Scripscan:Deepak Fertilizers & Petrochemicals Corp Ltd
cmp:130
Code:500645
Story:Deepak Fertilizers and Petrochemicals, ammonium Nitrate demand is witnessing sluggish growth due to lull in mining activities. However company is gaining market share by replacing imports. Recent media reports suggest Deepak is likely to be stopped supply of 0.18mmscmd gas from Reliance KG-D6 basin. However, management believes it is highly unlikely. Company may witness margin pressure due to recent currency depreciation since most of its raw materials are IPP linked. Our estimates already factors such margin pressure.Recent media reports suggest that EGOM will soon decide on a proposal from the petroleum ministry on a cut in the supply of 0.178 mmscmd of KG D-6 gas to Deepak Fertilizers. Deepak's total requirement of gas is 0.68 mmscmd with 0.15mmscmd of gas being sourced from Reliance's KGD-6 basin. However, management indicated that this is highly unlikely given that fertilizer sector has been accorded priority status. However, disrupted gas supply may induce company to increase imports and lead to increase in the costs of complex fertilizers and would put pressure on margins if company is unable to pass them on to the farmers. However, since fertilizer contributes less than 20% to bottomline, impact is likely to be limited.Company enjoys well diversified product portfolio which help the company to reduce single product risk. We have seen company has been able to protect its margins in chemical segment at 25% during challenging period of FY08 on account of diversified product portfolio. However recent currency depreciation and sluggish growth in ammonium nitrate poses near term risk to company's earnings. With no concrete plans for growth in FY13-14 we may see earnings stabilize at current level however free cash flow generation of ~ Rs 6 bn over next two years should help company to reduce its debt and strengthen balance sheet.With growing uncertainty, we have reduced our target P/E multiple from 8x to 6x FY13 estimates (based on previous five years average) and subsequently reduce our price target to Rs 185 (from Rs 250). At CMP stock offers attractive dividend yield of 5%+ and trades at 20% discount to book value.
Source:Emkay
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