Net Sales increased by a mere 2.2% YoY to Rs3.8bn (as against our estimate of Rs4.2bn) due to decline in trading revenues from fertiliser segment. However, OPM expanded by 321bps to 21.8% due to lower cost of traded goods. Consequently Adj. net profit increased by 22.5% to Rs436mn (post adjustment of exceptional gain of Rs257.1mn arising from sale of surplus land in Q3FY10)

Steady growth in Chemical business:

Revenue from Chemical business increased by 23.2% to Rs2.6bn and EBIT margins for chemical business expanded by 45bps to 30.4%. TAN margins were lower to the level of 25% because of increase in ammonia cost. As a result, DFPCL has hiked TAN price by 15% to Rs21000/ mt to maintain margins. Methanol prices increased by 40% QoQ to Rs16000/mt contributed to Methanol margins.

Subdued margins in fertliser segment:

The trading component of fertiliser sales declined by 36.6% YoY mainly on account of lower prices for bulk fertilisers like MOP. Manufactured fertilizer volumes like ANP were lower (-23% YoY) due to delayed shipment of phosphoric acid. Also EBIT margins on fertilizers was low (3.5%YoY) due to rise in APM gas cost YoY to Rs9.25/scm from Rs7/scm.

Realty continues to be a pain:

Contribution from specialty mall ‘Ishanya’ remained negative due to lower occupancy and despite of ongoing restructuring. Company has planned a capex of Rs550mn by FY12 towards restructuring out of which till date Rs120mn is already expensed. However, new tenant offerings to the tune of 1 lakh sq. ft could provide an impetus to this segment.

TAN plant expected to start production very soon

The company’s Technical Ammonium Nitrate (TAN) plant is expected to start production from March 2011 onwards. It is expected to produce 12000-15000 tons/month initially and management is targeting 200,000 tons by FY12 and capacity utilization of 70%.

VALUATIONS AND RECOMMENDATION

In light of expansion of its TAN capacity and positive growth outlook for fertilisers, we maintain our earning estimates for FY11 and FY12. At the CMP of Rs157, DFPCL is trading at a PER of 8.3x & 6.2x and EV/EBITDA of 5.0x & 3.8x for FY11E & FY12E respectively. We reiterate our ‘BUY’ recommendation with a target price of Rs228 (9x FY12E EPS)