Deepak Fertilisers & Petrochemicals Corporation

Recommendation: Buy
Price target: Rs169
Current market price: Rs132

JV with Yara International

Key points

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Deepak Fertilisers & Petrochemical Corporation Ltd (DFPCL) has agreed to form a joint venture (JV) company with Yara International ASA (Yara International) to produce and market ammonium nitrate and specialty fertilisers in India.
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DFPCL will own 51% stake in the JV, while the Norway-based Yara International will own the balance 49% stake. The current heads of agreement will be converted into final agreement after due diligence and necessary company and regulatory approvals.
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The JV will provide DFPCL stability and flexibility in its operations in ammonium nitrate and specialty fertilisers segments through Yara International's leadership in the ammonia value chain and a large-scale ammonia/urea production base in the low-cost natural gas regions. The JV will also invest in the company's Paradip project of setting up a 300,000 million tonne per annum (MTPA) ammonium nitrate plant.
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Indian technical ammonium nitrate (TAN) consumption is growing at about 5-6% per annum on the back of high coal demand for power generation. DFPCL is the only major domestic producer of TAN, with the balance being met through imports.
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DFPCL has already increased its ammonia capacity to 130,000 tonne per annum (TPA) from 90,000TPA during the second quarter. This along with increased natural gas availability and additional ammonia storage tank would benefit the company in reducing the raw material cost and enhancing its nitric acid production.
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For FY2009, we expect the company to post a revenue growth of 18.8%.
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At the current market price of Rs132, the stock is trading at 8.5x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs169.