Deepak Fertilizers share price has jumped 48 per cent so far this year, despite steep correction in benchmark indices on stock markets. The stock may rally around 52 per cent more, according to analysts at IIFL Securities. The brokerage maintains a positive outlook on the industrial and agricultural chemicals manufacturer stock as, at 10x FY23ii P/E, it continues to find valuations attractive. Deepak Fertilizers’ management recently reiterated that the company’s ammonia and ammonium nitrate (TAN) expansion projects are on track. Also, peak debt levels may not be as high as initially anticipated due to the healthy cash generation. Deepak Fertilizers is India’s top producer of TAN, nitric acid and isopropyl alcohol (IPA) and a niche maker of NPK fertilisers.
Stock Rating: Buy
Target price: Rs 900, Upside 52%, Horizon: 12 months
Analysts at IIFL securities believe that 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. Additionally, 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 Rs 85-90 levels, they said. Even a modest 10x P/E by then would imply a Mar-2025 target price of ~Rs 1,020-1,080 (and potentially higher, if DFPCL switches to the new tax regime).
Investment Rationale:
Expansion projects on track: 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, the brokerage noted. 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.
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Nitric-acid demand continues to be healthy: Improved realisation and demand of downstream derivatives continues to uphold demand of nitric acid. The Aarti Industries management believes that availability of nitric acid will improve in 2HFY23 and has also stated intentions to set up a concentrated nitric-acid plant. However, it will still have to purchase weak nitric acid from the open market. GNFC management has stated that off offtake of nitric acid remains robust.
TAN spreads may face near-term headwinds: Deepak Fertilizers management expects TAN spreads could be at risk in the near term as Russian supplies re-enter the market. Thus, though nitric-acid spreads remain elevated, benefits may likely be offset by reduced spreads of TAN. “While we expect FY23 growth to be muted, the growth phase is likely to start in FY24, as the two big capex projects are capitalised,” said analysts.
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