Maintain ‘buy’ on Deepak Fertiliser; TP revised to Rs 243

By: | Published: December 26, 2018 1:02 AM

Deepak Fertilisers (DFPCL) reported a weaker-than-expected Q2FY19 due to poor fertiliser results and forex impact. Given its large ongoing capex (Rs 5,500 crore) and leveraged balance sheet, DFPCL’s ability to fund the capex is a key concern.

Deepak Fertilisers , Ishanya MallDFPCL raised a long-term debt of Rs 960 crore, primarily to fund ongoing projects.

Deepak Fertilisers (DFPCL) reported a weaker-than-expected Q2FY19 due to poor fertiliser results and forex impact. Given its large ongoing capex (Rs 5,500 crore) and leveraged balance sheet, DFPCL’s ability to fund the capex is a key concern. However, the company’s leadership in concentrated chemical products and strong distribution of agri inputs along with management’s pedigree on executing large capex present a long-term investment opportunity at the current level. That said, factoring in the challenging environment to fund the capex and leveraged balance sheet, we are trimming the target FY20E EV/ebitda multiple to 7.0x (from 8.0x) giving us a revised TP of Rs 243 (Rs 376 earlier); maintain ‘buy’.

Consolidated revenue surged 44% y-o-y to Rs 1,770 crore driven by growth in both the fertilisers (51% y-o-y) and chemicals (39% y-o-y) segments; however, an ebit loss of Rs 4.5 crore in fertilisers (versus estimated profit of Rs 10.4 crore) and a forex loss of Rs 19 crore affected profitability. Higher input prices (phosphoric acid, ammonia) and poor availability of phosphoric acid subdued production, hurting profitability. The chemical segment’s margins at 12%, though down y-o-y, improved sequentially due to lower chemicals trading. PAT tanked 59% y-o-y to Rs 19 crore, below our estimate.

DFPCL raised a long-term debt of Rs 960 crore, primarily to fund ongoing projects. However, debt remained stable as it paid back Rs 1,030 crore of short-term debt (Rs 540 crore of short-term loans for the ammonia project converted to long-term borrowings). However, with FY19E debt/equity at 1.5x and debt/ebitda at 5x, along with total estimated capex of Rs 5,500 crore, funding of the large ongoing capex — particularly difficult amid currently tight liquidity conditions — remains a key concern. We believe that funding of DFPCL’s ambitious capex plan and leveraged balance sheet are taking a toll. Factoring in this, we are trimming the target FY20E EV/ebitda multiple to 7.0x (from 8.0x) and reducing FY19/20E earnings by 17/7%.

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