Chemicals business segment hurts margins at Deepak Fertilisers

Chemicals business segment hurts margins at Deepak Fertilisers

A drop in profitability of the chemicals business of Pune-based Deepak Fertilisers and Petrochemicals Corp. Ltd (DFPCL) affected the overall performance of the company in the September quarter.

Strong growth in chemicals’ revenue was largely on account of additional volumes from DFPCL’s new technical ammonium nitrate (TAN) plant, and better volumes and realizations across other chemical products.

However, the Ebit (earnings before interest and tax) margin of the chemicals business narrowed to 22% from 26% a year ago and 28.4% in the June quarter. The Ebit margin had declined year-on-year (y-o-y) in the June quarter as well. One main reason for that is higher ammonia prices. DFPCL’s new TAN plant imports its ammonia requirements, which is expensive.

On the other hand, the fertilizers business, which accounted for most of the remaining revenue, performed comparatively well. Revenue from fertilizers increased 22%, mainly driven by a strong performance in the manufactured fertilizers segment. The Ebit margin of this segment, too, improved on a y-o-y basis and remained more or less constant at 15%, compared with the June quarter. The company maintains that the outsourced specialty fertilizers segment, including water solubles, bio-fertilizers and micronutrients, performed well y-o-y.

On an overall basis though, the poor performance of the chemicals business marred DFPCL’s operating show, with profit margin declining by 170 basis points y-o-y, to 17%. One basis point is one-hundredth of a percentage point. Note that the September quarter operating margin is lower than the previous two quarters. Needless to say, if there is a decline in ammonia prices, it would benefit the firm. A weak operating performance and higher interest expenses meant that net profit grew comparatively slower than revenue. Total revenue increased 40% from a year ago to 577 crore, while net profit increased 30% to 54 crore.

Meanwhile, since the beginning of the fiscal, the DFPCL stock has performed well and increased 5% to 166.65. This is good compared with the 12% decline in the BSE-500 index during the same period.

The current quarter will see the impact of downtime of about three weeks in the new TAN complex because of some repairs/modifications. DFPCL though, maintains in a press statement that “its impact in the market will not be significant in view of the low activity in the coal mining sector due to the extended monsoon and Telangana stir".