Operating environment continues to challenge Deepak Fertilisers

Deepak Fertilisers and Petrochemicals Corp. Ltd’s (DFPCL’s) financial performance was tepid in the June quarter. Although revenue growth for the quarter was robust at 34% to Rs 634 crore from a year ago, it did not translate into commensurate net profit growth.

Net profit declined 29% to Rs 45 crore and was flat sequentially.

The reason? No prizes for guessing. Investors are aware that higher raw material costs took a toll on DFPCL’s operating performance last year. High raw material costs have played spoilsport this time as well.

For the June quarter, operating profit margin narrowed sharply by 770 basis points from the same period last year, to 16%. A basis point is one-hundredth of a percentage point.

Sure, this measure has improved from the March quarter, when operating margin was just 13%. But then, March quarter margins were among the lowest in many quarters in the past. So, beating that is no great feat.

Even previously, in the September and December quarters, operating margin was in the 16-17% range. Apart from a weak operating performance, the June quarter was also affected by interest costs more than doubling.

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Deepak Fertilisers and Petrochemicals Corp. Ltd has seen its first quarter profits fall. Mint’s Pallavi Pengonda says that while the company’s shares may look attractively priced, investors should watch out for the headwinds likely to hit it.

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DFPCL’s two important businesses—chemicals and fertilizers—delivered a lacklustre performance. The Ebit (earnings before interest and tax) margin of both businesses declined on a year-on-year basis. Even as the chemicals business Ebit increased marginally by 2%, the fertilizers business Ebit declined sharply by 40%.

So the chemicals business performance has offset the underperformance of the fertilizers business. Anyhow, the fertilizers business performance was expected to be subdued across the industry as firms had to deal with higher pipeline inventory.

The DFPCL scrip has underperformed the BSE-500 index since the beginning of this fiscal. At Rs 128, it trades at about five times estimated earnings for the year to March 2013.

While valuations appear attractive, the operating environment is challenging. The current quarter could be sluggish as mining activity slows during the monsoon and affects technical ammonium nitrate demand, an area in which DFPCL has business interests. Moreover, it would make sense for investors to keep a wary eye on raw material prices.

Also See | Intraday & quarterly performance (PDF)