Interesting article on ammonia and its use as a renewable fuel. I know that DF doesn’t have any immediate plans to enter this space but the backward integration makes sense if ammonia usage will grow as a renewable fuel. Also note the pilot plant in Australia and terminal being set-up in Aus to cater to liquified ammonia.
D: Invested.
I have checked the latest shareholding patter in detail and compared it to march 2021, the main big difference is that IFC has acquired almost 9% shares now around 5% at 55 lacs shares, which was earlier just 0.5%. Fidelity is showing up in latest but its not a new investor, its just that now its stake is above 1% it is highlighted, but if you look closely it was most likely there in the March quarter also under the FPI section. In terms of MF holdings, only Quant MF house was holding almost 6 lacs shares in April & may and now with the price at 450 level they also rode the momentum and exited. There is NIL holdings by any MF now.
I just know about the USD funding by IFC for their capex plan and issuance of warrants , but am not sure about what this latest arrangement is that IFC has acquired/converted shares under their name now at 5% stake. The retail shareholdings percentage are also almost same QoQ. And going by the investor calls being done in last 2 weeks, there may be a possibility now of getting many MF’s slowly into the bandwagon. Need to know more on the IFC shareholding part if anybody can check and let us know. Thanks! 
This was due to conversion of FCCB.
Regards,
Raj
Disc: Invested
IFC had the option to convert FCCBs within 6 years and they’ve converted bonds to equity shares within the first year. This is only for 1/4th the amount that IFC has committed (60mn USD) and 1/2 the amount (30mn USD) extended to DF via FCCBs.
15mn USD worth FCCB converted to equity shares would also bring down debt / interest cost for DF. These bonds had a 5% coupon interest rate.
HI Folks,
I was reading through the Annual report and I noticed and this point drew my attention & I would like to bring this to the group’s attention and would appreciate if someone could share how this should be interpreted,
Government interfering with pricing policy and profitability
Points for AR 20,
As disclosed in the last year’s report, effective 15th May, 2014, domestic gas supply to the Company was arbitrarily stopped by the Ministry of Petroleum and Natural Gas. The Company successfully challenged the same before the Hon’ ble Delhi High Court, which by its Orders dated 7th July, 2015 and 19th October, 2015 directed the Government of India (GoI) to restore
44 | Deepak Fertilisers And Petrochemicals Corporation Limited
the supply of gas. Review petition filed by the GoI, challenging the said Orders was rejected by the said Court. Further, the GoI also filed the Special Leave Petition (SLP) before the Hon’ble Supreme Court of India against the Order of Hon’ble Delhi High Court, which was also disposed without granting any relief to the GoI. The GoI has filed an affidavit before the Hon’ble Delhi High Court stating that Inter Ministerial Committee (IMC) has decided to recommend supply of pooled gas to the Company, subject to approval of the Competent Authority. GoI has further filed an application in the Hon’ble Delhi High Court seeking dismissal of the matter. The Company is contesting the said application since the Competent Authority has not decided based on the recommendation of the said IMC and the application so filed is pre-mature. The hearing in the Delhi High Court is now posted in the month of August 2020.
2. The Department of Fertilisers (DoF), Ministry of Chemicals and Fertilisers, had withheld subsidy due to the Company in accordance with applicable Nutrient Based Subsidy (NBS) Scheme of the Government of India (GoI), alleging undue gain arising to the Company on account of supply of cheap domestic gas.
Can someone please advise if this should be considered as a red flag?
DISC: Holding a small position but planning to raise my position.
Thank you in anticipation.
Really insightful discussion on Deepak Fertilisers. I have been studying the company for a while with a positive bias as I, like countless others, made good money in Deepak Nitrite (Still invested)!
Here is my thesis:
(1) It is not a speciality chemicals play: This seems like a classic case of “Making hay while the sun shines”. Adding the word ‘speciality’ in your chemical business means you get great valuations (40-50-60x, even 80x+ in a few cases) so why not portray basic commodity chemicals as speciality chemicals!
But unfortunately, IPA, TAN, Nitric acid are basic chemicals in the midst of a upcycle with massive tailwinds due to supply shortage. Management has mentioned in the recent concall (Q4) that TAN, Acid and IPA capacities have been closer to 80-95% in FY 2018-19. And One quick glance at the FY19 numbers shows you that margins were really low even at peak capacity and maximum operating leverage. In fact, TAN, which has the least commodity characteristics (although still wouldn’t call it a speciality chemcial) was operating at 105% capacity utilisation in FY19. (Taken from Q4 FY21 concall, correct me if I am wrong). All of this shows that margin expansion is not sustainable and should revert back to mean as soon as the demand-supply scenario normalises.
(2) Future growth prospects: Moreover, DF already has market leadership in TAN (42%), CNA (71%) and IPA (65%) hence we shouldn’t expect too much capacity expansion into these products except TAN which has already been announced. This might be the reason why they are going upstream and spending such a huge amount in the Ammonia expansion. Think about it, why would you allocate capital into a super commodity like Ammonia if you had better growth opportunities. Saving on logistics seems to be a weak argument because after considering logistics cost savings the ROCE of the project is 15%!!
With all this in mind it seems that the stock is priced to perfection. And earnings growth visibility is really low. But given the quality of the management, it will be interesting to track the story going forward. Please bear in mind that in the short term market might still escalate the PE ratios in search of the next spec chem superstar! Because that’s how the current bull market is behaving.
P.S. - I have massive respect for @phreakv6 and his post was one of the main reasons I started looking into the company in the first place. Really admire the clarity of thought. Would love to hear his thoughts on the above or other possible triggers for the stock which I might have missed.
Hi Pratul,
I think what constitutes specialty, I have so far not been able to figure out to be honest. Is it based on number of steps in the Chemistry or some sort of patented process of manufacturing? Doesn’t seem to be the case
For eg. Deepak Nitrite is classified as Specialty Chemicals. Phenol (> 50% of topline and bottomline) is a fairly simple compound C₆H₅OH and manufacturing it as well using cumene process that Deepak Nitrite uses is fairly straight-forward and has been around for over 75 years.
Is TAN specialty? I think if Phenol can be specialty chemical, then TAN too perhaps can be. 
Is it based on margins? Volatility in prices of the compounds manufactured? Doesn’t seem to be the case either. For eg. SH Kelkar hasn’t exceeded 20% margins in 10 years but its listed under Specialty Chemicals and Nocil has highly volatile margins but is specialty as well.
BEPL is specialty, Thirumalai is commodity - in reality both are having volatile prices, and are affected by imports.
In my opinion very few businesses listed under Specialty Chemicals are genuinely that - that is with consistent 25%+ margin, multi-step chemistry with integrations at every level - maybe a Vinati, SRF, Atul, Aarti, Fluorochem (going forward) alone may qualify from the businesses I follow (Ignoring Pidilite here)
There is no doubt price tailwinds in a lot of the products Deepak Fertilizer manufactures, as is the case with several other businesses for eg. ABS, PAN, Ethyl Acetate, Phenol and so on. I have no clue how long CNA, TAN prices can hold up. I had priced in IPA weakness when I took positions.
As for the ammonia capex, I took the managements calculations at face value and did not really dig very deep. My understanding of it goes like this - $450/MT is the landed price at their factory and if they manufacture it, it is going to cost $220/MT for gas and $40 for conversion costs and so will save about $190 which will go into EBITDA. As for IRR - they mention it will be in high teens.
Now all this is assuming the base case of prices of Ammonia at around $400. There are times when ammonia volatility takes the prices up to as high as $700 as well (and as low of $170). It is during these times the project could payoff in lumps. Sometimes the cash flow from these years could be 3-4x the normal cashflow (as we have seen in steel and several other commodities).
As for current valuation, it is definitely not the cheap no-brainer it was at 220 when I started buying. Risk is high at these prices and on top of it its under ASM-IV with hardly any liquidity (possibly manipulated as well). If they manage to find a partner to pony up the cash through equity or NCD or some route for the capex, and change their name to Deepak Petchem or something like that, 
maybe the removal fertilizer tag alone can let it re-rate a bit more.
Disc: Have traded in SHK, Nocil, Deepak Nitrite etc. in the past and hold Nocil as well. Invested here with an open mind - will change as things change (I am not ashamed to chicken out of ideas when necessary). Btw, Deepak Nitrite was presented in VP Goa, and I was the idiot who thought phenol prices would crash when this plant came up. How naive I was. So I could be very wrong here as well again (that’s what stoplosses are for)
I agree with @phreakv6 what is speciality chemicals is in realms of imagination …
We have DOW chemicals , Bayer and BASF with large R&D budget and patents at single digit margins and we have in India many chemical companies with hardly any R&D budget and patents bracketed as speciality chemicals …
India has got tailwind because of environment issues in developed countries and china … Enjoy the run as along one can but don’t overpay for such companies …
I would like to add one more point to the discussion. Scale is very important in commodity business as it helps you negotiate the down cycle well. Deepak has leadership position in multiple products as well as tailwind for the product demand/pricing. Besides valuations are also better with earning visibility of near term.
The tide will turn for sure but till then better to enjoy the ride.
Regards
Raj
Disc: Highest allocation in the portfolio
True. My understanding is that true specialty chemicals is where the end-product is customized to the buyer’s requirement – the chemical composition of the compound, purity levels or other such aspects. The buyer would not be able to source it off-the-shelf from the open market. Hence it yields higher margin for the seller but does not insulate him from price volatility as pricing agreements are usually based on key RM price + an agreed margin.
Well if you read the annual report further, it says that GoI did release the subsidy to it worth 500crs in FY 2019-20 and even subsidy worth 310cr was released against a bank guarantee furnished by Deepak Fert.
I checked the status of cases on DHC website and the last order therein is dated 2019 and no movement in the case since then (amazing judicial efficiency!). But in any case, the max exposure appears to be INR 300crs which is
@phreakv6 did all the heavy lifting. Adding some of the things I found interesting.
If there is one word which management thinks about the business it is ‘Challenging’. We come across this word across multiple annual reports over last 25 years.
If I ask myself what are the traits that Deepak has shown over last 20 years:
Few questions I had in my mind before I started reading and my hypothesis was that it is a passing phase and good times shall pass and business will become challenging again:
The history is fascinating:
Though there was lack of focus, Deepak was also busy building huge capacities. They expanded in Nitric Acid, TAN and added new capability in IPA and Bentonite Sulphur (Fertiliser). While they did this, they did not expand Fertiliser capacity for 27 years. Why? – Because LNG supply was a challenge and Fertilizer was a lower margin business. Priority was Ammonium Nitrate or TAN.
They used to make PAT of 51 cr in 1998 and they made PAT of 87 Cr in 2019. In spite of all the expansion and Gross Block increasing from 500 cr 1998 to 4600 cr in 2019, profitability has been a challenge. It has gone up in between but that was a passing phase. What was happening?
There is something, which happened in FY 2019.
Why did this happen. I have a working hypothesis:
Leavers of business :
Fertiliser : Deepak put up a huge NPK capacity which came online at the end of FY 2017. Why did they expand after 25 years? Because dynamics of fertiliser business is changing. LNG availability and price has improved. Earlier there was a lot of government intervention but slowly the subsidy is moving to DBT (Direct Benefit Transfer). GOI is working on this and once they deicide, subsidy will go to the farmer and the farmer will have the freedom to choose. So What?
TAN – Surprise – TAN is under Anti-Dumping Duty. Almost 75% of TAN portfolio is protected under ADD.
Ammonia CAPEX :
Concerns and Risk
Profitability Levers:
Deepak is a very difficult business to do. Its has many moving parts and if one part doesn’t work, business will struggle. It has to be seen if the Next Generation will be able to change the trajectory of the business.
Q1FY22 Results concall summary -
Management comments -
Very good performance considering RM price hikes (Amonia 102% price hike, Phos acid 49%, RGP - 50%, MOP 7%). It was better capacity utilization, cost optimization and production effeciencies. Price hikes to be taken. It take 1 to 2 qrt time to reflect price hike effect in PnL.
Dahej Palnt - 18 days shutdown in Q1 which was preponed. It will help in coming quarters.
IPA demand will continue to grow.
Mining - 54% growth with LDAN top product contribution. Cement sector yet to have demand growth.
Crop Nutrition - very good quarterly perfromace. 67% growth. 7th straight qrt of profit growth for division. Highest ever production
Capex - Amonia and TAN plant are in good control and running as per schedule. It will be strong foundation for future growth.
4 pronge startegy -
1. Size right - fertilizer growing good, Capcity addition, TAN etc. is bearing fruits
2. Backbone systems and technologies. Helping on cost optimization and positioning in market
3. Backward integration - Amonia facility coming up
4. Comodity to speciality - Industrial Chemicals, Mining and fertilizers. Customer to consumer transition
Government also helping with increased subsidy to fertilizer companies.
Reduced net debt by 240+ cr. in Q1. Finance cost reduced by 22% YoY.
Industrial Chemicals and Mining - volume growth of 11% YoY.
Fertilizer -
Crop Nutrition - volume up 25% YoY. Differentited NPK (Smartchem) - 39% volume up.
RM Price hike passing to customer - passage in short time is difficult. Contracts has provisions to pass on prices after month period.
subsidy - went up in Q1. Recieved approvals for NPK based subsidy.
Per tonne realization improves.
some debottlenecking can help to improve capacity. Market share gain of 6% in Maharashtra. Crop specific products like grapes, tomato etc are doing good. Joint GTM and marketin intiatives helping.
TAN - Capacity expansion is going on for 3.76 lakh tonne on east coast. Construction to start soon. Debottlenecking at Taloja plant is also being evaluated on technical basis
IPA - no plan for capacity addition.
Acid - No plans for capacity addition. Good demand for nitric acids and shift from China to India is also helping.
Margin normalization - YoY basis margins will remain in same range due to seasonality nature of business. by Q3 and Q4 price hike pass through will complete. Need to watch RM price movements during this period.
Capex - 1350 to 1400 Cr each in 2 years for Amonia plant. Amonia - Q4FY23, TAN - H2 of FY24 completion target. TAN - 1800 to 2000 Cr overall over next 3 years.
Risks - Mansoon for fertilizers, Nature of RM (Phos acid and MOP) - oligopoly supplies and demand fluctuations, Project timelines and costs (Amonia - contruction is only activity pending. Procurement is in place. Contractor has done 70% of global plants contruction).
My take away -
Disclosure: Invested from lower levels of @165 with 10% PF allocation.
Perhaps a noob question but still wanted to ask:-
My understanding is that what makes “ammonia” into “green ammonia” is essentially using water electrosysis to produce hydorgen and then using the age old Haber Bosch process to produce Amonnia by reacting Hydrogen with Nitrogen.
Now, DF proposes to utilise natural gas to make hydrogen (by first making methan CH4 and then obtaining Hydrogen through reaction with water). The process for reacting hydrogen so obtained via natural gas with atmospheric nitrogen remains the same i.e. Haber Bosch.
Can you replace the first leg of the process with another process that would classify ammonia as “green”? I’m trying to understand if the ammonia capacities could ever be interchangeable?
Also here is ACME saying that gas prices are likely to remain elevated:-
As per Dipan Mehta
“Deepak Fertilizer is today where Deepak Nitrite was 3 years ago.” If anyone here who can explain on it. Does that statement is hype or it does make sense ?
Deepak Fertilizers is executing two very large projects:
Disc: Largest holding from much lower levels
The projects are more than 6 quarters away (Ammonia) / 10 quarters (TAN).
Only positive I find here is that due to China issue and China plus one playing out, the demand for even their existing commodity chemicals may remain strong and that should aid their cash flows in the medium term.
Director General of Trade Remedies (DGTR) recommends quantitative restrictions on import of “Isopropyl Alcohol (IPA)” for 2 years under Safeguard Measures (Quantitative Restrictions) Rules.
Link to document https://www.dgtr.gov.in/sites/default/files/Final%20Findings%20Safeguards%20(QR)%20Isopropyl%20Alcohol%20.pdf
Thats a good news for Deepak F&P
Decent results by Deepak Fertilizers. Chemical section did good while fertilizer lagged due to seasonality.
@phreakv6 would like to know your views.
