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COMPANY ANALYSIS – DEEPAK FERTILISERS AND PETROCHEMICALS CORPORATION LTD.

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_separator][/vc_column][/vc_row][vc_row css=”.vc_custom_1659348579485{margin-top: 10px !important;margin-right: 10px !important;margin-bottom: 10px !important;margin-left: 10px !important;}”][vc_column][vc_column_text]Deepak Fertilisers and Petrochemicals Corporation Ltd. (DFPCL) is among India’s leading fertilisers and industrial chemicals producers. Set up in 1979 as an Ammonia manufacturer, DFPCL today is a multi-product Indian conglomerate with a product portfolio spanning industrial chemicals, bulk and speciality fertilisers, farming diagnostics and solutions, technical ammonium nitrate and value-added real estate. The Pune-based company, boasting a well-diversified product portfolio, enjoys a leadership position in most of its products. In its crop nutrient/fertiliser business, DFPCL is the only manufacturer of high-efficiency fertilisers (NPK complex and Bensulf). At the same time, it is a market leader in speciality and water-soluble fertilisers. The company is also the largest manufacturer of Bentonite Sulphur in the country.

Business Verticals:

• Industrial Chemicals (IC):
  • DFPCL is a leading manufacturer of industrial chemicals.
  • List of manufactured products:
    • Nitric Acid (Dilute, Concentrated & Strong)
    • Iso Propyl Alcohol (both pharma and industrial grade IPA) – Only manufacturer and supplier in India.
    • Methanol
    • Food-grade Liquid Carbon Dioxide.
  • The products cater to various sectors such as pharmaceuticals, agrochemicals, drugs and dye intermediates, refining precious metals, defence, resin, textile, and fertiliser.

• Crop Nutrition Business (CNB):
  • DFPCL is one of India’s leading manufacturers of NPK and speciality fertilisers.
  • The Company’s Crop Nutrition Business is housed under its 100% subsidiary, Smartchem Technologies Limited (STL).
  • The business offers a wide range of NP (Nitro Phosphate), NPK (Nitrogen Phosphorous Potassium) variants, Water Soluble Fertilisers and Bentonite Sulphur to Indian farmers.
  • The company under its brand, Mahadhan, offers high-quality NPK, speciality and water-soluble fertilisers, micronutrients and secondary nutrients.

• Technical Ammonium Nitrate (TAN):
  • DFPCL is the world’s 5th largest single entity TAN manufacturer producing High-Density Ammonium Nitrate (HDAN), Low-Density Ammonium Nitrate (LDAN) and Ammonium Nitrate Melt (AN Melt).
  • The Company is the only producer of explosives-grade TAN solids in India & also manufactures Medical-Grade Ammonium Nitrate, which is widely used in producing medical-grade nitrous oxide for use as an anaesthetic/analgesic.
  • The Company enjoys ~43% market share in the domestic TAN market.
  • Its Mining Chemical segment, i.e., TAN’s installed capacity is pegged at about 486,900 MTPA. In the future, the company is set to draw benefits from the increased TAN off-take, a trend which is likely to continue and sustain as demand for explosives is expected to increase, invariably underpinned by bolstering tailwind in infrastructure, power and mining sectors.
  • It caters to sectors like explosives, mining, infrastructure and healthcare.

Composition of Sales

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Research and Development Activities

The company, a unique player in the ammonia vertical, with products spanning industrial chemicals to fertilisers, is shifting its overall business strategy. To meet the evolving requirements of the changing marketplace, the four-decade-old company recently took a conscious decision to revisit its strategy and bring about the desired changes that will infuse some much-needed vibrancy to the entire business model and prepare it for its next growth phase. As part of this transformation journey, DFPCL has moved its entire production up the value chain so that its high-value differentiated products will no longer be primarily in the commodity space.

Backed by 2,000-odd employees, it has earmarked a significant CAPEX programme across its businesses to maintain its leadership position in the market. The company is looking to expand its multiple capacities, located in Taloja, Maharashtra; Dahej, Gujarat; Panipat, Haryana; and Srikakulam, Andhra Pradesh. It is also going in for major backward integration to ensure a consistent supply of its key raw material like ammonia. Apart from catering to India’s agriculture, pharmaceuticals, mining, chemicals and infrastructure sectors, its products are exported to 29 countries across six continents.  In most of its businesses, the company has moved up the value chain with differentiated products, offering closure to consumers with not just products but solutions too. The objective has been to not only expand the business but also do so more profitably and, hence, to face the competition more effectively. The company has recently raised ₹510 crores via QIP to fund its various projects.

Crop Nutrition Business (CNB):

In the fertiliser business, there has already been a significant turnaround.  In line with the strategy to move from commodity to speciality, value-added and innovative products, the company has introduced ‘enhanced efficiency’ NPK fertiliser under the ‘Smartek’ brand. It promotes Sulphur, an essential nutrient for crop productivity, through Bensulf, which comprises 90 per cent of Sulphur. The company also focuses on growing high-margin, crop-specific, water-soluble fertiliser. It recently launched a crop-specific water-soluble product addressed to the crop needs of grapes, tomatoes and sugarcane. The company has created a strong team of 300-odd agriculture graduates who are constantly in touch with farmers, helping them with the proper prescriptions and solutions. Towards this end, it has rolled out more than 25,000 demonstration plots for different crops across geographies. The marketing team has connected with more than 2.5 million farmers and over 4,000 focused retailers, strengthening communication and conviction around an improved farm yield of 12-15 per cent.

In fertiliser, the company carried out a CAPEX of Rs.800 crores to set up a 600,000-tpa greenfield facility (commercial production started in February 2017) for multiple grade NPK (nitrogen phosphorus potassium) fertiliser at Taloja, Raigad, Maharashtra. In Taloja, the company already has a production capacity of 300,000 tpa of nitro phosphate fertiliser at its existing NP plant. Going ahead, it plans to put up another 200,000-tpa NPK facility at Taloja. With all this, its total fertiliser capacity (crop nutrition business) now stands at 957,000 tpa, which also includes a combined 57,000 tpa capacity (Taloja & Panipat) of bentonite sulphur, which meets the plant’s sulphur requirements.

Industrial Chemicals (IC):

Following the Covid-19 outbreak, it swiftly commenced IPA supplies to hand sanitiser manufacturers, besides launching its own brand of hand sanitisers, IPA wipes and rubbing alcohol.

In another significant capex programme, DFPCL started the commercial production of its nitric acid complex at Dahej, Gujarat, in April 2019. The new facility, which has come up at a project cost of about Rs.550 crore, has a capacity of about 92,000 tpa for concentrated nitric acid and about 148,000 tpa for diluted nitric acid. With this newly-built capacity at Dahej now running at over 90 per cent capacity utilisation (despite teething troubles initially), DFPCL has now emerged as the second largest manufacturer of nitric acid in Asia. The company has the largest integrated nitric acid plants, with a combined capacity of about 1.11 million tpa at Taloja (Maharashtra), Dahej (Gujarat) and Srikakulam (AP). With this expansion, the company, the largest player in the space, has increased its market share in concentrated nitric acid to over 70 per cent now, while also making its foray into the Gujarat region (one of the most prominent chemical belts in the country). It serves customers in the north and east of India too.

Technical Ammonium Nitrate (TAN):

DPPCL has also made similar attempts to bring the desired vibrancy to other businesses. In the case of TAN, the company is increasingly connecting with end customers directly and introducing new value-added products. Besides, it has recently introduced on-the-ground services to deliver explosives to mine sites. The company’s strategic tie-ups to provide value-added products, deeper associations with the growing private coal mining segment and down-the-hole (DTH) last-mile delivery systems have commenced in earnest.

In its TAN business, the company has established long-term partnerships with key customers like Coal India, Adani, Tata steel, Balco, Hindustan Zinc, ACC, UltraTech and Ambuja Cement in the mining and cement sector. It also supplies TAN to explosives makers like Solar Industries, IDL, GOCL and Salvo Explosives.

The company has also earmarked a new TAN capacity of 376,000 tpa in Gopalpur, Odisha. Estimated to cost about Rs.1,800 crore, the project is likely to roll out in the next 24-36 months. It will further strengthen its leadership position in the TAN market, where it already has an installed capacity of 486,900 tpa at its Taloja complex.

DFPCL has also planned a significant CAPEX of about Rs.3,000-4,000 crore, putting up a greenfield project in Taloja to produce ammonia (capacity: 500,000 tpa), its key raw material. The ammonia capacity, which is likely to be commercialised in the next 24 months, will add substantially to its existing Taloja capacity of 128,700 tpa and help the company adequately manage its raw material supplies. This backward integration will help the company to have zero dependence on imports or third-party ammonia suppliers.

Board Structure

Set up in 1979 by Chimanlal K Mehta as an ammonia manufacturer, DFPCL today, is run by his youngest son Sailesh Mehta, who is chairman & managing director of the company.

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Other Special Strengths or Weaknesses

Strengths:

• Product differentiation boosting the company’s margins:
  • In FY2020-21, the company has shifted from 100% NPK production of plain grade to differentiated NPK, substantially boosting its volumes by as much as 198% YoY. During its turnaround as a differentiated player, the company’s margins increased from 1.7% in FY19 to 7.5% during FY21. Also, during the December ended quarter, the company launched Croptek, which is being sold at a premium to other fertilisers and hence lucrative for the company. Going ahead, the product is expected to gain wider adoption.
• China + 1 global supply chain strategy:
  • Coined way back in 2013 refers to a strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations. China’s continuing zero-covid policy has further exacerbated the situation for global companies. This will provide new opportunities to Indian manufacturers, especially in the speciality chemical space, which requires the company’s nitric acid as raw materials. Hence, strong demand for nitric acid is expected.

Weaknesses:

• Heavy reliance on government subsidy:
  • Rollback of subsidy aid by the government poised a major threat to the company’s crop nutrition business segment. The Indian government is under pressure to cut down subsidies. Any government payment delay can create working capital issues for the company.
• Ammonia prices and supply:
  • For Deepak Fertilisers and Petrochemical Corporation Limited (DFPCL), about 70% of the consolidated group turnover depends on ammonia as key raw material. This weakness, however, is not expected to exist in the future as the company has undertaken various projects to expand its ammonia production capacity.
• Irregular monsoon:
  • Erratic monsoon rains impact agricultural activities, which in turn affect sales of fertilisers. Therefore, any abnormal monsoon conditions will impact the crop nutrition business (CNB) segment of DPFCL.

Industry Characteristics

The fertiliser business (CNB) depends on the agricultural sector’s performance in which such products are used. Our country’s agriculture industry is seasonal, which may adversely affect the demand for fertiliser. Any delays and defaults in customer payments could affect the financial conditions of the CNB segment of DPFCL.

DPFCL source a significant proportion of its raw material requirements, such as ammonia, phosphoric acid, and ammonia sulphate, from foreign suppliers. Any fluctuations in raw materials price, availability, and quality could cause delays and increase input costs. Additionally, the company DPFCL does not have long-term sale agreements for the majority of its products. Any deterioration in demand for any key products could have an adverse impact on the business, its results of operations, financial condition, and cash flows.

DPFCL operates in an industry where there is a high entry barrier. This can be attributed to factors like government standards and permit requirements, high capital intensiveness, economies of scale and network effects, intellectual property, etc.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column css=”.vc_custom_1659350291717{margin-top: 10px !important;margin-bottom: 10px !important;}”][vc_single_image image=”70891″ img_size=”full” alignment=”center” css=”.vc_custom_1659352722778{margin-top: 10px !important;margin-bottom: 10px !important;}”][/vc_column][/vc_row][vc_row][vc_column css=”.vc_custom_1659350215498{margin-top: 10px !important;margin-bottom: 10px !important;}”][vc_column_text css=”.vc_custom_1659351990652{margin-top: 10px !important;margin-bottom: 10px !important;}”]

Government Regulation

Under the Department of Fertilizers, the government of India regulates fertiliser prices in India under Concession Scheme and Nutrient Based Subsidy Policy. The government pays a subsidy to fertiliser producers to make critical ingredients in agricultural activities affordable to farmers. This allows farmers to buy fertiliser at below-market rates.

Production Flow Chart

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Q1FY23 HIGHLIGHTS:

• Chemicals revenues doubled to Rs. 1,771 Cr, and margins expanded from 19% in Q1 FY22 to 41% in Q2 FY23.
• Fertilisers segment revenues grew by 26% y-o-y, although segment margins were impacted mainly due to a sharp increase in raw material prices.
• Adverse movement of key raw material Prices in Q1 (Ammonia▲ ~106% y-o-y; Phos Acid ▲ ~92% y-o-y; RGP ▲ ~35% y-o-y; Gas ▲ 91% y-o-y)
• Debottlenecking of TAN capacity by approx. 33,000 MT and NPK capacity by about 2,00,000 MT through process improvement of the existing plants at Taloja.
• Long-term growth is expected to be underpinned by change in product mix, headroom availability of additional capacities emerging from better operational management, debottlenecking, and greenfield expansions.

FINANCIALS:

CONSOLIDATED:

• Net Sales of ₹3,031.07 crores, growth of 50.6% QoQ and 59.4% YoY.
• Cost of raw materials of ₹1,888.65 crores, growth of 81.1% QoQ and 56.5% YoY.
• Net Profit stood at ₹435.66 crores, a gain of 54.0% QoQ and 233.5% YoY.
• Diluted EPS stood at ₹34.72, an increase of 55.7% QoQ and 198.3% YoY.

STANDALONE:

• Net Sales of ₹592.83 crores, growth of 5.7% QoQ and a decline of 12.2% YoY.
• Cost of raw materials of ₹391.89 crores, growth of 14.9% QoQ and 57.6% YoY.
• Net Profit stood at ₹100.73, a gain of 55.2% QoQ and 117.6% YoY
• Diluted EPS stood at ₹8.19, an increase of 54.8% QoQ and 83.6% YoY.

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image=”70854″ img_size=”full” alignment=”center” css=”.vc_custom_1659352122866{margin-top: 10px !important;margin-bottom: 10px !important;}”][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image=”70855″ img_size=”full” alignment=”center” css=”.vc_custom_1659350476532{margin-top: 10px !important;margin-bottom: 10px !important;}”][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image=”70856″ img_size=”full” alignment=”center” css=”.vc_custom_1659351194435{margin-top: 20px !important;margin-bottom: 10px !important;}”][/vc_column][/vc_row][vc_row][vc_column css=”.vc_custom_1659350395410{margin-top: 10px !important;margin-bottom: 10px !important;}”][vc_column_text css=”.vc_custom_1659350604486{margin-top: 10px !important;margin-bottom: 10px !important;}”]DFPCL has now positioned itself well in the market. It has so far carried out its transformational journey efficiently and appears to be sustaining its leadership position across its product portfolio. With consistently improving business performance from its industrial chemical and fertiliser segments, the company now has a relatively balanced product portfolio mix.

The journey of DFPCL began in 1979 when the visionary Chimanlal K. Mehta initially founded the company as an ammonia-making entity. A first-generation entrepreneur from a Jain family in Gujarat, CKM started his entrepreneurial journey in the chemical business in 1970, when he founded Deepak Nitrite (the company and the group are celebrating their 50th anniversary this year). The Rs2,400-crore Deepak Nitrite, another listed entity, now run by Chimanlal’s oldest son Deepak, is today one of India’s fastest-growing chemical intermediates companies with a diversified business of basic chemicals, fine & speciality and performance products.  Chimanlal Mehta, now the chairman emeritus, had drawn up a succession plan sometime in 2003-04, through which Deepak was given Deepak Nitrite, while the youngest son Sailesh took charge of DFPCL. The second sibling Ajay was weaned away through a financial consideration.

Today, both the Deepak group, led by flagship Deepak Nitrite and its associate companies and DFPCL are two separate entities. DFPCL is headed by Sailesh Mehta, whereas Deepak Mehta heads the Deepak group of companies/SBUs. Both companies are managed independently by distinct and separate management teams and stand as independent corporate entities, with no cross-shareholdings or common directors.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_separator][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

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