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Home / Markets / Stock Markets /  This fertilizer stock could give potential return of 50%: IIFL Securities
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After sliding from above 700 apiece levels to around 550 levels on NSE in first fortnight of June 2022, Deepak Fertilisers share price has shows some upside swing in the second fortnight of June 2022. However, the strong has given strong 50 per cent return this year and IIFL Securities believes that the base building phase in the stock is over and it is ready for strong upside in next 12 months. The IIFL Securities report says that the fertiliser stock may go up to 900 per share levels in next 12 months from the current 600 per share levels, expecting a potential 50 per cent upside in the stock in next one year..

On reason for being bullish on Deepak Fertilisers shares that has already surged near 50 per cent this year, IIFL Securities report says, "Management of the fertiliser company has reiterated that the ammonia and TAN expansion projects are on track. Also, peak debt levels may not be as high as initially anticipated due to the healthy cash generation. While nitric-acid demand is likely to remain robust, TAN spreads may soften as Russian supplies re-enter the market."

The brokerage went on to add that the ammonia and TAN expansion projects are on track, to be commissioned in 1QFY24 and 2QFY25, respectively. While ammonia prices have corrected in the last month, benefits from the ammonia expansion will be much more than envisaged, should ammonia prices sustain at current levels. Debt funding is also likely to be lower than estimated due to the healthy cash flows generated in FY22. Elevated nitric-acid spreads will help sustain cash flows.

"Management reiterated that the two growth projects – ammonia backward integration and TAN capacity expansion – are on track. The ~510,000MT ammonia capacity is likely to be commissioned by 1QFY24 and the 376,000MT TAN expansion is expected to be commissioned by 2QFY25. At current forex rates and 10-year average ammonia prices, we believe that the ammonia expansion is likely to contribute Rs9-10bn to Ebitda, once running at full utilisation," brokerage added.

Deepak Fertilisers management also stated that the debt taken for the ammonia project is likely to be lower than initially estimated. While management had previously anticipated a debt of around 70 per cent of the initial project cost, it believes that despite higher outlay the company shall now need to borrow around Rs21.8bn (50 per cent of the revised project costs of 43.5bn). The contained debt is primarily due to the strong cash generation in FY22 which is likely to continue in FY23 as well.

Asked about its suggestion to positional investors in regard to Deepak Fertilisers shares, IIFL Securities research report says, "We retain our positive stance on the stock as, at 10x FY23ii P/E, we continue to find valuations attractive. While nitric-acid realisations and spreads are expected to sustain in FY23, TAN spreads may soften. Thus, EPS growth in FY23 is expected to be muted. However, the company is likely to deliver considerably healthy growth in FY24 and FY25, as its key capex projects are commissioning then. Ammonia prices sustaining at current levels could further increase growth and FY24/25 Ebitda. By FY26, when both capex projects should be running at optimal utilisation, we expect EPS to approach 85-90 levels."

The brokerage went on to add that the stock may go up to 900 per share levels in 12-months from its current market price.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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