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Deepak Fertilisers & Petrochemicals Ltd (DFPC) operates in four business verticals:
chemicals, fertilisers, specialty retail and agri-business. It holds leading position in industrial
chemicals and fertilisers business in the country. The company manufactures iso propyl
alcohol, technical ammonium nitrate, ammonium nitro phosphate, methanol, nitric acid and
other specialty chemicals. It is a bulk importer of Muriate of Potash, Single Super phosphate,
complexes, solid solubles, bio fertilisers etc. The company had forayed in specialty retail
business through a 550,000 sq. ft entertainment and retail mall loacted at Pune in 2006. It had
also ventured in agri-services through a project named Saarrthie, where it provides nutrient,
crop and soil management advisory along with procurement of fruits & vegetables.
Smartchem Technologies Ltd., the main subsidiary of DFPC, is also engaged in the business
of manufacturing and trading of TAN (installed capacity of 37,000 MTPA) and weak nitric acid.
Industrial Chemicals: DFPC holds a wide chemical portfolio with leading position in multiple
products. It is the largest producer of Technical Ammonium Nitrate in the country with a
domestic market share of 30% (expected to reach 70% by FY12 due to installation of new 3lac
MTPA facility in Oct-2010). It manufactures low density ammonium nitrate, which is used for
making ammonium nitrate-fuel oil (ANFO), blasting agents and emulsified ANFO. ANFO
finds application in mining, quarrying and infrastructure as an explosive.
DFPC is the largest & only producer of iso propyl alcohol in India, with a dominant share of
75% in domestic market. Iso propyl alcohol is widely used as cleaning agent & water drying
fluid. The company also has Asia’s largest nitric acid complex with sizable share of 37% and
46% in dilute and concentrated nitric acids in Indian markets. It manufactures various
concentrations of nitric acid ranging from 60% to 98%. These acids are used in manufacturing
of drugs & dye intermediaries and refining of precious metals. Methanol is another key
product in the portfolio which is used in manufacturing of drugs, pharmaceuticals, pesticides
and other chemicals.
Fertilisers: The company is a leading manufacturer & importer of phosphate & potash based
fertilisers respectively. It has a total installed capacity of 230,000 MTPA for ammonium nitro
phosphate fertilisers. These fertilisers are categorized under various grades and marketed
under Mahadhan & Bhoodhan brands through a network of over 1,000 dealers across the
country. Import of various fertilisers like Muriate of Potash, Single Super Phosphate,
complexes, solid solubles, bio fertilisers etc is an integrated part of this business division.
Specialty Retail: DFPC diversified its business portfolio by venturing into specialty retail
segment in 2006, through a 550,000 sq. ft mall named High Street Ishanya. The mall originally
meant for exhibiting interior designing products is recently converted into an entertainment,
lifestyle and retail mall. It is located at prime location in Pune.
Agri-Services: Mahadhan Saarrthie, generally known as Saarrthie, is an agri-division concept
designed by DFPC to provide farming solutions in nutrient management, crop & soil
management, fertiliser usage, pest control and other important processes in harvesting. It
acts as a one-stop shop for farmers to understand the advances in global farming technology
and enhance their performance in yield and quality. Currently, the company covers 5500
farmers in three states through a chain of 9 Mahadhan Saarrthie centres. The company also
procures fruits & vegetables from farmers for leading retail organizations.
FERTILISERS: GATEWAY TO FOOD SECURITY
Agriculture is the mainstay of Indian economy. Agriculture and allied sectors contribute
~15% to Gross Domestic Product of India, while about 55% of its population is dependent on
agriculture for their livelihood. However, despite having vast areas of arable land India
faces huge challenge to meet its food requirements due to poor crop productivity compared
to international standards. As shown in the table, India suffers from low crop productivity in
all major foodgrains including wheat and rice.
India with its population of 1.17bn, growing at 10 yr CAGR of 1.5% per annum, is a large and
growing market for agricultural food products. Its per capita income, at constant prices, has
increased at an average of 5.4% per annum during the previous decade. However, the
production of foodgrains has remained almost stagnant with a nominal growth of 1% creating
massive gap between production and consumption. Hence, limited land bank makes it
formidable to focus on enhancement of crop productivity to lead the way of self sufficiency
in foodgrains.
India's crop productivity is affected by low usage of fertilisers and wide deviation from ideal
NPK ratio. (NPK ratio is the proportion in which different fertilisers are used. This ratio varies
with soil type & climate and determines crop productivity.) Per hectare fertiliser consumption
in India is 120kgs compared to 333kgs and 170kgs in China and Bangladesh. Even, the NPK
ratio at 5.3:2.2:1 is widely distorted from India's ideal ratio of 4:2:1.
Presently, urea (N-type) prices are controlled by the govt. while P & K-type fertilisers are
freely priced. Cheap availability of urea has distorted India's NPK ratio. Hence, its crucial to
include urea in Nutrient based scheme (NBS) to restore balance in NPK usage. Besides,
reforms are necessary in urea investment as its raw materials are available domestically.
For P-type fertiliser only 5-10% raw materials are available domestically, while K-type fertilisers
have to be completely imported.
In Nutrient based scheme (NBS) for phosphate-based (P type) and potash-based (K type)
fertilisers, subsidy is linked to import price parity and fair price is determined by considering
the average of prevailing and estimated future prices. This scheme has simplified industry
complications & created demand for inclusion of urea under NBS. However, complex subsidy
structure, high international prices and lack of farmer ability to absorb price hike has lead to
delay in decision by the government. Considering rising pressure from industry, need of
food security and weighing subsidy bill we except urea inclusion in NBS in FY12.
India imported less than 5% of its total urea requirement previously, however now it has to
import about 20% of total urea consumption (of ~27mn MT). Potash based fertilisers (K type)
are 100% imported while import of phosphate based (P type) fertilisers (primarily DAP) is 40-
60% of consumption.
INVESTMENT RATIONALE
Revenues to ride on TAN capacity expansion
DFPC is the largest producer of Technical Ammonium Nitrate (TAN) in the country with a
total installed capacity of 432,000 MTPA. TAN is a strong oxidizing agent commonly used as
an explosive in mining, cement and infrastructure industries. Domestic demand for TAN has
grown at the rate of 8-9% per annum and is currently estimated at 5.5-6.0lac tonnes against
domestic production of 2.5lac tonnes (excluding DFPC's new 3lac MTPA capacity, established
in Oct 2010, currently under stabilization process). We expect this demand to sustain on the
back of stable growth in mining & cement sectors and robust prospects in infrastructure
(especially during 12th Five Year Plan). Utilisation level for the new capacity is expected to be
70% and 80% in FY12E and FY13E respectively, while the old unit is expected to maintain 95%
level.
The company's TAN market share is expected to grow from 30% in FY10 to 70% by FY12. Tieup
with industry leaders like Coal India and likely exports of 50,000-70,000 tonnes per year
would keep demand intact. In terms of realisation, LDAN (low density ammonium nitrate - a
variant of ammonium nitrate) commands a premium of ~15% over fertiliser grade ammonium
nitrate (generally used as explosive) due to its better fuel oil absorption capacity. DFPC is the
sole producer of LDAN and is poised to benefit from its monopolistic position in this market.
Ammonia is the key raw material for production of TAN which is produced captively by the
company. However, additional requirement of ammonia for the new facility would be imported
by the company and it has established strong variable pricing contracts with major suppliers
in Middle East. EBITDA margin for TAN is expected to drop from 30% to 25-27% due to import
of additional ammonia requirement.
Subsidy revision & volume growth to drive fertiliser revenues
Ammonium Nitro Phosphate (ANP) is the key fertilizer manufactured by DFPC which
contributed 10% in revenues in FY10. Fertiliser production is expected to revive due to better
gas availability (against requirement of 0.65 mmbtu per day) and revision of fertiliser prices
under Nutrient based scheme w.e.f. Apr 2011. Utilisation is set to improve from 44% in FY10
to 50% and 60% in FY12 and FY13 respectively. We expect traction in revenue and margin in
fertiliser segment due to healthy growth in volumes and enhancement of subsidy
Healthy cash flows to continue from IPA & nitric acid
Isopropyl Alcohol (IPA) is the largest revenue generator for DFPC and is expected to
contribute ~23% in total revenue in FY11. DFPC is the only producer of IPA in India with total
installed capacity of 70,000 MTPA and domestic market share of 75%. Utilisation level for IPA
is expected to remain stable around FY10 level of 88%. Realisation and margin are likely to
hold their historical levels, below INR 60,000 per tonne and ~20% respectively, till FY13. We
expect steady cash flows from IPA going ahead. Nitric acid is also expected to maintain its
utilisation level and post stable cash flows till FY13. DFPC’s market share in domestic market
stands at 46% and 37% in concentrated and diluted products respectively. Nitric acid contributed
~11% of total income in FY10 and is expected to maintain these levels.
Ishanya occupancy to rise in FY12
High Street Ishanya has undergone major restructuring in FY11 and is now operational as an
entertainment, lifestyle and retail mall. The company expects the occupancy rate to improve
from 40% in FY10 to 60% starting H2 FY12. Average rentals are also expected to improve
from INR 30 per sq. ft.
Strong balance sheet provide room for expansion
DFPC is better placed in terms of credit position and is well poised to raise capital for any
future expansion. It raised INR 4100mn through debt for the new TAN facility while the
remaining requirements wase met through internal accruals. We expect repayment of INR
2500mn of debt in FY12, thereby dropping the debt-to-equity ratio to 0.4x from 0.8x in FY10.
CONCERNS
Volatility in Ammonia prices: Ammonia is the key raw material for TAN. Fluctuation in ammonia
prices could adversely affect our profit estimates.
Regulatory Risks: Fertiliser industry is regulated by a set of policies decided by Govt. of
India. Change in policy matters directly impacts price and consumption of fertilisers.
VALUATION & OUTLOOK
Lack of competition, switching of major mining & infrastructure players to technical grade
AN (from fertiliser grade AN) and strong growth in infrastructure in Southeast Asia (especially
India in 12th Five Year Plan) would support TAN growth. Better utilisation of ANP unit and
revision of fertiliser prices under NBS provide strong revenue visibility for the fertiliser
segment. Contribution from methanol could surprise earning estimates while income from
bentonite sulphur is expected to rise stably till FY13.
Historically, the stock has traded at an average PE of 5.7x over FY07-10. However, considering
the commanding position of the company in multiple products, its steady cash flows and
upper trading range of 6-7x we expect an upward revision of PE for DFPC to 7x and thereby
arrive at FY12E target of INR 202. We recommend BUY on the stock with 12-15 months
perspective.
