Company Name – Deepak Fertilizers and Petrochemicals Corporation Ltd. (DFPCL) Current Share Price – INR 675 (June 1, 2022) Market Cap – INR 8,135 cr |
[Updated for Q4FY22/FY22 results]
1. What is interesting about the stock?
“Top gear Sanju!”. Are you familiar with this movie's dialogue? If not, take out time to watch the movie ‘Jo Jeeta Wohi Sikandar” and enjoy one of the finest underdog hero movies. If you have, you’ll probably be able to equate Sanju and DFPCL. Both always had high potential but kicked into top gear after years of taking it easy.
Deepak Fertilizers and Petrochemicals Corporation Ltd. (DFPCL) is among India’s leading producers of fertilizers and industrial chemicals. Set up in 1979 as an ammonia manufacturer, Company’s product portfolio includes technical ammonium nitrate (TAN), industrial chemicals, bulk, and specialty fertilizers, farming diagnostics and solutions, and fresh produce. DFPCL has always focused on products with the potential for import substitution. E.g., a large part of India’s total Isopropyl alcohol (IPA) consumption of 200,000 tpa is still imported. The company has a ~42% market share in TAN, 30-70% share across various grades of nitric acid, and ~85% share in IPA. DFPCL has manufacturing facilities in Taloja (Maharashtra), Srikakulam (A.P.), Panipat (Haryana), and Dahej (Gujarat).
The production flow chart for various products is:
Segment-wise split for the key products in Q4FY22 was:
Chemical business (Revenue - INR 1,500 cr; Segment Profit - INR 524 cr)
Pharma (IPA)/Specialty chemicals (NA) - Revenue of INR 501 cr (a jump of ~70% on YoY). IPA sales volumes increased by 66% YoY despite some production loss on account of a mechanical issue. Nitric Acid (NA) sales volume was down ~6% on a YoY basis but the robust demand for Nitric Acids due to improved consumption and enhanced prices of downstream products helped in realizing better prices and margins. Increased demand from India due to the China + 1 factor is supporting in generating demand and healthy margins
Mining Chemicals (TAN) - Revenue of INR 839 cr. Volume was down ~8% on a YoY basis with revenue being up by ~110% implying a huge spurt in realization. While raw material costs (natural gas and ammonia) have continuously risen through the year, healthy demand for TAN has enabled the Company to pass on rising input costs and even increase margins. TAN production in Q4 was impacted due to the unavailability of ammonia.
Fertilizer business (Revenue - INR 506 cr; Segment Profit - INR 54 cr)
So, the Chemicals business contributed 91% of segment profit in Q4FY22 vs 88% in Q4FY21.
Dr. Reddy’s Laboratories, Aurobindo Pharma, Mylan Laboratories, Hetero Drugs, Divis Laboratories, and Asian Paints are key customers for IPA. In nitric acid, customers include Aarti Industries, Kutch Chemical Industries, Ordnance Factory Board, Jindal Steel, Rudraksh Chemicals, and Nuclear Fuel Complex. Clientele for its TAN business includes large corporates such as Coal India, Adani, Tata steel, Balco, Hindustan Zinc, ACC, UltraTech, and Ambuja. Company also supplies TAN to explosives makers like Solar Industries, IDL, GOCL, and Salvo Explosives.
The Company is currently in the midst of aggressive capacity enhancement implementation, which is expected to bolster revenues and safeguard raw material sourcing in the future. Projected increases in capacities areas are mentioned in the table below:
As of March 31, 2022, capex details for Ammonia and TAN capacity enhancements were:
Total cost incurred in Ammonia project: INR 2,483 cr; Pending investment: INR 1,867 cr
Total cost incurred in TAN Project: INR 366 cr; Pending investment: INR 700 - 900 cr
Investment in the Ammonia project is a backward integration initiative to ensure a consistent supply of ammonia and associated raw materials. On the other hand, the TAN project is expected to cut the country’s import bill by INR 4,500 cr per annum over the first decade of operations.
In terms of products, the company is now attempting to move up the value chain with specialty products. Further, to make operations more efficient and nimbler, DFPCL has implemented a corporate rejig involving moving the fertilizer and TAN businesses into a wholly-owned subsidiary of DFPCL - Smartchem Technologies. The two businesses enjoy synergies such as common raw material requirements and select manufacturing processes and hence have been clubbed together. The remaining businesses - industrial chemicals and a retail mall continue to be in DFPCL.
Key competitive advantages of the Company are:
Key products cater to a market where supply by Indian manufacturers is well short of demand in the country.
Market leadership in most of the products that the company manufactures.
Implementation of backward integration to protect against raw material price fluctuations.
2. Key Historical Financials
Historically, DFPCL witnessed revenue growth but declining profits due to shrinking margins. In FY10, the company had a PAT of INR 165 cr on revenues of INR 1,328 cr. In FY18, it had pretty much the same PAT despite revenues having grown to INR 5,995 cr
A focus on products that are higher on the value chain is again expanding margins. In FY22, EBITDA margin and PAT margin has increased to a respectable ~18% and 9% respectively from under 7-10% and 1-2% in FY19 and FY20. A key contributor to higher margins has been:
Spurt in IPA prices due to the pandemic, which is likely to come back to pre-pandemic levels in the future. IPA is a key component of hand sanitizer.
China + 1 supports significantly higher realization in Nitric Acid
Shortage in coal and other base metals is leading to a jump in TAN with Russia - Ukraine ongoing conflict.
All the factors mentioned above drove bumper results in Q4FY22 with EBITDA margins of 25%
Cash Flow convertibility (CFO/EBITDA) has improved since FY18 due to a decrease in the cash conversion cycle possibly because of better negotiating power with the Company in COVID-19 and other causes of shortages
ROCE/ROE jumped to 20/21% in FY22
3. What is my view on company valuation?
The Company’s stock price moved from about INR 78 on May 28, 2020, to the current price of INR 675. DFPCL is trading at an EV/EBITDA (TTM) ratio of c. 7.5x and a P/E (TTM) ratio of c. 12x.
Even though the decline in TAN, Nitric Acid (NA), and IPA prices could result in lower profitability and a fall in share price, a P/E of 12x seems attractive in the long run as DFPCL shall benefit from its capacity enhancement in FY24/FY25. While the capex is funded significantly by debt, a low D/E ratio means the company has bandwidth for an increase in leverage. Company is in the sweet spot on the realization of key products which may continue for a couple of years driving the share price higher. However, in long term, the realization (and ROCE/ROE) could trend lower.
On an overall basis, the Company looks interesting and an investor could evaluate the investment for the long term.
4. What are the risks to the investment analysis?
Risks to the analysis are:
The Company sources ammonia from the Middle East. Till such time its ammonia plant expansion is live, it continues to be exposed to an escalation in the prices of ammonia.
Delay in the payment of subsidies by the government could impact the company’s working capital cycle.
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
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