Stock Pointer

Deepak Fertilizers & Petrochemicals Ltd. CMP Rs 88 P/E 4.2x FY11e &BUY
Deepak Fertilizers & Petrochemicals Ltd (DFPCL), is operating in the business
PRICE TARGET Rs 156/- of chemicals, fertilizers & specialty retailing. After the expansion of its technical
(18 Months) grade ammonium nitrate (TAN) facility by 300000 tonnes, it will be one of the
largest producers of TAN in the world
Index Details
¾ Key Investment Highlights
Sensex 16063.9
Nifty 4765.6 TAN plant to be the growth driver over the next few years.
Industry Chemicals & Fertilizers With the proposed 300,000 MT expansion of its TAN facility at Taloja, DFPCL
Script Details will be able to produce 472,000 TPA by FY2011. This Rs. 655 crore expansion,
which is being put up at half the cost of comparable international facilities, is on
Mkt Cap (Rs in crores) 775.8 schedule for completion by November 2011 and benefit the company from
Book Value (Rs) 91.1 economies of scale.
Eq Shares O/s (Cr) 8.9
Avg. Vol 155577 Increased gas availability to boost chemical & fertilizer production
52 Week H/L 111/47 The recent multi source gas tie ups (up to 0.9 million scm per day) will reduce
Dividend Yield (%) 4.5 the erstwhile gas shortages and help in better utilization of capacities.
Face Value (Rs) 10 Accordingly, Ammonium nitrate phosphate (retrofitted for 290000 tpa)
production should get ramped up to 145000 tpa in FY2010 and 220000 tpa in
BSE Code 500465 FY2011 from the current 57000 tpa. The APM gas supply (cost of $3.2 /
NSE Code DEEPAKFERT mmbtu) of 0.39 scm will be used for the production of the ANP and Sulphur
bentonite

Share-Holding Pattern New foray in agri exports to ramp up, while the worst is over at Ishanya
Having tasted initial success in its foray into agri exports, the company is
Indian
General
Promoters investing Rs.60 crore in warehousing and logistics. We expect the turnover
public
30%
43% from this high margin business to grow to Rs. 8 crore in 2010 and Rs. 22 crore
in FY2011.
Ishanya’s conversion to a multi format store and inclusion of a state of the art
NRI's/OCB's Banks, Fin entertainment centre and a multi cuisine mega food court is expected to
3% Inst. and
Insurance increase footfalls & drive utilization levels to upwards of 65% (currently 55%)
Private 2% and average rentals to rise to Rs. 42 per square foot (Rs. 33 per square foot)
Corporate FII's
Bodies Mutual Fund
3%
with some incremental income from revenue sharing.
¾ Valuations & Recommendations
8% 11%

At CMP of Rs 88, the stock is trading at 4.91x & 4.21x its FY10 & FY11
Sensex Vs DFPCL estimated earnings of Rs 17.42 & Rs 21.48 respectively and dividend yield of
4.61%. With the enhanced availability of gas and increased production,
stabilization of product prices in the international markets and the 300,000 tpa
TAN expansion well on track for completion in Q3FY2011, we recommend a
strong BUY on the stock for a target price of Rs.156 over the next 18 months,
representing an upside of ~77% from the current levels.
Key Financials:
Y/E March, (Rs in crore) 2009 2010E 2011E
Net Revenue 1448.1 1469.2 1863.2
EBIDTA 308.2 348.2 422.6
PAT 152.1 161.6 187.9
EPS 16.9 17.9 20.9
EPS Growth (%) 48.4 6.4 16.6
ROCE (%) 17.9 17.8 17.4
RONW (%) 18.5 17.1 17.2
P/E(x) 5.2 4.9 4.2
EV/EBIDTA (x) 4.0 3.4 3.5
-1-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer
¾ Company Background
Deepak Fertilizers & Petrochemicals Ltd (DFPCL) started commercial production of Ammonia
in 1979 in technology collaboration with Fish International Engineers (USA) using natural gas
as feed stock. At that time it was India’s only merchant ammonia manufacturer. Currently the
company has a diversified product portfolio of chemicals, fertilizers and other agri-
commodities

Flow Chart of DFPCL’s Manufacturing Process

Source: Company

Despite the fact that the chemical and fertilizer prices are very volatile and cyclical, DFPCL’s
diversified product portfolio and its flexible manufacturing process enables the company to
optimize its product mix and augment its margins.

Revenue mix of manufactured products

The new TAN plant is expected

to stabilize by Q4FY2011,
leading to an increased
contribution of TAN in the
product portfolio amidst a rising
top line

2009 2010E 2011E

Source: Company, Ventura Securities Estimates

Profitability of DFPCL
25% OP Margin PBT Margin PAT Margin
DFPCL has been able to 20
maintain stable margins
15
despite volatility of chemical
10
and fertilizers prices.
5
0
2008 2009 2010E 2011E

Source: Company, Ventura Securities Estimates

-2-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer
Apart from manufacturing, the company also has a vibrant trading business (30-35% of total
sales) which involves bulk & specialty fertilizers, chemicals and export of agri commodities.

500000
450000 Installed Capacity Production
400000

Production (MT)
350000
300000
250000
200000
150000
100000
50000
0
2007 2008 2009 2010E 2011E
Years

Source: Company, Ventura Securities Estimates

DFPCL has successfully completed the following projects and it will be reflected in the current
year’s workings.

Recent Projects
Capacity
Installed Cost
Projects after Status
Capacity (Rs Cr)
Expansion
Fourth Dilute Completed in
297,000 445,000 105
Nitric Acid Plant August 2009
Expansion of
Completed in
Ammonium 90,000 132,000 20
FY2009
Nitrate Plant
Doubling of Co2 Completed in
16,500 33,000 -
Capacity FY2009
Bentonite Sulfur Completed in
- 25,000 16
Plant FY2009
To be
Ammonia Storage
- 15,000 87 operational in
Tank
Q3FY2010
Source: Company, Ventura Securities Estimates

Projects in Pipeline

Capacity
Installed Cost
Projects after Status
Capacity (Rs crore)
Historically the company has Expansion
always completed its capex To be
Technical Ammonium completed in
implementation on schedule. Nitrate Plant
132000 432000 655
November
FY2010
Source: Company, Ventura Securities Estimates

¾ TAN plant to be the growth driver over the next couple of years

Implementation of the
project is well on course and
we are confident that the
management will execute
this project without any
inordinate delays
With the proposed 300,000 MT expansion of its technical grade ammonium nitrate (TAN)
facility at Taloja, DFPCL will be able to produce 472,000 TPA by FY2011. With this Rs. 655
Crore expansion (which is being put up at almost less than half the cost of comparable
international facilities), the company will not only have economies of scale but will also
enhance its cost competitiveness.
Domestic demand for TAN remains strong
The domestic market for TAN is about 600,000 TPA and is growing at a robust growth of 8% -
9% p.a. DFPCL is the only manufacturer of TAN in India, and with bulk of the TAN being
imported, the company with its enhanced capacity is well positioned to benefit from this.

-3-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer
Production of Ammonium Nitrate by DFPCL

500000
Installed Capacity Production
450000

400000

350000

Production (MT)
300000

250000

200000

150000

100000

50000

0
2007 2008 2009 2010E 2011E 2012E
Years

Source: Company, Ventura Securities Estimates

TAN is largely used to make explosives and hence, increasingly its production is being
curtailed internationally to prevent misuse. This is a significant entry barrier and with DFPCL
being the only licensed private manufacturer for more than a decade, its monopolistic position
will ensure that the company will maintain its dominant position.

Current applications of ammonium nitrate

Consumption
Sector Weightage (in %) Projected Growth Rate
(in 000’MT)
7.6% for XI th Plan ending
Coal 65 400
2011-12
Currently, the gap between 5% for XI th Plan ending
Iron Ore 6 36
2011-12
domestic demand and
consumption is met through Cement 8-9% for XI th Plan ending
6 36
(Limestone) 2011-12
imports of cheaper fertilizer
grade AN, which however 7% for XI th Plan ending
Other mining 2 12
2011-12
does not give the optimum
blast efficiency. Rs. 250 Billion worth
Infrastructure 18 108 Investments expected in
FY10
Non Explosive
3 18
use
100 622
Source: Company, Ventura Securities Estimates

¾ Increased Gas Availability to boost Fertilizer Production

DFPCL have been able to resolve the issue of gas supply which was a growth constraint.
Apart from the APM gas, DFPCL now has access to gas from PMT / RLNG gas suppliers
along with KG gas and ONGC and also access to the spot market. At present, DFPCL has
contracted 0.728 million square meter cube (mmscmd) per day from various sources at a
weighted average (landed) cost of ~US$ 5/mmbtu. In addition to this, the company is also
entitled for KG basin gas of 0.178 million sm3 per day.

The enhanced gas supply will result in increased production of complex fertilizers by DFPCL.
We expect the Ammonium Nitro Phosphate (ANP) plant to operate at 63% capacity utilization
this year against 25% observed last year. DFPCL has also started manufacturing Bentonite
Sulfur, a specialty fertilizer, and during the year the company expects to grow the top line by
Rs. 20 crore and bottom line by Rs. 5 crore respectively.

-4-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer
Revamping of Ishanya to
increase footfalls and impact
capacity utilization and
rentals positively
-5-
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
¾ New foray in agri exports to ramp up, while Ishanya is expected to turn around.
™ Agri commodities trading offers exciting prospects
Through its Saarthie initiative, DFPCL has developed strong ties with the farming community.
Using these centers spread over the states of Maharashtra, Madhya Pradesh and Gujarat,
DFPCL provides Soil & Water testing facilities to farmers and advices them on the use of
nutrients (NPK). It also provides marketing linkages through tie-ups with product procurement
agencies enabling the farmers in obtaining the Global GAP certification which ensures the
International Quality standards for their farm produce. At present Saarthie covers over 5000
hectares of arable land and it plans to expand these centers to the states of Punjab, Haryana
and Uttar Pradesh.
Besides selling fertilizers through these centres, DFPCL also procures agri products mainly
fruits & vegetables and sells it to exporters and organized retailers. We expect the turnover
from this agri trade to go up to 8 crore in FY2010 and Rs. 22 crore from Rs. 3.9 crore
recorded in FY2009. Considering the exciting potential (of high margins and potential volume
growth) of the agri business, DFPCL is planning to invest Rs 60 crore in warehousing and
logistics facilities.
™ Worst is over at ISHANYA
In our opinion, the decision to convert the 550,000 square foot (sft) ‘Ishanya’ from a specialty
mall to a multi format store is a step in the right direct. Not only will it lead to increased
utilizations but the rental should also start picking up. The planned offerings besides multi
product stores, also includes a state of the art entertainment centre and a multi-cuisine mega
food court. The impact of this makeover should be seen from the end of Q1FY2011. We
expect utilization levels to be upwards of 65% (from the current 55%) and average rentals of
around Rs. 42 sft, currently at Rs. 35 per sft with some amount of incremental income from
revenue share agreements with the incumbent stores.
This make over will be done at a marginal cost not exceeding Rs 10-15 crore. The company
has also roped in a marketing consultant to advice on the content offerings
¾ Financial Performance
For the half year ended Sep 2009, the revenues of Rs. 597.3 crore and PAT at Rs. 75 crore
of the company were down yoy by ~15.6% and ~13.5% respectively on the back of lower
chemical prices, reduced trading revenues and unplanned shut down of the manufacturing
plant. However in sequential quarters, the company has shown a marked improvement with
revenues increasing by 46% to Rs. 354.9 crore for Q2 FY10 from Rs. 242.4 crores in Q1
FY10, while profit after tax declined by ~7.2% from 38.9 crores in Q1 FY10 to 36.12 crores in
Q2 FY10 as there was a fall in other income. Revenue from the Chemicals business stood at
Rs. 210.32 crore for Q2 FY10 (from Rs. 175.08 crores for Q1 FY10) while revenue from the
agri-business jumped to Rs. 146.72 crores (from Rs. 64.31 crores in Q1 FY10).
Chemical prices have rebounded almost 80% from the pre meltdown levels and good volume
growth in the chemical business was witnessed in Q2FY10 signifying demand recovery. The
company has resumed the production of methanol and had produced 21,400 MT of methanol
while improving Isopropyl Alcohol (IPA) prices have contributed to both the topline and the
bottomline. The commissioning of the fourth Dilute Nitric Acid (DNA) plant has augmented
DFPCL’s total DNA capacity to 4,45,000 MTPA and with the increased gas availability,
utilization of capacities should also improve.
Thursday, November 5, 2009
Stock Pointer
¾ Financial Outlook

Methanol prices have recovered since Q1FY10 and are likely to remain steady around $235-
245/mt. We expect methanol prices to stabilize around these levels due to the increased
demand from China and the increased capital cost for setting up new capacities which would
put a floor on the prices of methanol. Being the only Indian producer and first company in the
world to receive the US pharmacopoeia certification for its IPA product and development of
cosmetic grade IPA, prices of IPA are expected to remain firm within the range of Rs. 48000 -
49500 / mt, with an upward bias. On TAN, given that DFPCL is the only company which
manufactures the technical grade of Ammonium Nitrate in India, we expect the company to
reserve pricing power.

Production (in ‘000 tpa) of major products

# Sulfur
Year Methanol IPA TAN Co2 ANP##
Bentonite
Installed
100.0 70.0 432.0 33.0 229.0 25.0
capacity
2009 12.2 51.2 117.4 21.5 57.4 0.6
2010 73.0 64.0 160.0 20.0 145.0 12.0
2011 90.0 66.0 220.0 26.0 220.0 18.0
# The capacity is for FY2011
## ANP plant has an installed capacity of 229000 tonnes, but has been retrofitted for 290000 tonnes.
Source: Company, Ventura Securities Estimates

Over the next three years we expect the top line and the bottom line to grow at CAGR of
13.4% and 11.1% respectively. The operating profit margin for FY2010 and FY2011 are
expected to be 24.36 and 23.03%, while the net profit margin for FY2010 and FY2011 are
expected to be 11.08% and 10.06% respectively.

¾ Key Concerns

The chemical and fertilizers business is very sensitive to the pricing of the raw materials
namely ammonia, methanol and polypropylene. Also the non-availability of phosphoric acid
and sulphur can impact production.

¾ Valuations & Recommendations

At CMP of Rs 88, the stock is trading at 4.91x & 4.21x its FY10 & FY11 estimated earnings of
Rs 17.42 & Rs 21.48 respectively and dividend yield of 4.61%. With the enhanced availability
of gas and increased production, stabilization of product prices in the international markets
and the 300,000 tpa TAN expansion well on track for completion in Q3FY2011, we
recommend a strong BUY on the stock for a target price of Rs.156 over the next 18 months,
representing an upside of ~77% from the current levels.

-6-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer
Price/Earning Bands
350
3x 6x 9x 12x 15x CMP
300
250
200
150
100
50
0

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Source: Company, Ventura Securities Estimates

Price/Book Value Bands

300.00
CMP 0.5x 1x 1.5x 2x 2.5x
250.00

200.00

150.00

100.00

50.00

0.00
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Source: Company, Ventura Securities Estimates

EV/EBIDTA Bands

400.00 EV 3x 5x 7x 9x 11x
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Source: Company, Ventura Securities Estimates

-7-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer
Financials & Projections
Profit & Loss Statement Key Ratios
Y/E March, Fig in Rs. Cr 2009 2010E 2011E Y/E March, Fig in Rs. Cr 2009 2010E 2011E
Per Share Data
Net Sales 1412.1 1429.2 1835.2 EPS 16.9 17.9 20.9
Total Expenditure 1139.9 1121.0 1440.7 Cash EPS 48.4 6.4 16.6
Operating Profit DPS 4.0 4.0 4.0
272.2 308.2 394.6
Book Value 91.1 104.7 121.3
Other Income 36.0 40.0 28.0 Capital, Liquidity,
EBIDTA 308.2 348.2 422.6 Return Ratio
Debt/Equity 0.8 0.7 0.8
Depreciation 52.4 61.4 93.1 Current Ratio 2.3 2.6 1.9
Interest 40.5 58.9 64.4 ROCE (%) 17.9 17.8 17.4
PBT ROE (%) 18.5 17.1 17.2
215.4 227.8 265.1
Dividend Yield 4.5 4.5 4.5
Tax 63.3 66.2 77.2 Valuation Ratio (x)
APAT 152.1 161.6 187.9 P/E 5.2 4.9 4.2
Exceptional Item P/BV 1.0 0.8 0.7
3.4 3.3 3.3
EV/Sales 0.9 0.8 0.8
RPAT 148.7 158.3 184.5 EV/EBIDTA 4.0 3.4 3.5

Balance Sheet Cash Flow Statement

Y/E March, Fig in Rs. Cr 2009 2010E 2011E Y/E March, Fig in Rs. Cr 2009 2010E 2011E
PBT 212.0 224.5 261.8
Sources of Funds Depreciation 52.4 61.4 93.1
Shareholder’s Fund Interest 40.5 58.9 64.4
803.1 923.4 1069.9
W.C Change -53.1 -4.7 -49.5
Loan Funds 607.8 671.6 808.2 Tax -58.5 -66.2 -77.2
Deferred Tax Liability Others -10.4 0.0 0.0
65.1 65.1 65.1
Operating Cash
Total 1475.9 1660.1 1943.2 Flow 182.8 273.9 292.5
Change in Fixed
Application of Funds
Assets -222.0 -140.5 -494.0
Fixed Assets Change in
972.7 1051.8 1452.7 Investments -11.7 -3.7 0.0
Investments 154.5 158.2 158.2 Cash Flow from
Investing -233.8 -144.2 -494.0
Current Assets, Change in Debt 258.4 63.9 136.6
loans & Advances Interest -40.5 -58.9 -64.4
348.2 449.6 331.7
Dividend -38.0 -38.0 -38.0
Miscellaneous Expenditure Cash Flow from
Financing 179.9 -33.1 34.1
0.5 0.5 0.5
Net Change in Cash 128.9 96.6 -167.4
Total 1475.9 1660.1 1943.2 Opening Balance 30.0 159.0 255.6
Closing Balance 158.9 255.5 88.2
Source: Company, Ventura Securities Estimates

-8-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page
Stock Pointer

Ventura Securities Limited

Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079

This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no
responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their
articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in
part without written permission is prohibited. This report is for private circulation.
-9-
Thursday, November 5, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page