Buy Deepak Fert; target of Rs 185: Emkay

Emkay Global Financial Services is bullish on Deepak Fertilizers and Petrochemicals Coprn and has recommended buy rating on the stock with a target of Rs 185 in its August 28, 2012 research report.

“Emkay’s TAN margins continue to remain under pressure due to high ammonia prices. Margins declined to 21-22% in Q1FY13 compared to 25% last year as ammonia prices increased from $450/mt to $700/mt within a short span. Ammonia prices continue to rule at ~$700/mt currently due to supply crunch globally as extended shutdowns at some plants have squeezed availability. Further, lower TAN offtake due to monsoons & new regulations on movement of TAN restricts company’s ability to pass on additional cost increases. High competition from imported cheaper grade TAN also limits scope of further price increases. In FY13, Deepak expects to produce 280,000-300,000mt of TAN.”

“We expect Q2FY13 to be a muted quarter for chemicals segment due to margin pressure in TAN & extended maintenance shutdown in Iso-Propyl Alcohol (IPA) plant. Though IPA margins are expected to improve qoq (Q1FY13 IPA margins stood at 12% against 20% last year), however extended maintenance shutdown is likely to result in 10% yoy decline in IPA volumes for Q2FY13. However, we expect ammonia costs to soften from Q3FY13 due to resumption of production at some plants globally. Working capital situation is also likely to improve in subsequent quarters due to subsidy receivables being released by the govt. & reduction in farmgate receivables.”
 
“We have downgraded FY13 earnings by 12% to Rs 26.7 (previous Rs 30.4) due to near term pressure on earnings. Though near-term concerns persist, however we expect Deepak’s long-term growth to be driven by ramp-up in TAN capacity & recently announced expansion in fertilizers. Continuous ramp-up in the new TAN facility is likely to result in improving the blended capacity utilization to 80% (350,000mt) in FY14 from 65-70% capacity utilization in FY13. Increase in capacity of complex fert is likely to result in incremental revenues of Rs 13bn. Greenefield expansion in Bentonite Sulphur is also expected to support earnings. Further, company continues to screen opportunities in specialty chemicals. Maintain buy with target price of Rs 185,” says Emkay Global Financial Services research report.

Public holding more than 90% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More