Q1FY24 Review: Deepak Fertilizers: Impacted by one-time costs

31 Jul 2023 , 12:53 PM

DFPC delivered a steady Q1, but for Rs1.6bn of one-time channel inventory losses in the Fertiliser business (due to the downward revision of NBS rates). The company’s ammonia backward integration project is undergoing trial runs and commissioning is expected soon. However, spreads of ammonia are currently negative. While prices of TAN and nitric acid have started cooling off, spreads remain healthy and above long-term averages. Analysts of IIFL Capital Services cut their FY24-26 EPS estimates by ~4-5%, primarily to factor in the rising finance costs. Their SOTP-based TP (rolled forward to Sep’24) comes down to ~Rs720. 

Ammonia backward integration plant to be commissioned soon: 

The upcoming ammonia plant has started trial production and is likely to commence operations soon. However, ammonia spreads are currently negative (US$125-150/MT) and thus, analysts of IIFL Capital Services do not expect the plant to contribute to Ebitda in the near term. Management is hopeful that ammonia prices will recover in H2FY24. The company will look to sell excess capacities to smaller consumers in the domestic market – wherein one gets a healthy premium to the FOB price. 

Russian imports hinder TAN business: 

The TAN business was impacted by the dumping of cheap Russian FGAN into India. Volumes / revenue fell 15%/50% YoY. While Q2 is expected to remain subdued due to the monsoon, management expects recovery in the H2 of the year as prices of nitrate-based products are slowly increasing in Europe. 

Cheap valuations: 

While TAN and nitric acid margins have shrunk off extremely elevated levels, they continue to remain above long-term averages. Additionally, Fertiliser margins too are improving with time. Analysts of IIFL Capital Services expect ammonia spreads to start normalising from year-end. While YoY growth in the upcoming quarters may look subdued, given the high base, they believe benefits from Greenfield ammonia expansion will start being visible in FY25. Analysts of IIFL Capital Services estimates also assume moderation in nitric acid margins; but should they continue to be strong, there is upside risk. In this context, valuations are reasonable.