Deepak Fertilisers Q2 FY26: Margin Pressure Amid Volume Growth

The stock traded at ₹1,439.40 on November 06, 2025, declining 4.29% during the trading session, reflecting investor concerns over margin compression. The company's operating profit margin (excluding other income) contracted sharply to 15.42% in Q2 FY26 from 19.30% in Q1 FY26 and 17.99% in Q2 FY25, marking the lowest quarterly margin in recent periods. This margin erosion overshadowed the robust top-line performance, raising questions about pricing power and cost management in the current operating environment.

The second quarter results presented a tale of two narratives: impressive volume-driven revenue expansion contrasted against deteriorating profitability metrics. For the half-year period H1 FY26, the company's consolidated net profit stood at ₹456.37 crores, reflecting a 12.48% year-on-year increase from H1 FY25's ₹405.64 crores. However, the sequential decline in quarterly profitability signals emerging challenges in maintaining pricing discipline amid competitive pressures and potentially elevated input costs.

Financial Performance: Revenue Strength Masks Margin Weakness

Deepak Fertilisers achieved its highest-ever quarterly revenue of ₹3,005.83 crores in Q2 FY26, driven by robust demand across its industrial chemicals and fertiliser segments. The 13.05% sequential revenue growth from Q1 FY26's ₹2,658.75 crores demonstrated strong volume momentum, whilst the 9.43% year-on-year expansion underscored the company's ability to capitalise on market opportunities. On a half-yearly basis, H1 FY26 revenues reached ₹5,664.58 crores, representing a 12.82% increase over H1 FY25's ₹5,028.05 crores.

However, the revenue growth story was significantly undermined by severe margin compression. The operating profit (PBDIT excluding other income) declined to ₹463.64 crores in Q2 FY26 from ₹513.02 crores in Q1 FY26, despite the substantial top-line increase. This translated into an operating margin of just 15.42%, down from 19.30% in the preceding quarter and representing the weakest margin performance in recent quarters. The 387 basis points sequential margin erosion suggests substantial pressure from raw material costs, competitive pricing dynamics, or unfavourable product mix shifts.

The profitability trajectory deteriorated further down the income statement. Profit before tax declined to ₹309.52 crores in Q2 FY26 from ₹345.21 crores in Q1 FY26, whilst the net profit after tax slipped to ₹213.20 crores from ₹243.17 crores. The PAT margin compressed to 7.12% from 9.17% in the previous quarter, reflecting the cumulative impact of margin erosion. Interest costs provided some relief, declining to ₹74.78 crores from ₹88.11 crores sequentially, indicating improved working capital management or debt reduction efforts.

The tax rate increased to 30.85% in Q2 FY26 from 29.36% in Q1 FY26, adding to the bottom-line pressure. Employee costs showed a marginal decline to ₹151.22 crores from ₹155.06 crores, whilst depreciation remained relatively stable at ₹106.33 crores. Other income contribution was modest at ₹26.99 crores, up from ₹23.77 crores in the preceding quarter but significantly lower than the ₹49.64 crores recorded in Q4 FY25, suggesting normalisation of treasury income or one-time gains.

Operational Challenges: Margin Dynamics Under Scrutiny

The most concerning aspect of Q2 FY26 performance was the sharp deterioration in operating efficiency metrics. The operating profit to net sales ratio plummeted to 15.42%, marking the lowest level across recent quarters and signalling substantial operational headwinds. This margin compression occurred despite the company achieving record quarterly revenues, indicating that volume growth came at the cost of profitability—a trade-off that raises questions about pricing discipline and competitive intensity in the fertiliser and industrial chemicals markets.

From a capital efficiency perspective, Deepak Fertilisers maintained a respectable return on equity (ROE) of 15.90% on an average basis, though the latest quarterly ROE stood at 14.97%. The return on capital employed (ROCE) averaged 17.39% over recent periods, with the latest figure at 15.59%, demonstrating reasonable capital productivity despite the margin pressures. However, the sequential decline in these metrics aligned with the profitability deterioration, suggesting that the company's ability to generate returns is under pressure in the current operating environment.

The company's balance sheet revealed a debt-to-EBITDA ratio of 2.41 times on average, indicating moderate leverage levels. Long-term debt stood at ₹3,675.79 crores as of March 2025, up from ₹3,455.42 crores in the previous year, reflecting continued capital investments. The net debt-to-equity ratio averaged 0.57, suggesting a manageable debt burden. However, the interest coverage ratio, measured as EBIT to interest, averaged 5.47 times—adequate but not exceptional for a capital-intensive chemicals business.

Working capital management showed mixed signals. Trade payables increased to ₹1,713.55 crores in FY25 from ₹1,284.86 crores in FY24, whilst current assets stood at ₹4,201.92 crores. The debtors turnover ratio for H1 FY26 declined to 0.64 times, marking the lowest level in recent periods and suggesting slower collection cycles or extended credit periods to customers. This deterioration in receivables efficiency could indicate competitive pressures forcing the company to offer more generous payment terms, potentially impacting cash flow generation.

Cash Flow Dynamics: Strong Operating Generation

On a more positive note, Deepak Fertilisers demonstrated robust cash generation capabilities in FY25. Operating cash flow surged to ₹1,879.66 crores, the highest annual figure in the company's recent history, up substantially from ₹731.00 crores in FY24. This impressive cash generation was driven by improved working capital management, with changes in working capital contributing ₹333.00 crores positively compared to a negative ₹261.00 crores in the previous year. The strong operating cash flow provided the company with financial flexibility to fund capital expenditure and service debt obligations.

Investing cash flow remained negative at ₹1,061.00 crores in FY25, reflecting continued capital deployment towards capacity expansion and modernisation projects. The company's fixed assets increased to ₹5,489.57 crores from ₹5,656.06 crores, indicating ongoing investments in plant and equipment. Financing cash flow was negative at ₹688.00 crores, suggesting net debt repayments and dividend distributions. The closing cash balance stood at ₹354.00 crores as of March 2025, up from ₹224.00 crores in the previous year, providing a comfortable liquidity cushion.

Peer Comparison: Competitive Positioning

Within the fertiliser industry, Deepak Fertilisers occupies a distinctive position with its diversified portfolio spanning industrial chemicals and fertilisers. The company's valuation multiples and profitability metrics present an interesting comparison against sector peers, revealing both competitive strengths and areas of concern.

Deepak Fertilisers trades at a P/E ratio of 19.32 times, positioned between the sector extremes of Chambal Fertilisers' 10.35 times and F A C T's elevated 639.86 times. The company's valuation appears reasonable relative to its ROE of 15.90%, which compares favourably with most peers except F A C T's exceptional 48.18%. The price-to-book ratio of 3.04 times is higher than most competitors, suggesting the market assigns a premium to the company's industrial chemicals diversification and growth prospects.

From a leverage perspective, Deepak Fertilisers' debt-to-equity ratio of 0.57 is higher than most peers, with only Paradeep Phosphates showing comparable leverage at 0.78. This moderate debt burden reflects the capital-intensive nature of the chemicals business and ongoing capacity expansion projects. The dividend yield of 0.67% is modest but consistent with the company's growth-oriented capital allocation strategy, with a conservative payout ratio of 13.52% leaving ample room for reinvestment.

The company's market capitalisation of ₹18,170.67 crores positions it as a mid-sized player in the fertiliser space, ranking fifth amongst the peer group. This market positioning reflects the company's niche focus on industrial chemicals alongside fertilisers, differentiating it from pure-play fertiliser manufacturers. The valuation premium relative to some peers appears justified by the superior ROE and diversified revenue streams, though recent margin pressures could challenge this premium if sustained.

Valuation Analysis: Attractive Entry Point Despite Near-Term Concerns

At the current market price of ₹1,439.40, Deepak Fertilisers trades at a P/E ratio of 19.32 times trailing twelve-month earnings, representing a 26% discount to the industry average P/E of 26 times. The stock's price-to-book ratio of 3.04 times compares against a book value per share of ₹494.03, indicating the market values the company's assets at approximately three times their accounting value. This premium reflects intangible factors such as brand value, market position, and growth potential beyond the balance sheet figures.

The enterprise value multiples provide additional valuation context. The EV/EBITDA ratio of 11.39 times and EV/EBIT ratio of 14.39 times suggest moderate valuation levels relative to the company's earnings power. The EV/Sales ratio of 2.11 times indicates that the market values the company at approximately two times its annual revenue, whilst the EV/Capital Employed ratio of 2.30 times reflects the premium assigned to the company's invested capital base. The particularly attractive PEG ratio of 0.23 times suggests the stock may be undervalued relative to its growth prospects, given the five-year EBIT growth rate of 31.19%.

The company's valuation grade has fluctuated between "Attractive" and "Fair" over recent months, currently assessed as "Attractive" since August 22, 2025. This classification suggests that at current price levels, the stock offers reasonable value relative to its fundamentals, growth prospects, and peer comparisons. The dividend yield of 0.67%, whilst modest, is supported by a conservative payout ratio of 13.52%, indicating scope for future dividend growth as earnings expand.

The stock currently trades approximately 19.00% below its 52-week high of ₹1,776.95 and 62.05% above its 52-week low of ₹888.25. This positioning in the middle-to-upper portion of the annual range suggests the market has partially digested the recent margin pressures whilst maintaining confidence in the company's longer-term prospects. The technical indicators show the stock trading below its short-term moving averages (5-day, 20-day, 50-day, and 100-day), indicating near-term weakness, though it remains above the 200-day moving average of ₹1,365.94, suggesting the longer-term uptrend remains intact.

Shareholding Pattern: Promoter Restructuring and Institutional Confidence

The shareholding structure of Deepak Fertilisers underwent a dramatic transformation in Q2 FY26, with promoter holding declining sharply to 4.86% from 45.63% in the previous quarter. This 40.77 percentage point reduction represents a significant corporate restructuring event, though the nature and implications of this change require careful interpretation. The remaining promoter stake is held across five entities, with Nova Synthetic Private Limited holding the largest portion at 34.53%.

Institutional participation remained relatively stable despite the promoter shareholding changes. Foreign institutional investors (FIIs) held 10.95% as of September 2025, down marginally from 11.25% in the previous quarter. The FII stake has fluctuated in a narrow range between 9.67% and 11.56% over the past five quarters, indicating neither aggressive accumulation nor significant exit. The presence of 157 FII holders suggests broad-based international interest in the stock.

Mutual fund holdings showed a modest increase to 9.03% in Q2 FY26 from 8.97% in Q1 FY26, with 24 mutual fund schemes holding positions in the company. This gradual accumulation by domestic institutional investors signals confidence in the company's prospects despite the recent margin pressures. Insurance companies increased their stake to 2.90% from 2.65%, whilst other domestic institutional investors (DIIs) maintained a minimal 0.67% holding. The combined institutional holding of 23.55% provides a stable shareholder base and indicates professional investor confidence.

Non-institutional shareholding stood at 30.82% in Q2 FY26, down marginally from 30.86% in the previous quarter. This category, which includes retail investors and non-institutional entities, has declined gradually from 34.69% in September 2024, suggesting some profit-booking by retail participants. The pledged shares data was not available, though the promoter pledging stood at 4.86% of total equity, warranting monitoring given the already low promoter stake.

Stock Performance: Volatility Amid Long-Term Wealth Creation

Deepak Fertilisers' stock price performance presents a study in contrasts between exceptional long-term wealth creation and challenging near-term momentum. Over the past decade, the stock has delivered a remarkable 888.26% absolute return, vastly outperforming the Sensex's 217.62% gain by an alpha of 670.64 percentage points. This extraordinary long-term performance translates to a ten-year CAGR of approximately 25%, demonstrating the company's ability to compound shareholder wealth through business cycles.

However, the near-term picture is considerably less impressive. The stock has declined 4.29% in the latest trading session, 3.06% over the past week, 7.25% over one month, and 6.13% over three months, consistently underperforming the Sensex across these shorter timeframes. This recent weakness reflects investor concerns over the margin compression evident in Q2 FY26 results and uncertainty about the sustainability of profitability in the face of competitive pressures.

The year-to-date performance of 19.94% and six-month return of 15.75% demonstrate that the stock had built significant momentum earlier in the year before encountering headwinds in recent months. The one-year return of just 3.33% marginally underperforms the Sensex's 3.79%, whilst the stock has underperformed the fertiliser sector's 8.15% return by 4.82 percentage points over the same period. This sector underperformance suggests company-specific challenges rather than broader industry headwinds.

The stock's volatility of 44.24% over the past year significantly exceeds the Sensex's 12.45%, reflecting the higher risk profile typical of mid-cap chemical companies. The adjusted beta of 1.35 classifies Deepak Fertilisers as a high-beta stock, indicating it tends to amplify market movements—rising more in bull markets but also falling more sharply during corrections. The risk-adjusted return of 0.08 over one year compares unfavourably with the Sensex's 0.30, suggesting that the stock's returns have not adequately compensated investors for the elevated volatility.

Technical Analysis: Mildly Bullish Trend Faces Resistance

From a technical perspective, Deepak Fertilisers currently exhibits a "Mildly Bullish" trend classification as of September 29, 2025, having downgraded from "Bullish" status. This trend characterisation reflects the stock's position relative to key moving averages and momentum indicators. The stock trades below all its short-term moving averages—the 5-day MA at ₹1,491.40, 20-day MA at ₹1,474.23, 50-day MA at ₹1,469.58, and 100-day MA at ₹1,519.78—indicating near-term technical weakness.

However, the stock remains above its 200-day moving average of ₹1,365.94, suggesting the longer-term uptrend remains intact despite recent consolidation. This positioning above the 200-day MA provides technical support and indicates that the current weakness may represent a correction within an ongoing bull market rather than a trend reversal. The immediate support level lies at the 52-week low of ₹888.25, whilst immediate resistance is encountered at the 20-day moving average area around ₹1,474.23.

The technical indicator summary presents mixed signals. On a weekly basis, the MACD shows a "Mildly Bearish" signal, whilst the KST indicator also flashes "Mildly Bearish". However, moving averages remain "Bullish" on the weekly timeframe, suggesting the longer-term trend structure remains positive. On a monthly basis, both MACD and Bollinger Bands show "Bullish" signals, though the KST indicator displays "Mildly Bearish" characteristics. The RSI shows no clear signal on either timeframe, indicating the stock is neither overbought nor oversold.

Delivery volume analysis reveals interesting participation patterns. The one-month delivery volume increased by 11.24%, whilst the one-day delivery change stood at 6.52% versus the five-day average. On November 4, 2025, delivery volume represented 42.51% of total volume, significantly higher than the five-day average of 27.93% and the trailing one-month average of 40.26%. This elevated delivery participation suggests genuine investor interest rather than speculative trading, indicating accumulation by long-term holders despite the price weakness.

Investment Thesis: Quality Business Facing Cyclical Headwinds

Deepak Fertilisers presents a nuanced investment proposition, characterised by strong long-term fundamentals confronting near-term operational challenges. The company's proprietary Mojo Score of 65 out of 100 translates to a "HOLD" rating, reflecting the balanced assessment of various investment parameters. This score positions the stock in the middle ground—neither a compelling buy nor a clear sell—requiring investors to weigh multiple considerations carefully.

The quality assessment grades the company as "GOOD", recognising its strong long-term financial performance. The five-year sales growth of 16.59% and exceptional EBIT growth of 31.19% demonstrate the company's ability to expand both top-line and profitability over extended periods. The average ROCE of 17.39% and ROE of 15.90% indicate efficient capital deployment and healthy returns on shareholder equity. The moderate debt-to-EBITDA ratio of 2.41 times and adequate interest coverage of 5.47 times suggest manageable leverage levels.

However, the financial trend classification of "FLAT" for Q2 FY26 highlights the immediate concerns. The operating profit to net sales ratio hitting a multi-quarter low of 15.42%, coupled with sequential profit decline despite revenue growth, signals operational challenges that cannot be ignored. The debtors turnover ratio declining to its lowest level at 0.64 times suggests potential working capital pressures or competitive dynamics forcing extended credit terms.

Outlook: What to Watch in Coming Quarters

The investment case for Deepak Fertilisers hinges critically on whether the Q2 FY26 margin compression represents a temporary aberration or the beginning of sustained profitability pressure. Investors should monitor several key indicators over the next two to three quarters to assess the trajectory of the business and the validity of the current valuation.

The forward outlook depends substantially on the company's ability to navigate the current margin pressures whilst maintaining volume momentum. Management commentary on pricing trends, raw material cost outlook, and capacity utilisation will be critical inputs for assessing near-term prospects. The company's track record of delivering 31.19% EBIT CAGR over five years provides confidence in management's execution capabilities, though the current environment clearly presents challenges.

From a valuation perspective, the stock's attractive multiples provide a margin of safety, with the P/E of 19.32x and PEG ratio of 0.23x suggesting limited downside risk at current levels. However, the "HOLD" rating reflects the prudence of waiting for clearer signs of margin stabilisation before committing fresh capital. Existing shareholders benefit from the company's quality fundamentals and long-term growth trajectory, justifying continued holding despite near-term volatility.