Yes, high Ammonia prices will help Deepak Fert.
Management in the concall clearly stated that at $375 they will reach EBITA breakeven, and at $425, PBT breakeven.
I am following Deepak Fertilisers from the last 3 years and I have a position in it for the last 3 years.
I feel most of your analysis is spot on.
Management mentioned they raised funding for the Mining business at a valuation of 13,500 crores, but the entire business is valued now at 15,100 crores.
One major challenge remains: low ammonia prices continue to weigh on the company’s performance. If you examine the long-term charts for ammonia and Deepak Fertilisers’ results, there is a clear correlation between earnings and ammonia pricing.
We can track live ammonia prices at the following link: Ammonia - Singapore Exchange (SGX)
Deepak of next 5 years is not going to be the same as Deepak of last 5 years.
Next 5 years we will see following growth triggers play out:
Equinor Gas Contract. Impact explained here: Deepak Fertilizers and Petrochemicals - #364 by r8b8. Based on my understanding it should increase margins of each segment by 9-10%. This acts has a hedge against volatility on Ammonia Prices. Management themselves in Q2FY26 said that Equinor gas contract will bring down breakeven Ebitda level for Ammonia much lower.
Q1FY26
Q2FY26
In the past, Bulk fertilizers segment was 40-50% of the overall revenue. This segment is directly impacted by lower Ammonia because of NBS. When price of Ammonia falls, the government lowers the cost of fertilizers because they don’t want farmers to pay a lot for something which companies are making for cheap. Thus they lower realizations of bulk fertilizers. This impacts Deepak more than other players due to backward integration. When other players can easily buy cheap Ammonia from spot market, Deepak needs to pay fixed cost for keeping the Ammonia plant running. However by FY29, the bulk fertilizers segment is going to be less than 50% of the fertilizers segment and 15-20% of the overall revenue. Even in worst case where Ammonia prices crash completely, only 15-20% of the company will be impacted. But this too gets offset by Specialty fertilizers. Because unlike bulk fertilizers where prices drop with drop in Ammonia, the specialty fertilizers prices don’t drop, thus improving margins of specialty fertilizers segment.
CNA segment is insulted from Ammonia prices because most of the capacity is tied to Aarti Industries contract. For the remaining capacity, they will benefit from Equinor gas making them the cheapest producer of CNA. Deepak already has a dominant position in CNA in India and controls more than 50% of the market, thus having significant pricing power.
In WNA segment, they are moving to Solar Grade Nitric Acid (already developed and are selling), and Steel Grade Nitric Acid. With optionality of Semiconductor Grade Nitric Acid. Solar Grade Nitric Acid is a specialty chemical and thus will be protected against downside from Ammonia prices.
In TAN segment, they are moving from B2B to B2C Blasting solutions which are long term sticky contracts with pass through for Ammonia price volatility. In B2B, they sell AN Melt & HDAN which are extremely costly to ship long distances. At the moment for customers in East, they are shipping from Taloja plant in west. The freight cost kills the margins. With Gopalpur going live, they will save on the expensive freight cost, thus improving margins which should act has a hedge towards drop in Ammonia prices.
As Deepak, moves away from being a commodity company manufacturing bulk fertilizers & bulk chemicals to a specialty company manufacturing specialty fertiilzers & specialty chemicals and a solutions company providing blasting solutions. The correlation with volatility in Ammonia prices will start to fade.
@kdjolly My view is that management plans to monetize a minority stake in the Deepak Mining business by bringing in a global strategic or private equity partner. The business is fully backward integrated across TAN, PBS, explosives, and ammonia, giving it end-to-end blasting solutions capability and a strong competitive moat. A strategic investor would likely value the asset on replacement cost and moat rather than near-term earnings. Selling a 10-20% stake at 20-25x EBITDA could serve as a valuation benchmark, forcing public markets to re-rate the remaining 80-90% stake held by shareholders.
Where did you get the information of ’ No direct share issuance to DFPCL shareholders; benefits flow via holding company value’? I suppose no new shares are being issued as they become subsidiaries, but new shares will be issued once they demerge and are listed as separate entities right? That’s the cleanest way to unlock value and in my opinion will be case.
Extremely well written and simple. let us see how it pans out. Thank you
It will take me at least another life to combine chemistry and Finance in such a detailed manner. Thank you very much for the detailed info.
What’s your thoughts on the current debt level? The company is paying ₹400 cr annual interest that is almost half of their annual profit. With some capex plans underway, the debt is likely to increase further. Total debt ₹4k cr while sales was ₹10,200 cr last year. Is this a cause for concern, given that the interest cost will directly impact the bottom line?
Company is mainly into manufacturing of bulk chemical commodity like IPA, Fertiliser, Nitric Acid, Ammonia and now with the entry of China even Ammonium Nitrate.
Due to the high tide in chemical sector margin of the Company was alevated to 20% as agaisnt mean margin of 12-13%. The margins are now reverting to mean and so will the valuations will also be. With lower margin and peak debt of around 4500 Cr, it will be interesting to see how the Company performs. Company was into financial turbulence during 2018 & 2019 due to reduction in margin and higher capex, because of which the rating was also downgraded. The same cycle may repeat if the margins further decline.
Disclosure: Invested with tracking position from lower levels.
Q3 results were below expectation but the transition from commodity to specialty continues.
Following slide from Q3 PPT perfectly summarises the long term thesis:
Some data from Q3 to back the transition:
Next quarter should be better than Q3 with recovery in TAN, Nitric Acid & specialty fertilizers. IPA is going through challenges and will probably take another 2-3 quarters to see recovery. Growth will kick in once Equinor Gas contract begins in May and Gopalpur & Dahej plant goes live.
Regarding Current Valuation:
It’s trading at 15X TTM PE, 1.18 PS, Market Cap / FY25 CFO of 7. Deepak made 1880 Cr CFO in FY25. There are more than 5,000 companies listed in the Indian stock market, but only 178 companies made more than 1,800 Cr CFO in FY25. Median market cap of these 178 companies is 86,596 Cr.
Further, if we look at companies which made FY25 CFO in the range of 1,800 - 2,000 Cr. We get a total of 26 companies. The average market cap of these companies is 42K Cr, and the median market cap of these companies is 32K Cr. Deepak is 13K Cr.
Moreover, if you run the following query on screener:
Cash from operations last year > 1800 AND
Price to Earning < 16 AND
Price to Cash Flow < 8
You get only 31 companies, including Deepak. 14 of them are banks and NBFCs. Excluding them, the average market cap of these companies is 97K Cr, and the median market cap of these companies is 36K Cr.
Out of total sales of Rs 8494 Cr for 9 Months ending Q3 FY 26, trading sales is around Rs 1500 Cr. Entire YOY growth for 9 M is on account of trading sales.
