Deepak Fertilisers may see big dip in first quarter profit

The ₹3,800-crore Deepak Fertilisers & Petrochemicals Corporation may witness a substantial erosion in profit in the first quarter of this fiscal as its Pune plant stopped operations last month due to shortage of gas supplies.

The 300,000-tonne-a-year fertiliser plant came to a grinding halt on May 15 after the Union Ministry of Petroleum and Natural Gas stopped domestic natural gas supplies to the company on the ground that it produces phosphatic and potassic fertilisers, which are traded at market price, unlike urea.

Gas is used to manufacture ammonia, one of the basic ingredients for producing fertilisers.

Though the company has moved the Delhi High Court for legal reprieve against the “arbitrary and discriminatory” decision by the Centre, the case is scheduled for the final hearing on July 1.

It means, even if Deepak Fertilisers gets a favourable verdict, gas supplies will not be resumed before July. Till then the company has to survive on traded volumes.

In 2013-14, the company sold around 555,000 tonnes of fertilisers. This includes 245,000 tonnes of complex fertilisers – those with different ratios of nitrogen (N), phosphate (P) and potassium (K) – manufactured at its Pune facility.

The rest are bulk fertilisers (225,000 tonnes) and water soluble or micronutrient speciality fertilisers (85,000 tonnes). With its production facility remaining shut, the company will lose over 40 per cent of volume for half of the current quarter. The loss is not merely on the top line. Traded fertilisers fetch lower profit margin. Naturally, the impact should be sharper on profit. Deepak earned a net profit of ₹43 crore on a turnover of ₹742 crore in the April-June quarter last year. Annual profit stood at ₹244 crore at an operating margin of over 14 per cent.

A bigger issue is how the company will negotiate in the longer run if gas supply does not resume.

Company sources ruled out the possibility of using imported regasified LNG (liquefied natural gas), due to prohibitive costs vis-à-vis availability of cheaper domestic natural gas to its competitors.

Use of imported ammonia as feedstock is one option. But it is a costlier proposition. Most importantly, over the last 30 years, Deepak invested heavily in creating a gas-based facility. A change in production plan would turn that investment obsolete.