Deepak Fertiliser’s Q2FY18 numbers were marginally below estimates. PAT came in at Rs 462 million versus Rs 566 million estimate due to lower-than-expected fertiliser margin and higher tax provisioning. Commissioning of NPK plant and higher chemical trading propelled top line 34 % y-o-y to Rs 12.3 billion. Factoring in weak H1FY18 numbers, we revise FY18E EBITDA/PAT down 15%/20%. However, as we expect DFPC’s earnings momentum to pick up fuelled by fertilizer business and higher utilisation in TAN, we revise up FY19E EPS 5%. On anticipated sustenance of earnings momentum underpinned by significant capex planned over 2-3 years, we revise up our target multiple from 12x to 14x FY19E EPS. DFPC also entails rerating potential from DBT and rerating in chemical sector. Consequently, we raise our TP to Rs 531 and maintain ‘buy’.
Chemical revenue jumped 12 % y-o-y to Rs 7.7 billion with growth coming primarily from the traded segment up 58 % y-o-y to Rs 3.2 billion. TAN also reported strong volume spurt, partially aided by low base. Post Q1FY18 margin, which had been impacted by inventory losses due to volatility in ammonia prices, Q2FY18 chemical margin improved 240bps y-o-y to 16.3%. While H1FY18 has been impacted by inventory losses, we expect FY19E margin to improve driven by improved TAN pricing, benefiting from imposition of anti-dumping duty and higher utilisation. Fertiliser segment’s revenue jumped 43% y-o-y to Rs 4.5 billion driven by commissioning of its NPK plant. This led to manufactured revenue catapulting 2x to Rs 3.5 billion, while traded revenue contracted 46 % y-o-y. Margin also improved 570bps to 4.2%. DFPC also reported an Rs 60 million forex related loss in the fertiliser segment.
Factoring the impact of lower margin in the chemical segment in H1FY18, we revise our FY18E EBITDA/PAT down 15%/20%. However, as we expect DFPC’s earnings momentum to pick up fuelled by fertilizer business and higher utilisation in TAN, we revise up FY19E EPS 5%. Also, factoring in revenue potential from planned capex (NPK of 0.3MTPA and Dahej nitric acid Plant) we revise up our multiple to 14.0x.