Deepak Fertilizers and Petrochemicals

Business:

• Revenue contribution: 40% Fertiliser; 40% Mining chemical (TAN); 20% Industrial chemical (Nitric acid & IPA)
• Profit contribution: 80-90% from mining and industrial chemicals (vs revenue contribution of 60%)
• Change in favorable product mix: Moving from fertiliser to mining and industrial chemicals (down from 80 to 45% now)- Agri cyclicality reducing
• Raw materials: Nitric acid (75% of capacity would be utilised internally) and amonia for TAN and fertiliser
• Ammonia is made from hydrogen (compressed from air) and nitrogen (gas)
• Entered into long term contract from Equinor for stable natural gas price (to start in 2026)
• Only manufacturer of TAN in India; serves 40% of domestic demand (rest is imported from Russia)
• 2200 cr capex in TAN would enable to serve 60% of domestic demand and make it 3rd largest TAN producer in world (expected to go live in H2 FY’26)
• 65% demand of TAN comes from Coal mining (Govt’s focus)
• Russia dumped 50% of their supply to India in FY’24 (much lower than FY’23) due to muted demand in Peru and Brazil- this is normalizing
• No supply addition of TAN in 5 years

Market share:
45%- Nitric Acid (South Korea is largest exporter; China was but imposed export ban)
35%- IPA

Fundamental triggers:

• Amonia prices going up

• TAN spreads increasing

• Import duty increasing

• Capex of 2000 cr in nitric acid (60% capacity already booked for 20 years)

• Volatility in margin going down due to backward integration

• In TAN business, moving into forward integrating explosive chemicals: Like Solar industries; in nitric acid also moving towards speciality nitric acid (solar and steel grid- high purity is required)

• Margins becoming 18-20%

• With expanded capacity, can serve 60% of India’s domestic demand

Multiple things at play:
Govt focus on mining (tailwind)-> Beneficiary is Deepak as only player of TAN in India (used in coal mining as explosive) → Supply side constraint: imports are made tougher due to higher import duty on TAN in budget (plus Russia banning its export); Change in product mix (favorable); backward integration

During FY25, they can do 950 to 1000 crore PAT if commodity prices remain stable; trading at a 12-13x PE ratio.

Monitorable:

• Margins in the range of 18-20%
• Check commodity prices (investor presentation)
• Competitive intensity: Coal India (key customer) and Chambal is expected to enter into TAN
• Debt level
• Monitor backward integration of ammonia

Credit:
SOIC IAS
Bastion Research https://youtu.be/gj0eUjrL46Q?si=tfk9Mac4SFfku6gB
Ammonium nitrate prices set to rise as India cuts imports from Russia – BusinessToday