Tata Chemicals and Deepak Fertilisers are two important firms in the chemicals and fertiliser spa. In the last 5 years, both the stocks have given multibagger returns to their investors. While Tata Chemicals has surged 280 percent, Deepak Fertilisers has advanced 150 percent in this time.
However, in the past 1 year, the latter (Deepak Fert) has massively outperformed Tata Chemicals, rising 105 percent in this period as against a 25 percent gain in Tata Chemicals.
In 2022 so far, Deepak Fert is also one of the biggest gainers in the fertiliser space, up 133 percent as against an around 30 percent rise in Tata Chem.
About the firms
Tata Chemicals is a subsidiary of Tata Group which operates in sectors including chemicals, crop protection and specialty chemical products. The company is one of the largest chemical companies in India with operations in India, Europe, North America and Africa. It has a publicly listed subsidiary called Rallis India.
Meanwhile, Deepak Fertilisers produces and sells fertilizers and industrial chemicals in India. It operates through Chemicals, Bulk Fertilisers, Realty, and Windmill segments. It also exports its products to the Middle East, Africa, and southeast Asian countries. The company was incorporated in 1979 and is headquartered in Pune, India.
Both the stocks reported robust earnings in the June quarter, however, Deepak Fertilisers outpaced Tata Chemicals.
Deepak Fertilisers posted a 233 percent YoY surge in its net profit in the June quarter at ₹435.66 crore versus ₹130.63 crore registered in Q1FY22. Revenue from operations also jumped 59.4 percent YoY to ₹3,031.07 crore in the quarter under review from ₹1,902.10 crore posted in the same period last year. The company said robust top-line growth and margin enhancement were primarily driven by the chemical segment.
Commenting on the performance, Sailesh C. Mehta, chairman & managing director said, "We have continued our strong operational performance in Q1 FY23 on the back of improved margins in the Chemical segment. This persistent business performance is a result of our long-term strategic initiatives, strong market positioning and favourable market conditions."
Meanwhile, Tata Chemicals reported an 86.25 percent rise in its consolidated net profit at ₹637 crore in Q1FY23 versus ₹342 crore in the corresponding quarter of the previous fiscal. Its revenue from operations advanced 34.15 percent during the quarter under review at ₹3,995 crore compared to ₹2,978 crore in the year-ago period.
Tata Chemicals versus Deepak Fertilisers: Which to pick?
Narendra Solanki, Head- Equity Research Anand Rathi believes that Deepak Fertilisers in a good choice in the fertiliser space.
"Deepak Fertilizers offers a wide range of NP (Nitro Phosphate), NPK (Nitrogen Phosphorous Potassium) variants, Water Soluble Fertilisers (WSF) and Bentonite Sulphur. DFPCL has shifted from plain grade to differentiated fertilizers which demand premium pricing over plain grade. The company has also launched Crop specific fertilizer viz Croptek that combines NPK with micronutrients. The above shift from being a commodity to specialty players will result in increased margins. The Capacity utilization of NP/NPK was 75 percent while bensulf was 76 percent during Q1FY23. Thus the available capacity across their plants also provides headroom for future growth potential," explained Solanki.
Considering the above points one may invest in Deepak Fertilizers for the long term, he said. Further one should also keep in mind that the company also has a diversified portfolio of products where the chemical Segment contributes around 55-60 percent of the total revenue of the company. The same should also be considered while taking decisions, he added.
However, he pointed out that it is important to note that Both the companies are not exactly comparable. Fundamentally both the companies are good and investors may prefer investing in both the companies for the long term, he said.
"In Chemical Segment, Deepak Fertilizers manufactures TAN, Nitric Acid and IPA whereas Tata Chemical is present in the manufacturing of Soda ash, sodium bicarbonate and iodised salt," noted Solanki. Hence, both the companies are not comparable on an apple-to-apple basis.
Outlook on Fertiliser sector
According to Solanki, increasing Raw material prices and supply side challenges are key risks to the companies going ahead in terms of costs while any uneven monsoon has the potential to affect the demand for fertilizers in the country. Also, changes in subsidy policies like reduction, etc could also affect the fertilizer companies' profitability, he added.
However, the risk of a breach of the government’s fiscal deficit target could play a spoilsport for the sector as it could prompt the Centre to cut back on subsidy support, caution analysts.
“Fertilizer companies may continue to benefit from higher fertilizer prices but may see a pull-back in volumes in the recent quarter due to weak sowing activity. Capex done towards backward integration into phosphoric acid will incrementally add to margin support, while high prices of ammonia and gas will continue to hurt EBITDA/ton,” B&K Securities said in a note.
This will remain an overhang on the sector’s outlook in the short-to-medium term, however, most experts are bullish on the long-term outlook of the sector.
Disclaimer: This story is for educational purposes only. Please speak to an investment advisor before making any investment decisions.