Surge in material costs hits Deepak Fertilisers

Surge in material costs hits Deepak Fertilisers

Deepak Fertilisers and Petrochemicals Corp. Ltd (DFPCL) posted robust revenue growth for the quarter ended June, but it didn’t translate into a comparable profit growth.

Operating performance was hit primarily on account of a sharp spike in raw material costs. Total raw material cost as a percentage of revenue rose three percentage points from a year ago to 56.4%.

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But it was expected, as DFPCL’s new technical ammonium nitrate plant uses expensive imported ammonia, leading to higher raw material costs. Ammonium nitrate is commonly used as an explosive in mining and infrastructure industries.

Employee costs, too, rose at a faster pace. Operating profit margins narrowed by about 250 basis points to 23.8% from a year ago. One basis point is one-hundredth of a percentage point.

However, June quarter margins still look better than those in the preceding quarter and fiscal year 2011, which were about 22%.

Revenue growth at 35% to 474 crore, too, was stronger than that seen in the March quarter (32% year-on-year). This was primarily driven by a strong 44% growth in the firm’s chemicals business, which formed 68.5% of gross revenue in the June quarter.

Fertilizer business, which accounted for 30% of the total revenue, grew at a slower pace of 14%, but its profitability was comparatively higher. Weak operating performance and lower other income led to 22% growth in net profit to 64 crore.

DFPCL shares have remained flat at about 160 since the beginning of this calendar year. But they have outperformed the BSE-500 Index during the same period. Most analysts expect this outperformance to continue. If raw material costs soften in the near future, it would help. Further, the new technical ammonium nitrate facility would add to volumes.

Investors need to keep a tab on raw material cost fluctuations and changes in the government regulations on fertilizer policy.

Graphic by Naveen Kumar Saini/Mint

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