Dalal Street Investments
Top

Deepak + Gujarat Narmada Valley Fertilisers – HDFC Sec

April 21, 2008

Deepak Fertalizer”DFPCL is setting up a 0.3 mtpa Greenfield nitric acid and ammonium nitrate plant in Paradeep, Orissa at a capex of about Rs 5 bn. The company intends to divest 49% stake in this project to YARA International, a global major in fertilizers.DFPCL has its gas supply met from ONGC’s Mumbai Offshore; however, due to a problem at their end, the gas supplies fell in FY08E. We expect the situation to turn into normalcy and DFPCL to get higher volumes of gas from ONGC.

FY09, will be an inflexion year for DFPCL, with most projects stabilizing and getting on-stream. Gas too will be available through KG basin. We expect re-rating standing by a visibility in sustainable earnings growth over a longer term and availability of gas. The stock is attractively priced at 7.1x FY09E EPS and 5.4x FY10E EPS. HDFC maintains the BUY rating albeit with a modest Target price of Rs 169 (Our target Price earlier was Rs 204). Our target price corresponds to 11.5x FY09E PER.

Gujarat Narmada Valley Fertiliser:GNFC’s profit grew at a CAGR of 21% during FY05-07, mainly led by strong realisations in chemicals. Fertilisers accounted for 58% of revenues, but contributed only 18% to profits in 9MFY08. GNFC’s urea plant has fuel oil as its feed. The company produces about 0.64 mtpa of urea and is required to switch over to gas before March 2010, beyond which the government would stop subsidizing its expensive urea.

It is investing about Rs 7.5bn for the conversion and the draft policy allows the manufacturer to retain savings on energy for a period of UPTO 10 years, but it leaves room to withdraw the policy within five years. As the policy is ambiguous about the period, GNFC is waiting for the final policy notification to come through.

Its utilization rate in chemicals has been over of 120% for 4 years in a row. The CAGR in PAT of 41% during FY04-07 was mainly led by higher realizations in chemicals, stringent cost savings and other income.

GNFC has been trading at a 25~30% discount to private sector players like Tata Chemicals and Coromandel. We expect the valuation gap to continue, given public sector image and and slower profit growth in FY10E.HDFC has set a target price of Rs 166 on the stock with a market performer rating.

Comments

Got something to say?






Bottom