High raw material costs and a slump in fertilizer demand have adversely impacted Deepak Fertilisers and Petrochemicals Corp. Ltd in the December quarter. Even though the company was able to boost sales by 3.4%, profits plunged 36.3% to Rs.31.7 crore.
Operating profits at its chemicals business, which accounts for 64% of sales, fell 29.5% as a 26% jump in ammonia prices squeezed margins. Ammonia is used in the production of industrial chemicals and complex fertilizers. The unavailability of domestic gas and high spot prices, meanwhile, have made production of methanol unviable. As the company shut the methanol plant, the chemicals segment’s operating profit margins dropped 10 percentage points to less than 14%.
The performance of its other mainstay business—fertilizers—has been impacted by untimely rains and delayed sowing. Fertilizer sales fell more 18.5% to around Rs.225 crore. According to the company, overall fertilizer consumption in India fell 43% in the December quarter. As high costs squeezed margins, operating profits of the fertilizer business fell by more than a third to Rs.18.8 crore.
Overall, even though the company was able to reduce finance costs by around 20% or Rs.4.6 crore, net profit margins contracted more than three percentage points to just over 5%. The weak results shaved 1.53% off the stock price on Wednesday, while the broader CNX 500 index closed the day with a marginal loss of 0.16%.
Despite low valuations, the stock may continue to underperform the broader markets for some time. High farm-gate prices and inventories at dealer levels are resulting in low off-take of the complex fertilizers. Subdued activity in the mining and infrastructure industries, on the other hand, is expected to weigh on technical ammonium nitrate (TAN) volumes. The company is increasingly looking to export TAN. To give impetus to the business, it has recruited some senior personnel. While the step is in the right direction, analysts are not expecting TAN volumes to improve significantly in near term.
Also margin pressures are not expected to abate any time soon. According to the management, margins of the chemicals division could remain under pressure for “another quarter or two” due to high input costs and gas prices. Manish Mahawar, analyst at Prabhudas Lilladher Pvt. Ltd, says, “For the stock to gain positive momentum, the non-fertilizer volumes have to pick up and ammonia prices have to trend lower. Till then we may continue to see margin pressures, which, in turn, could weigh on the stock performance.”