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New pastures for Deepak Fertilisers

New pastures for Deepak Fertilisers
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First Published: Thu, Mar 31 2011. 11 20 PM IST
Updated: Thu, Mar 31 2011. 11 20 PM IST
Deepak Fertilisers and Petrochemicals Corp. Ltd plans to go global. The company announced on Wednesday that it intends to set up a technical ammonium nitrate (TAN) plant of 300 kilo tonnes per annum capacity in south Australia. TAN is used as an explosive for about four-fifths of the world’s mining.
The company estimates the cost of the south Australian project at about $350 million (Rs1,565 crore). It would undertake a detailed environmental impact assessment and conduct feasibility studies in the next 12-15 months.
After that, if the company finds the project feasible, it would take two years to complete it. If things work out as planned, the project should see the light of day three years from now.
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That’s rather far into the future, which is why the scrip did not react much, moving up a mere 2.6% in the last two trading days.
According to the investor presentation, TAN demand in the Oceania region in 2010 stood at 1.54 million tonnes per annum (mtpa) and is expected to grow by 8% per annum to about 2.5 mtpa by 2016. On the other hand, Oceania TAN capacity in 2010 stood at 1.6 mtpa and another 0.3 mtpa is under construction. Deepak Fertilisers hopes to capitalize on this gap.
As far as financing is concerned, the company says it is open to options. Its debt-to-equity ratio at the end of fiscal 2010 (FY10) stood at 0.8 time, which appears comfortable. It is also expected to generate decent cash flows.
Deepak Fertilisers’ stock has performed well in FY11. Analysts expect higher ammonia prices, a key raw material, to affect operating profit margin to some extent. The company posted an operating margin of 22% for the nine months ended December.
“After initial delays (related to achieving the desired concentration of nitric acid), new TAN plant has become partly operational in February 2011,” wrote analysts from JPMorgan in a note to clients last week. They have cut their earnings before interest, tax, depreciation and amortization estimates by 7-9% for FY12E-FY13E and earnings per share estimates by 10-14% to account for delay in the commissioning of the new TAN plant and higher ammonia prices.
At Rs159, the stock trades at about 6.5 times its estimated earnings for FY12. That’s cheap, but last year’s outperformance could limit sharp upsides.
Graphic by Paras Jain/Mint
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First Published: Thu, Mar 31 2011. 11 20 PM IST