Q2FY24 Review: Deepak Fertilizers: Benefits of ammonia plant to accrue soon

6 Nov 2023 , 11:49 AM

DFPC delivered a steady Q2, but for Rs1.9bn impact of channel inventory losses in the Fertiliser business (due to the downward revision of NBS rates) and ammonia plant stabilization. The ammonia backward integration project got commissioned in Aug’23, however the profitability got impacted due to initial stabilisation and lower ammonia prices. Ammonia prices have since recovered. While prices of TAN and Nitric Acid have started cooling off, spreads remain healthy. Analysts of IIFL Capital Services have largely maintained their FY24- 26 EPS estimates as improvement in ammonia spreads got compensated by lower TAN spreads. Their SOTP-based, TP (rolled forward to Dec’24) goes up to Rs780 (earlier Rs720). 

Ammonia plant commissioned: 

The much awaited ammonia plant has been commissioned in Aug’23. The initial stabilization phase along with lower ammonia prices impacted consolidated Ebitda by Rs870mn and Pbt by Rs1.48bn in Q2’24. The ammonia prices have now recovered to $550/tn and this has improved the spreads to $75-100/tn. Further, the Ultra Mega Project benefit from ‘The Government of Maharashtra’ has been increased to 100% of the eligible project investments (up from the previous limit of 75%). This will improve the ammonia plant’s RoI. 

Stable Q2 despite one offs: 

The TAN business was impacted by the dumping of cheap Russian FGAN into India as despite ~9% YoY volumes growth revenue fell by 44%. Management was optimistic of a recovery in H2’24 as prices FGAN black sea prices are expected to improve in conjunction with urea and ammonia prices. Further, the recent lifting of export ban by GoI opens up the export opportunity for domestic manufacturers. Though demand was strong in Fertiliser business, the profitability got impacted due to NBS rate cut as the company took provision of Rs1.06bn on channel inventory. 

Cheap valuations:

While TAN and Nitric Acid margins will come off from extremely elevated levels, Fertiliser margins will improve in H2’24. Analysts of IIFL Capital Services expect improving ammonia spreads to start aiding overall profit from H2’24. While growth in the upcoming quarters may look subdued given the high base, they believe benefits from ammonia plant will be visible in FY25. Analysts of IIFL Capital Services estimates also assume moderation in TAN and Nitric Acid margins, but should they continue to be strong, there is upside risk. In this context, valuations are reasonable.