Detailed Narrative
Q2 FY26 Performance Overview and Margin Compression
Deepak Fertilisers reported Q2 FY26 operating revenue of INR 3,006 crores, marking a 9% Y-o-Y growth. For the first half (H1) of FY26, operating revenue grew 13% Y-o-Y to INR 5,665 crores. However, operating EBITDA margins saw a decline from 18% to 15% in Q2, primarily due to challenges in the IPA and Ammonia segments. Despite this, H1 PAT grew 11%.
Strategic Shift Towards Specialty Products and Crop Nutrition Growth
The company's strategy to transition from commodity to specialty products is yielding results, with specialty offerings now contributing almost 22% to H1 revenues. The Crop Nutrition business demonstrated strong resilience, growing 54% Y-o-Y, driven by its flagship specialty product, Croptek, which saw a 54% Y-o-Y growth. The specialty product portfolio within Crop Nutrition now accounts for 28% of segment revenue, up from 22% in the previous year.
TAN Business Momentum and Project Progress
The Technical Ammonium Nitrate (TAN) business maintained strong momentum, achieving a 29% Y-o-Y volume growth to 137 KT. The B2C segment of TAN also grew 33% Y-o-Y. Key growth projects, including the TAN project at Gopalpur (87% complete) and the Nitric Acid project at Dahej (70% complete), are on track for commissioning by the end of Q4 FY26. These projects are expected to reach 70% capacity utilization in FY27 and over 80% in FY28, with an expected ROCE of over 20%.
Challenges in IPA and Ammonia Segments
The Chemicals segment experienced a 21% Y-o-Y decline, largely due to subdued performance in IPA and Ammonia. IPA volumes remained flat at 17 KT, facing margin pressures from global oversupply, a steep drop in acetone prices, and increased competition from US imports. The Ammonia segment was impacted by global price volatility, with FOB Middle East Ammonia prices averaging $300/metric ton in Q2, significantly lower than the previous year, though they have since rebounded above $400.
Capital Allocation, Debt, and Strategic Acquisition
The company generated INR 782 crores cash from operations in H1 FY26. Despite a capex outlay of INR 870 crores in H1, net borrowing increased only marginally to INR 3,402 crores, maintaining a healthy net debt-to-EBITDA ratio of 1.74x and net debt to equity of 0.48x. The full acquisition of Platinum Blasting Services (PBS) for an enterprise value of INR 537 crores at 6.7x EBITDA strengthens the company's mining solutions footprint in Australia and India.
Outlook and Future Strategy
Management anticipates a robust Rabi 2025 season for Crop Nutrition due to favorable monsoons and increasing adoption of specialty products. The Ammonia plant is expected to see a 10% capacity increase after a Q4 FY26 shutdown. The attractive LNG gas contract with Equinor, set to kick in by mid-next year, is expected to significantly reduce gas prices and improve Ammonia profitability. The company remains committed to cost optimization and market realignments to drive margin recovery in challenging segments.