Deepak Fertilisers & Petrochemicals - Q2FY12: Strong Profit Growth in a Challenging Environment:: JPMorgan

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DFPC reported a 30% YoY increase in 2Q profits in a challenging environment,
which entailed lower TAN demand on extended monsoon, MTM forex losses, and
raw material cost pressure. While DFPC has taken successive price hikes for
TAN, it has not been able to pass on the full impact of raw material costs. The
new TAN plant will be closed for three weeks in October for maintenance/repair.
We cut our EPS estimates for FY12/13 to factor in lower TAN volumes and higher
raw material costs. Maintain OW with a PT of Rs220.
 Delay in new TAN plant ramp-up: DFPC is facing issues with mechanical
equipment, which would require shutdown for a week. DFPC also plans to
bring forward its planned maintenance in 4Q and close the new plant for three
weeks. As a result, production from the new TAN plant will be lower by 30K
tons in FY12. Demand for TAN has been sluggish for the 2Q on account of
extended monsoons and stir in Telangana, and with 3Q also likely to be weak;
management deemed it appropriate to shut the plant in 3Q. DFPC expects TAN
production to begin ramping up from 4QFY12.
 Taking price hikes to mitigate cost pressure. DFPC imports ~70%-75% of its
ammonia requirement and most of its phosphoric acid requirement, prices of
which have increased 67% YoY and 27% YoY, respectively. Although, DPFC
hiked its TAN price by Rs2000 in 2Q, it has not been able to completely passthrough
price increases due to sluggish demand for TAN. Fertilizers have fared
much better though, where margins have improved. Management indicated they
would continue to hike prices going forward if costs do not abate.
 Q2FY12 result highlights. Revenues up 42% YoY, driven primarily by growth
in TAN (+82% YoY) and IPA volumes (+34% YoY). EBITDA margin declined
180bps YoY mostly due to MTM F/X loss of Rs80MM. Adjusted for MTM
losses, EBITDA margins declined only 50bps. Net profits increased 30% YoY.
 Maintain Overweight. We cut our FY12/FY13 estimates by 13%/4% factoring
in lower TAN volumes and higher interest costs on commissioning of new TAN
plant. Maintain OW and roll forward our PT to Sep-12 (from Mar-12), still at
Rs220 based on 8x Sep-13E P/E.