya mall) -

in the current quarter as against Rs 257 mn adjusted in previous year - pertaining to

sale of leasehold land. Revenues for the quarter increased marginally by 2% yoy to Rs

3.8 bn (tad ahead of our estimates of Rs 3.5 bn). Revenues from the chemical segment

increased by 23% yoy to Rs 2.6 bn (contributed 68% to total revenues) while fertiliser

revenues declined by 24% yoy to Rs 1.2 bn due to lower fertiliser sales.

Chemical segment reported robust margins at 30% while….

On account of rising chemical prices, the company reported robust chemical EBIT

margins at 30.4% (+50 bps yoy / +420 bps qoq) - marginally higher than our estimates

of 29%. Resulting EBIT increased by 25% yoy to Rs 799 mn contributing 97% of the

total EBIT. Methanol prices increased by ~40% to Rs 16,000 / mt from Rs 11,000 / mt in

Q2FY11. IPA and other chemicals too witnessed marginal price increase. Although raw

material cost - mainly gas and ammonia - increased marginally, it was compensated by

higher finished product prices. We expect that strong margins in Methanol (EBITDA %

at ~35%) may remain stable in Q4FY11 too while recent increase in TAN prices by ~

15% to Rs 22,000 / mt should drive margins in Q4FY11. Increasing gas prices and

ammonia prices are our near term concerns.

… Fertiliser margins suffered due to lower production

Lower phos acid availability for Q3FY11 (company’s shipment got delayed) adversely

affected ANP fertiliser production. ANP sales volumes declined by 24% yoy / 35% qoq

to 23,000 mt. Fertiliser trading also declined by 37% yoy / 39% qoq to Rs 715 mn.

Consequently, fertiliser revenues declined by 24% yoy to Rs 1.2 bn and fertiliser

margins also fell sharply to 3.5% with EBIT contribution of mere Rs 43 mn. The

company has contracted raw material (phos acid) at US$ 830 / mt and has increased

ANP prices by 5% in the previous two months. However, we expect fertiliser profitability

to remain subdued in Q4FY11 due to lower seasonal demand.

Upgrade price target, maintain BUY

We maintain our FY11 / FY12 estimates at Rs 21.2 / Rs 25.2 and maintain our BUY

recommendation on the stock. We expect strong Q4FY11 results on account of higher

chemical prices and commissioning of TAN plant by Q4FY11 should drive revenues and

profitability for FY12.