Gas supply stoppage casts cloud over Deepak Fertilisers
The most pressing concern for Deepak Fertilisers in the near-term is the gas supply
Shareholders of Deepak Fertilisers and Petrochemicals Corp Ltd may have missed the woods for the trees. The company’s shares declined by about 5% on Thursday on the news of gas supply stoppage, but reversed these losses and ended the day with a gain of 4% after its March quarter results were announced.
Deepak Fertilisers delivered a stellar performance primarily on the back of strong performance by its chemicals business, revenue from which increased by 73% year-on-year and accounted for slightly more than two-thirds of last quarter’s total revenue.
The company maintains that the chemicals business performed well on account of better realization of products such as methanol, improved capacity utilization of technical ammonium nitrate (TAN) and softer ammonia (raw material) prices. Trading in chemicals contributed more to revenue growth during the quarter. Earnings before interest and taxes (Ebit) of the chemicals business tripled to ₹ 143 crore.
Deepak Fertilisers derives almost the entire remaining revenue from its fertilizers business, which had a satisfactory quarter. Revenue from manufactured fertilizers declined by 32% due to the non-availability of a key input—phosphoric acid. However, traded fertilizers did relatively well and boosted overall fertilizer revenue growth.
As a result, Deepak Fertilisers’ revenue for the March quarter rose as high as 62% over the same period last year to ₹ 1,070 crore. Operating profit margin increased substantially by 480 basis points to 15.5%, as expenses rose at a relatively slower pace.
One basis point is one-hundredth of a percentage point.
Strong operating performance and single digit rate of increase in depreciation costs and interest expenses meant that net profit increased by 214% to ₹ 91 crore.
So far so good. Methanol prices have declined, said Somnath Patil, president and chief financial officer of Deepak Fertilisers, and should reflect in the June quarter results. Other than that, the most pressing concern in the near-term is the gas supply.
The company has approached the Delhi High Court to seek remedial measures. Investors would do well to closely follow developments on this front.
Moreover, developments on the Mangalore Chemicals and Fertilizers Ltd deal will also be consequential. These events will determine Deepak Fertilisers’ stock movement. Currently, the stock trades at 5.7 times its estimated earnings for the current financial year.
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