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Monday, October 27, 2008

Deepak Fertilisers & Petrochemicals - Good Dividend Yield with growth - Buy

Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs169
Current market price: Rs46

Q2FY2009 results: First-cut analysis -
Result highlights
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Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) has reported a strong set of numbers for Q2FY2009 on the back of a significant improvement in realisations in both its business segments.
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The company’s net sales increased by 70.5% year on year (yoy) to Rs375.1 crore in Q2FY2009 owing to a robust increase in the realisations in both the chemical and fertiliser segments.
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Chemical segment: The revenues from the chemical segment increased by 62.9% yoy to Rs253.9 crore from Rs155.8 crore in Q2FY2008. The revenues saw a high growth during the quarter primarily because of a significant improvement in the realisations across product categories.
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Fertiliser segment: The revenues from the fertiliser segment rose by 71.4% yoy to Rs121.2 crore from Rs70.7 crore in Q2FY2008 due to a manifold increase in the manufacturing activity.
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Realty: During the quarter, the company’s specialty mall for interiors and exteriors, Ishanya, earned revenues of Rs4.0 crore, which was higher compared with the Rs3.1 crore earned in Q1FY2009.
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The other income declined by 30.2% to Rs4.7 crore in Q2FY2009 from Rs6.8 crore in Q2FY2008 on account of a drop in the interest income. The interest income fell due to the non-availability of surplus funds during the quarter.
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DFPCL’s operating profit grew by 112.8% yoy to Rs83.8 crore as its operating profit margin (OPM) came in at 22.3%, marking an increase of over 470 basis points compared with 17.6% in Q2FY2008. However, the earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 91.7% yoy to Rs88.5 crore due to a 30% decline in the other income.
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Chemical segment: The profit before interest and tax (PBIT) of the chemical segment almost doubled to Rs74.9 crore from Rs37.3 crore in Q2FY2008 with the PBIT margin increasing by 550 basis points to 29.5% in Q2FY2009 from 24.0% in Q2FY2008. However, sequentially the PBIT margin declined from 34.7% in Q1FY2009.
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Fertiliser segment: The fertiliser segment registered a segmental profit of Rs9.5 crore during the quarter as against a loss of Rs1.5 crore in Q2FY2008 and a profit of Rs4.0 crore in Q1FY2009.
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During the quarter the company booked a foreign exchange (forex) loss of Rs13.0 crore on account of the outstanding external commercial borrowing of $15 million. Cumulatively, the total forex loss for H1FY2009 stood at Rs32 crore.
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In the second quarter, the interest expenses increased fourfold to Rs13.0 crore as compared with Rs3.1 crore in Q2FY2008 on account of the rising interest rates.
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During the quarter the company booked an extraordinary loss of Rs1.6 crore; of this Rs1.45 crore was towards the expenditure incurred for brand launching activity and Rs0.16 crore was towards voluntary retirement scheme compensation.
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Though the H1FY2009 results have been above expectations, the outlook for the second half of FY2009 remains bleak due to the softening in the prices of chemicals, as it may lead to contraction in the company’s realisations going forward.
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In addition, for FY2009 the company had guided for a revenue target of Rs18 crore from the real estate business. However, the revenues from the real estate business during H1FY2009 stood at Rs7.1 crore. The ongoing slowdown in the real estate sector raises concerns over the company’s ability to achieve its revenue target for FY2009.
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At the current market price of Rs46, the stock is trading at 3.4x its FY2009E earnings per share (EPS) and 2.6x its FY2010E EPS. At the current market price and dividend (Rs3.5 per share in FY2008), the stock provides a dividend yield of over 7%, offering a healthy margin of safety for the investor. We maintain our Buy recommendation on the stock.

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