Deepak Fertilisers & Petrochemicals Corporation

TAN project on track: Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) is in the process of setting up a technical ammonia nitrate (TAN) plant in Taloja near Mumbai, which will enhance its TAN capacity more than three-fold, to 432,000 million tonne per annum (MTPA) from 132,000MTPA currently. The plant is expected to come on-stream by September 2010 and the project is progressing as per schedule. With the plant coming on stream, we expect the company?s TAN revenue to grow at a compounded annual growth rate (CAGR) of ~52% from FY2010 to FY2012. Thus the contribution of TAN to the company?s top line would increase to around 28% from 19% currently. 

Enhanced capacity utilisation due to improved availability of raw materials: DFCL?s capacity utilisation has suffered in the past on account of unavailability of raw materials such as natural gas. As a result, the capacity utilisation for methanol and ANP had remained low. To obviate the same, the company has now contracted around 90% of its natural gas requirement and this is expected to improve its capacity utilisation levels, going ahead

Demand for industrial chemicals remains strong: The demand for industrial chemicals remains strong on the back of a healthy growth expected for industries such as pigments and nitro cellulose, which are DFCL?s user industries.

Expectations of a normal monsoon positive for fertiliser sales: The India Meteorological Department (IMD) in its latest update on the progress of monsoon has revised upwards its forecast for the monsoon this year to 102% of the long period average (LPA) from 98%. The expectations of a normal monsoon this year could positively impact the fertiliser sales with the same contributing around 30% to the company?s top line. 

Maintain Buy with a revised price target of Rs178: We continue to remain optimistic on the future prospects of the company and are upgrading our price target on the back of improved visibility of earnings accruing from the TAN plant, as the project implementation schedule remains on track and the date for commissioning approaches nearer. Additionally, the improved raw material availability as well as the expectations of a normal monsoon also bodes well for the future prospects of the company. At the current market price of Rs149, the stock trades at 6.7x its FY2012E earnings per share (EPS) and 1.1x its FY2012E book value (BV). We maintain our Buy recommendation on the stock and upgrade our price target to Rs178 (8x FY2012E EPS).