Deepak Fertiliser’s (DFPC) Q1FY18 consolidated sales, at Rs 12.8 billion, 20% plus y-o-y, surpassed estimates, but PAT of Rs 374 million, -17% y-o-y, disappointed owing to decline in chemical profitability. Chemical margins were affected by the sharp volatility in input prices, mainly ammonia, even as fertiliser business improved profitability, segment profit of Rs 261 million versus loss of Rs 133 million in Q1FY17 as the new NPK plant was commissioned.
With improving profit contribution by fertiliser division, EBIT of Rs 1.4 billion in FY18E versus loss of Rs 0.1 billion in FY17 and recovery in pending subsidies, we raise our FY18/19E EPS by 7%/6% to Rs 32.7/36.5. We also raise our target multiple to 12x (from 9x) as earnings visibility enhances and return ratios improve. Consequently, we raise our TP to Rs 438, Rs 308 earlier and maintain ‘buy’.
Chemical revenue saw muted growth along with 36% y-o-y slide in EBIT to Rs 862 million as sharp volatility in ammonia prices led to inventory-led loss. However, with stabilisation in ammonia prices and pick up in chemical demand, we expect chemical margins to improve in subsequent quarters. Fertiliser revenue surged 57% as the new 0.5mn mtpa NPK plant was commissioned in Q1FY18. As a result, fertiliser segment contributed profit of Rs 261 million as against loss of Rs 133 million in corresponding period of last year.
DFPC commissioned its NPK plant during the quarter and augmented capacity by 0.5mn mtpa. Going ahead, with further addition the company expects capacity to touch 0.8mn mtpa by FY19, which would in turn bolster fertiliser profitability. We expect fertiliser EBIT to rise to Rs 1.36 billion/1.67 billion in FY18/19 as against loss of Rs 0.13 billion in FY17.
We expect earnings visibility to enhance, balance sheet and return ratios to to improve (RoCE of ~17% by FY19 from ~10% in FY17) following improvement in fertiliser business. As a result, we raise our FY18/19E earnings by 7%/6%, target multiple to 12x (from 9x) and target price to Rs 438, Rs 308 earlier, while maintaining ‘buy’ on the stock.