Q4FY23 Review: Deepak Fertilizers: Tailwinds to headwinds

22 May 2023 , 10:16 AM

After witnessing tailwinds in FY23, Deepak Fertilisers is now facing headwinds for FY24. Collapse of Ammonia spreads has coincided with the company’s upcoming plant commissioning. And for that reason, we now expect the Greenfield project to yield lower returns. Analysts of IIFL Capital Services cut their FY24/25 EPS estimates by ~30- 45% and build in a recovery in spreads only from Q4FY24. Their SOTP-based, TP (rolled forward to Jun’24) comes down to ~Rs730. For Q4, the company reported a ~6% YoY decline in Ebitda. While Fertiliser Ebit grew ~89% YoY, Chemicals declined ~28% — due to pressure on TAN margins following increased exports from Russia.

Ammonia spreads have collapsed: 

Ammonia spreads have collapsed over the last few months. At current rates, the upcoming ammonia plant will just about to break-even. However, management stated that the long-term average is ~US$200-230/MT and spreads are expected to normalise over the longer term. Plant is on track to be commissioned this quarter and the company plans to sell excess production to local purchaser. Ramping up the plant is not seen to be a challenge.

TAN spreads under pressure: 

Post recovery in Russian exports and ban on Indian exports, reduction in TAN realisations has started to impact TAN (and also the Chemical segment) margins. However, central government is likely to allow Indian exports to resume soon. Demand from TAN continues to be strong, especially from the Infrastructure sector. The company endeavours to improve margins by increasing the share of TCO contracts.

Near-term headwinds; but valuations attractive: 

While TAN margins have shrunk off elevated levels, Nitric Acid spreads continue to hold strong. 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, we believe benefits from Greenfield ammonia expansion will start being visible in FY25. Their 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.