Deepak Fertilisers & Petrochemicals, a leading manufacturer of fertilisers and industrial chemicals, has experienced a remarkable surge in its share price. The company shares, which were trading at ₹75.15 apiece in March 2020, have seen a significant upward trajectory, surging by a staggering 1313% to reach an all-time high of Rs. 1,062 in October last year.
After hitting a record high, the stock underwent a phase of correction. Nonetheless, even after the significant drop, the stock is still up by an impressive 760% in the last three-year period.
Brokerage firm IIFL Securities believes the stock has the potential to run further and can even surpass its previous record high. The brokerage said the recent correction in the stock price has made it attractive on the back of its healthy return ratios.
IIFL Securities said the company has delivered a steady performance in the October-December quarter of FY23, driven by the continued high spreads of key products such as nitric acid and TAN.
However, volumes of TAN declined 10% YoY in Q3, due to weak demand from the infrastructure and non-coal mining segments and the resumption of imports from Russia. The management expects 4Q volumes to grow sequentially, as it is a seasonally strong quarter, said the brokerage.
Nitric acid volumes showed a growth of 10% YoY, while the volumes of IPA fell by 37% YoY. The brokerage said the IPA continues to face pricing competition from China amidst the rising cost of propylene and fuel.
The management intends to shift focus on speciality grade IPA, sanitiser and disinfectant segments. However, cost pressures are expected to continue in future, it noted.
In addition, the volumes of bulk fertilisers declined by 9% YoY, which the management attributed to the delayed start of the Rabi season (due to a delay in the withdrawal of the SW monsoon).
The ammonia expansion project is on track to be commissioned in 1QFY24 and is 93–94% complete. The company has secured 40% of its gas requirements in a 3-year contract with GSPC. Pricing under this contract is Brent-linked and comes to US$16–18/mmbtu at the prevailing Brent rates.
The company also intends to participate in the upcoming rounds of Reliance’s gas auctions, which it opined are likely to be at lower pricing.
The brokerage believes that the concerns around the fall in spreads and erosion in profitability are overdone, as the key investment thesis of backward integration into ammonia to boost Ebitda remains intact.
The business case for setting up the ammonia project in India is predicated on the savings in freight costs and import duties (besides the reduction in operating risk—raw material security). These, along with benefits from the state of Maharashtra, provide much comfort on the US$230/t of EBITDA accretion from the new ammonia plant, IIFL highlighted.
IIFL remains positive on the stock with a 12-month target price of ₹1,100 apiece, which indicates an upside of 70% from the stock's previous closing price of ₹646.
Meanwhile, the management reiterated that the proposed demerger of its mining chemicals and fertilisers businesses would help each of the business verticals focus on their respective competencies. It also highlighted that post-demerger, each of the businesses can independently raise capital.
Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not MintGenie.
