Friday, September 25, 2009

Stock Idea: Deepak Fertilisers & Petrochemicals Corp.

Deepak Fertilisers & Petrochemicals Corp.
Back on track
Upward movement in chemical prices: Prices of Methanol and Isopropyl alcohol have increased by 27.3% to Rs14000/MT and by 10.6% to Rs52000/MT QoQ respectively in Q2FY10. Deepak Fertilisers (DFPC) halted the production of methanol in H2FY09 due to a sharp fall in the price; however, the same has restarted in Q2FY10. Management believes that OPM will be stable since benefit of improving chemical prices will be set off by improved raw material prices. Improved feedstock availability: DFPC has tied up with GAIL for 90% of their gas requirement (including APM gas) at present. Improved gas availability leads to better capacity utilisation of chemicals as well as fertiliser plant. Company’s fertiliser plant operated at 25% in FY09 due to shortage of gas and phosphoric acid. On the back of an improved feedstock scenario, we have taken 60% and 80% utilisation level for fertiliser plant in our FY10E and FY11E estimates, respectively. De-merger of Ishanya mall is on cards: Ishanya mall occupancy remains stagnant at 55%. Company is planning to de-merge this business into a separate entity. However, management has put this decision on hold atleast for a year and will take this up only once this business turns profitable. We believe that any concrete decision along-with interest of any independent investor could be an upward trigger for the stock, going forward.
Expansion plans: DFPC is setting up an ammonium nitrate plant of 3.5lac tonnes, with a capex of Rs655cr. It is expected to come on stream by Q3FY11. Company has already expended Rs260cr and tied up with the banks for the rest.

Recommendation: Improved feedstock availability has eased our concerns on the stock. Hence, we have upgraded our earnings by 7.2% and 8.2% for FY10E and FY11E, respectively due to better capacity utilisation of plants. Also, we are upgrading our rating from ‘Reduce’ to ‘Accumulate’ on the stock, with a revised target price of Rs122 (i.e 7x of FY11E EPS).
Source: moneycontrol.com

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