Deepak Fertilisers’ Q3FY14 results surprised positively, driven by higher top‐line as well as better margins in fertiliser. Top‐line growth of 63% YoY was driven by higher manufacturing as well as trading in both chemicals and fertilisers segment. Chemicals margins improved 260bps QoQ to 13.1% driven by improvement in realization along with stabilization of raw material prices. Fertiliser margins improved significantly to 13.7% (530bps YoY/300bps QoQ) benefitting from margin improvement in specialty fertilisers and higher manufactured fertilisers. Adjusted PAT stood at Rs699m, 121% YoY. With ramp‐up in TAN operations, opportunity in chemical trading and higher manufactured fertiliser volumes, we expect revenues to increase at a CAGR of 15.4% over FY13‐16E. We maintain ‘Accumulate’ (21% earnings CAGR over FY13‐16E, attractive valuations, 5% dividend yield, 30% discount to book value) with target price of Rs135. However, increase in gas prices, going forward, are likely to remain a key overhang on the stock in the near‐term.
* Top‐line growth of 63% YoY along with margin improvement boosted PAT:
Deepak Fertilisers reported revenues of Rs10.1bn, 63% YoY (PLe: Rs8.6bn) driven by higher chemicals as well as fertiliser revenues. EBITDA for the quarter stood at Rs1.3bn, 91% YoY with margins of 13.1%. (PLe: Rs1.0bn with margins of 11.7%). Adjusted PBT for the quarter stood at Rs962m, 130% YoY (PLe: Rs706m). Adjusted PAT stood at Rs699m, 121% YoY (PLe: Rs523m). We have adjusted for Rs111m of VRS-related cost included in the current quarter results and Rs55m of MTM gain included in the fertiliser segment. Reported PAT stood at Rs643m, 103% YoY. We have not adjusted for EO losses of Ishanya of Rs53m included in results. On a 9M basis, adjusted EPS stands at Rs19.7.
* Chemicals reported revenues significantly ahead of estimates; margins improved 260bps QoQ to 13.1%:
Chemicals reported revenues of Rs6.5bn, 57% YoY (PLe: Rs5.4bn), driven by higher manufacturing volumes and traded chemicals. Manufactured chemicals recorded revenues of Rs5.2bn, 43% YoY (PLe: Rs4.6bn), while traded chemicals reported revenues of Rs1.3bn (PLe: Rs800m). Key products like Iso Propyl Alcohol and Technical Ammonium Nitrate registered a growth of 12% and 36%, respectively. Adjusted chemicals margins improved 260bps QoQ to 13.1% (reported chemicals margins stood at 12.6%; 50% of the Rs111m VRS-related costs was in chemicals segment). Margins benefitted from easing of ammonia prices and better realization of products including, Methanol and IPA.
* Fertilisers performance impressive:
Fertiliser segment reported revenues of Rs4.0bn, 78% YoY (PLe: Rs3.6bn) driven by higher trading. Traded fertiliser revenues stood at Rs1.9bn (PLe: Rs1.6bn) driven by higher specialty fertiliser trading. Manufactured fertilisers reported revenues of Rs2.1bn, 105% YoY (PLe: Rs2.0bn) led by higher volumes of ANP manufactured fertiliser. ANP sales volumes stood at 77,077mt, 120% YoY. Adjusted fertiliser margins stood at 13.7%. Fertiliser margins benefitted from margin improvement in specialty fertilisers. Going forward, management highlighted that sustainable margins in fertilisers will be 10-12%.
* Maintain ‘Accumulate’ with target price of Rs135:
Deepak Fertilisers is currently trading at 4.7x FY15E earnings, which is at a discount of 30% to its long-term average. We recommend ‘Accumulate’, with target price of Rs135. Dividend yield of 5.0% prevents further downside risk. Increase in gas prices and reduction in APM gas for complex fertiliser production remains a key overhang on the stock.
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