Deepak Fertilizers (DFPC IN, INR 93, maintain Buy)

We attended the analyst meet of Deepak Fertilisers (DFPCL) post declaration of its Q4FY07 results, wherein the management presented its growth strategies, going forward. Based on our discussion, we believe, the industrial and chemicals divisions (which grew 41.2% and 60.8% respectively in FY07) will continue to maintain the growth momentum. This is because the company's product portfolio caters to high growth sectors such as pharma, agro-chemicals, defense, mining, and infrastructure. We expect DFPCL to increase its capacity utilization significantly from existing ~60% to ~100% with availability of additional gas from Dahej - Uran pipeline, expected to come by Q2FY08 and additional gas from KG basin by Q2FY09. Management has also guided that current gas prices are ruling at higher levels and are expected to soften by the end of this financial year.

DFPCL's isopropyl alcohol (IPA) project has been operational since August 2006 and has contributed revenues of INR 760 mn for FY07. With a capacity of 70,000 tonnes, we expect the project to contribute revenues of INR 2 bn in FY08E. Moreover, the company is on track to start its real estate venture, Ishanya, a design centre and specialty mall located in Pune, in Q2 FY08 and has already booked 76% of the space. The company also owns 5-acre land in the vicinity of its existing mall, which it intends to develop in strategic tie-up with leading hotel chains. DFPCL's 300,000 tpa ammonium nitrate project is also expected to come on stream in Q2FY10. We expect the segment to contribute revenues of INR 1.5 bn in FY10. The company has guided for tying up with sources in the Middle East for supply of ammonia. This additional supply of ammonia also has the potential to increase company's utilization significantly.

Post completion of these initiatives, we expect DFPC's sales and profits to grow at CAGR of 21% and 11.7% respectively during FY06-09E. There exists clear upside to our numbers with increased capacity utilization from the additional gas or ammonia availability and softening of gas prices. At current market price of INR 93, the stock trades at 7.6x and 7.4x our FY08E and FY09E EPS estimate of INR 12.2 and INR 12.6, respectively. Our base case sum of parts (SOTP) valuation, accounting for incremental commodity business EBITDA on gas upside, comes at INR 130 and INR 150 for FY08E and FY09E, respectively. We maintain our 'BUY' recommendation.