Deepak Fertilisers’ Q2 margins impress, but outlook remains dim
- Companies can have only two layers of subsidiaries: Govt
- Cow vigilantes: Supreme Court asks 22 states to file compliance reports
- Delhi HC seeks government’s stand on plea to stay WhatsApp, Facebook operations
- North Korea’s leader Kim Jong-Un to be ‘tested like never before’: Donald Trump
- Tata Steel, Thyssenkrupp merger: Thousands protest in Germany
Shares of Deepak Fertilisers and Petrochemicals Corp. Ltd gained 2.6% on Thursday after the company reported a strong operating performance for the September quarter. Revenue increased a mere 3%, trailing analysts’ estimates. But the sales quality is better.
As the company resumed production of fertilizers using spot natural gas, it reduced its trading business. From less than 44% a year ago, the contribution of revenue from manufacturing has gone up to about 55% in the last quarter.
This helped Deepak Fertilisers expand margins 2.9 percentage points to 8.9%. Operating profit, or Ebitda (earnings before interest, taxes, depreciation and amortization), jumped 52% and net profit more than doubled to Rs.26 crore.
The chemicals business did well. Operating profit at the business more than doubled as the segment benefited from higher volumes. Margins at the segment almost doubled. “Margins in manufactured products showed improvement during the quarter. The acids business and technical ammonium nitrate recorded a substantial growth in volumes as compared to the same quarter in the previous year,” the company said in a statement.
Fertilizers, on the other hand, posted an operating loss of Rs.2.7 crore as the business was not able to recover fixed costs fully. The strong operating performance of the chemicals business negated this loss.
Deepak Fertilisers saw a substantial rise in inventories and short-term borrowings from March this year. Trade receivables jumped 53% as the subsidy from the government has been delayed. During the quarter, the company launched a water soluble fertilizer, which may have added to inventories.
While a good winter crop season can help lower inventories, resumption of gas supplies under the administered price mechanism remains crucial for Deepak Fertilisers. Though the company has received a favourable court verdict on this, supply has not resumed yet. Resumption of domestic gas supply will help the firm operate its plants at an optimal level and extract better economies of scale.
With spot gas, Deepak Fertilisers will not be able to attain a similar cost structure, say analysts. “We await more clarity on gas resumption. Though valuations are attractive, visibility of earnings remains weak if gas supply does not resume,” a domestic brokerage firm said in a note.
The writer does not own shares in the above-mentioned companies.