Despite revenue growth of 9.73% year-on-year to ₹2,830.07 crores in Q3 FY26, the company's bottom line suffered significantly due to compressed operating margins and elevated interest expenses. Operating profit margin (excluding other income) contracted sharply to 12.48% from 18.85% in the year-ago quarter, marking the lowest level in the trailing four-quarter period. The quarter's performance underscores mounting operational challenges in the fertilisers and chemicals sector, where input cost pressures and competitive dynamics are squeezing profitability.
The quarter's results paint a concerning picture of margin erosion despite top-line expansion. Net sales grew 9.73% year-on-year but declined 5.85% sequentially from Q2 FY26's ₹3,005.83 crores, indicating demand volatility. More worryingly, operating profit before depreciation, interest, and tax (excluding other income) fell to ₹353.14 crores from ₹486.12 crores in Q3 FY25, representing a 27.35% year-on-year decline. This margin compression reflects the challenging operating environment facing the company's core chemicals and fertilisers businesses.
| Quarter | Revenue (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | YoY Change | Operating Margin |
|---|---|---|---|---|---|
| Dec'25 (Q3) | 2,830.07 | -5.85% | 141.49 | -43.56% | 12.48% |
| Sep'25 (Q2) | 3,005.83 | +13.05% | 213.20 | +1.48% | 15.42% |
| Jun'25 (Q1) | 2,658.75 | -0.32% | 243.17 | +24.35% | 19.30% |
| Mar'25 (Q4) | 2,667.35 | +3.42% | 277.24 | — | 18.00% |
| Dec'24 (Q3) | 2,579.02 | -6.11% | 250.71 | — | 18.85% |
| Sep'24 (Q2) | 2,746.72 | +20.40% | 210.09 | — | 17.99% |
| Jun'24 (Q1) | 2,281.33 | — | 195.55 | — | 20.36% |
Financial Performance: Margin Compression Overwhelms Revenue Growth
The quarter's financial performance reveals a troubling divergence between top-line growth and bottom-line contraction. Whilst net sales expanded 9.73% year-on-year to ₹2,830.07 crores, the company's profitability metrics deteriorated sharply across the board. Operating profit margin (excluding other income) contracted by 638 basis points year-on-year to 12.48%, the lowest level in the past seven quarters. This margin erosion translated into operating profit declining to ₹353.14 crores from ₹486.12 crores in Q3 FY25, a 27.35% year-on-year fall.
The sequential comparison paints an equally concerning picture. Revenue declined 5.85% quarter-on-quarter from ₹3,005.83 crores in Q2 FY26, whilst net profit plunged 33.64% from ₹213.20 crores. This sequential deterioration suggests the company faced significant operational headwinds during the October-December 2025 period, potentially driven by subdued demand conditions, pricing pressures, or elevated input costs. The PAT margin compressed to 5.00% from 7.12% in the previous quarter and 9.81% in Q3 FY25, highlighting the severity of profitability challenges.
Interest costs emerged as a critical pressure point, surging 28.91% sequentially to ₹96.40 crores in Q3 FY26 from ₹74.78 crores in Q2 FY26. On a year-on-year basis, interest expenses declined marginally from ₹98.37 crores in Q3 FY25, but the sequential spike reflects higher working capital requirements or debt servicing obligations. The operating profit to interest coverage ratio deteriorated to 3.66 times in Q3 FY26, the lowest in the trailing four-quarter period, raising concerns about the company's ability to service its debt comfortably amid weakening operational performance.
The quality of earnings also raises questions. Other income surged to ₹46.16 crores in Q3 FY26 from ₹12.56 crores in Q3 FY25, representing a 267.52% year-on-year increase. Whilst this provided some cushion to profit before tax, the reliance on non-operating income to support profitability is not sustainable. Core operating performance, as evidenced by the sharp decline in operating profit excluding other income, remains under significant pressure. The company's ability to reverse this trend will be critical for investor confidence going forward.
Critical Concern: Deteriorating Profitability
Operating profit to interest coverage has fallen to 3.66 times in Q3 FY26, the lowest in recent quarters. Combined with a 638 basis point year-on-year contraction in operating margin to 12.48%, the company faces mounting pressure on its ability to generate sustainable cash flows. Interest costs surged 28.91% sequentially to ₹96.40 crores, further squeezing profitability. With PAT margin at just 5.00%, the company has limited buffer to absorb further operational or financial shocks.
Operational Challenges: Capital Efficiency Under Pressure
Beyond the immediate quarterly performance, the company's operational efficiency metrics reveal deeper structural challenges. Return on equity (ROE) stands at 16.02% on an average basis, which whilst respectable, has been declining from historical highs. The latest ROE of 15.11% indicates moderating capital efficiency as the company struggles to generate adequate returns on shareholder funds amid margin pressures. Return on capital employed (ROCE) tells a similar story, at 17.80% on average but falling to 15.07% in the latest period, suggesting that the company's investments are yielding diminishing returns.
The balance sheet structure warrants careful scrutiny. As of March 2025, the company carried long-term debt of ₹3,675.79 crores against shareholder funds of ₹6,236.62 crores, resulting in a debt-to-equity ratio of 0.59. Whilst this leverage level is manageable, the company's debt-to-EBITDA ratio of 2.29 times (on average) indicates that it would take over two years of current EBITDA generation to repay outstanding debt. More concerning is the net debt to equity ratio of 0.55, suggesting limited financial flexibility to weather prolonged margin pressures or fund growth initiatives without further dilution or debt accumulation.
Working capital management has also deteriorated. Cash and cash equivalents on a half-yearly basis stood at ₹247.38 crores, the lowest level in recent periods, constraining the company's operational flexibility. The cash flow statement for FY25 shows operating cash flow of ₹1,879.00 crores, but after accounting for investing activities of ₹1,061.00 crores and financing outflows of ₹688.00 crores, net cash inflow was just ₹129.00 crores. This tight liquidity position limits the company's ability to respond to market opportunities or absorb unexpected shocks.
Balance Sheet Snapshot: Moderate Leverage But Tight Liquidity
Deepak Fertilisers operates with a debt-to-equity ratio of 0.59 and net debt to equity of 0.55, indicating moderate leverage. However, the debt-to-EBITDA ratio of 2.29 times suggests limited deleveraging capacity in the near term. With cash reserves at ₹247.38 crores (half-yearly basis) and EBIT to interest coverage averaging 5.48 times, the company has adequate but not comfortable financial cushion. Capital employed efficiency, as measured by sales to capital employed ratio of 1.10 times, remains below optimal levels, indicating that the company needs to generate higher revenues per rupee of capital invested to improve returns.
Industry Context: Navigating a Challenging Fertiliser Landscape
Deepak Fertilisers' struggles must be viewed within the broader context of the Indian fertilisers and chemicals industry, which has faced significant headwinds in recent quarters. The sector has grappled with volatile raw material prices, particularly for ammonia and phosphoric acid, which are key inputs for fertiliser production. Additionally, government subsidy policies and pricing controls have constrained manufacturers' ability to pass on cost increases to end customers, squeezing margins across the industry.
The company's diversified portfolio spanning industrial chemicals (Nitric Acid, Iso Propyl Alcohol, Liquid CO2) and fertilisers provides some insulation from sector-specific challenges, but the current quarter's performance suggests that pricing pressures are widespread. The chemicals segment, which typically commands better margins than commodity fertilisers, appears to have faced demand softness, contributing to the overall margin compression. The company's ability to navigate these industry headwinds will depend on its capacity to optimise its product mix, improve operational efficiency, and potentially pass on cost increases through strategic pricing.
Looking at the competitive landscape, Deepak Fertilisers faces intense competition from both domestic players and imports. The company's market positioning in specialty chemicals like pharma-grade IPA provides some differentiation, but the bulk of its revenue still comes from more commoditised products where pricing power is limited. The company's focus on value-added real estate development represents an attempt to diversify revenue streams, but this segment's contribution remains relatively modest compared to core operations.
Peer Comparison: Valuation Discount Reflects Performance Concerns
Deepak Fertilisers' valuation metrics reflect investor scepticism about near-term prospects. The stock trades at a price-to-earnings (P/E) ratio of 14.20 times trailing twelve-month earnings, representing a significant discount to the fertilisers industry average P/E of 23 times. This valuation gap suggests that the market has priced in concerns about the company's ability to sustain profitability amid ongoing margin pressures. The price-to-book value (P/BV) ratio of 2.15 times is also below the peer group average of approximately 9.9 times, indicating that investors ascribe limited premium to the company's asset base.
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| Deepak Fertilisers | 14.20 | 2.15 | 16.02 | 0.55 | 0.90 |
| Coromandel International | 31.41 | 5.49 | 20.41 | -0.23 | 0.66 |
| Chambal Fertilisers | 9.36 | 1.77 | 19.28 | -0.08 | 2.30 |
| EID Parry | 17.89 | 1.86 | 12.82 | -0.26 | — |
| Paradeep Phosphates | 14.10 | 2.14 | 9.65 | 0.67 | 0.59 |
Comparing key performance metrics with peers reveals a mixed picture. Deepak Fertilisers' ROE of 16.02% (on average) is lower than Coromandel International's 20.41% and Chambal Fertilisers' 19.28%, but higher than EID Parry's 12.82% and Paradeep Phosphates' 9.65%. This suggests that whilst the company generates reasonable returns on equity, it lags behind the best-in-class performers in the sector. The company's debt-to-equity ratio of 0.55 is higher than most peers, indicating greater financial leverage and potentially higher financial risk.
The dividend yield of 0.90% is modest compared to Chambal Fertilisers' 2.30%, reflecting the company's conservative dividend payout ratio of 13.52%. This low payout suggests management is prioritising capital retention for growth investments or debt reduction over immediate shareholder returns. However, given the current operational challenges, investors may question whether retained earnings are being deployed effectively to generate adequate future returns.
Valuation Analysis: Attractive Entry Point or Value Trap?
Deepak Fertilisers' current valuation presents a conundrum for investors. On one hand, the stock trades at a P/E ratio of 14.20 times, well below the industry average of 23 times, suggesting potential upside if the company can stabilise margins and return to earnings growth. The price-to-book ratio of 2.15 times is also reasonable given the company's asset-heavy business model. The stock's PEG ratio of 0.33 indicates that the market may be undervaluing the company's growth potential, as a PEG ratio below 1.0 typically suggests undervaluation relative to earnings growth prospects.
However, the valuation discount exists for good reason. The company's financial trend has turned negative, with quarterly profit declining 43.56% year-on-year and operating margins at multi-quarter lows. The stock has underperformed the broader market significantly, delivering a negative return of 14.60% over the past year compared to the Sensex's 7.88% gain, resulting in a negative alpha of 22.48 percentage points. The technical trend has also turned bearish, with the stock trading below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating sustained selling pressure.
The company's proprietary Mojo score of 36 out of 100, which has resulted in a "SELL" rating, reflects the confluence of negative factors weighing on the stock. Whilst the company benefits from attractive valuation and good quality fundamentals (supported by healthy institutional holdings of 23.48%), the negative financial trend and bearish technical indicators dominate the investment thesis. The stock's sharp decline of 37.68% from its 52-week high of ₹1,776.95 to the current price of ₹1,107.45 underscores the severity of investor concerns.
"The valuation discount reflects genuine operational challenges rather than market mispricing—margin recovery and earnings visibility are prerequisites for re-rating."
Shareholding Pattern: Institutional Confidence Waning
The shareholding pattern reveals subtle but significant shifts in investor sentiment. Promoter holding has remained stable at 45.63% over the past five quarters, indicating no change in management's commitment to the business. However, foreign institutional investor (FII) holding has declined from 11.56% in December 2024 to 10.31% in December 2025, representing a cumulative reduction of 125 basis points. The sequential decline of 64 basis points from September 2025 to December 2025 suggests that overseas investors have been reducing exposure amid deteriorating fundamentals.
| Investor Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 45.63% | 45.63% | 45.63% | 45.63% | 0.00% |
| FII | 10.31% | 10.95% | 11.25% | 10.74% | -0.64% |
| Mutual Funds | 9.66% | 9.03% | 8.97% | 8.23% | +0.63% |
| Insurance | 2.79% | 2.90% | 2.65% | 2.55% | -0.11% |
| Other DII | 0.72% | 0.67% | 0.65% | 0.55% | +0.05% |
| Non-Institutional | 30.89% | 30.82% | 30.86% | 32.31% | +0.07% |
On a more positive note, mutual fund holding has increased from 4.71% in December 2024 to 9.66% in December 2025, representing a substantial addition of 495 basis points. The sequential increase of 63 basis points from September 2025 to December 2025 suggests that domestic institutional investors see value at current levels despite near-term challenges. The presence of 24 mutual funds in the shareholder base indicates reasonably broad-based domestic institutional interest. However, the overall institutional holding of 23.48% (combining FII, MF, insurance, and other DII) remains moderate, suggesting limited institutional conviction compared to market leaders.
Stock Performance: Sustained Underperformance Across Timeframes
Deepak Fertilisers' stock performance has been decidedly negative across most relevant timeframes, reflecting the market's pessimistic assessment of the company's prospects. Over the past year, the stock has declined 14.60% compared to the Sensex's 7.88% gain, resulting in a negative alpha of 22.48 percentage points. The underperformance has been even more pronounced in recent months, with the stock falling 26.37% over three months and 31.04% over six months, whilst the Sensex declined just 2.86% and gained 1.51% respectively over the same periods.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -6.33% | +0.31% | -6.64% |
| 1 Month | -10.27% | -2.51% | -7.76% |
| 3 Months | -26.37% | -2.86% | -23.51% |
| 6 Months | -31.04% | +1.51% | -32.55% |
| Year-to-Date | -14.04% | -3.11% | -10.93% |
| 1 Year | -14.60% | +7.88% | -22.48% |
| 2 Years | +76.40% | +14.77% | +61.63% |
| 3 Years | +75.69% | +39.16% | +36.53% |
The stock's technical indicators paint a uniformly bearish picture. The overall technical trend is classified as "BEARISH" as of January 5, 2026, having deteriorated from "Mildly Bearish" previously. The stock trades below all key moving averages—5-day (₹1,172.32), 20-day (₹1,211.32), 50-day (₹1,267.31), 100-day (₹1,365.39), and 200-day (₹1,416.56)—indicating sustained selling pressure across multiple timeframes. The MACD indicator shows bearish signals on both weekly and monthly charts, whilst Bollinger Bands also signal bearish momentum.
The stock's high volatility of 38.89% over the past year, combined with negative returns, places it in the "HIGH RISK LOW RETURN" category—an unfavourable risk-return profile for investors. The risk-adjusted return of -0.38 compares poorly with the Sensex's risk-adjusted return of 0.70, indicating that investors have been penalised for taking on the additional volatility. The stock's beta of 1.27 suggests it is 27% more volatile than the broader market, amplifying losses during market downturns.
Investment Thesis: Quality Company Facing Cyclical Headwinds
Deepak Fertilisers presents a nuanced investment case that requires balancing its long-term quality credentials against near-term operational challenges. The company benefits from a "GOOD" quality grade, reflecting its healthy long-term growth trajectory (5-year sales CAGR of 15.98%, EBIT CAGR of 26.06%) and reasonable capital efficiency metrics (average ROCE of 17.80%, average ROE of 16.02%). The company's leadership position in industrial chemicals like Nitric Acid and IPA provides some competitive moat, whilst its diversification across chemicals and fertilisers offers revenue stability.
However, the near-term drivers are decidedly negative. The quarterly financial trend has turned "NEGATIVE" as of December 2025, with profit declining 43.56% year-on-year and operating margins at multi-quarter lows. Technical indicators are uniformly bearish, with the stock trading below all key moving averages and momentum indicators flashing sell signals. The combination of negative financial trends and bearish technicals creates a challenging environment for fresh investment, despite the company's attractive valuation at a P/E of 14.20 times.
The company's Mojo score of 36 out of 100, which translates to a "SELL" rating, reflects this challenging confluence of factors. Whilst the attractive valuation and good quality fundamentals provide some support, the negative financial trend and bearish technical momentum dominate the near-term investment outlook. The stock's sustained underperformance relative to both the broader market and the fertilisers sector (underperformance of 16.70% versus sector over one year) suggests that investors should wait for clearer signs of operational stabilisation before committing fresh capital.
Key Strengths & Risk Factors
KEY STRENGTHS ✓
- Market Leadership: Dominant position in industrial chemicals including Nitric Acid, Iso Propyl Alcohol (pharma and industrial grade), and food-grade Liquid CO2
- Diversified Portfolio: Revenue streams across chemicals, fertilisers, and value-added real estate reduce dependence on any single segment
- Attractive Valuation: P/E of 14.20x represents 38% discount to industry average of 23x, with PEG ratio of 0.33 suggesting potential undervaluation
- Strong Long-term Growth: 5-year sales CAGR of 15.98% and EBIT CAGR of 26.06% demonstrate solid historical expansion
- Healthy Capital Efficiency: Average ROCE of 17.80% and ROE of 16.02% indicate reasonable returns on invested capital
- Rising Domestic Institutional Interest: Mutual fund holding increased from 4.71% to 9.66% over the past year, with 24 funds holding the stock
- Manageable Leverage: Debt-to-equity ratio of 0.59 and net debt to equity of 0.55 provide financial flexibility
KEY CONCERNS ⚠
- Severe Margin Compression: Operating margin (excl OI) collapsed to 12.48% from 18.85% YoY, lowest in seven quarters
- Profit Decline: Net profit plunged 43.56% YoY to ₹141.49 crores despite 9.73% revenue growth, indicating deteriorating operational efficiency
- Rising Interest Burden: Interest costs surged 28.91% QoQ to ₹96.40 crores, with operating profit to interest coverage falling to 3.66 times
- Weak Liquidity: Cash and equivalents at ₹247.38 crores (half-yearly) represent the lowest level in recent periods
- Negative Financial Trend: Quarterly financial trend turned negative with profit, margins, and cash flow all deteriorating
- Bearish Technical Outlook: Stock trading below all key moving averages with MACD, Bollinger Bands, and other indicators flashing bearish signals
- Sustained Underperformance: Stock down 14.60% over one year vs Sensex gain of 7.88%, with negative alpha of 22.48 percentage points
- High Volatility: 38.89% volatility with negative returns places stock in "HIGH RISK LOW RETURN" category
- FII Exodus: Foreign institutional holding declined from 11.56% to 10.31% over the past year, indicating overseas investor scepticism
Outlook: What to Watch
POSITIVE CATALYSTS
- Margin Recovery: Any signs of operating margin stabilisation above 15% would signal improving pricing power or cost control
- Volume Growth: Sequential revenue growth returning to double digits would indicate demand revival
- Interest Cost Moderation: Reduction in quarterly interest expense below ₹80 crores would improve profitability
- Working Capital Improvement: Cash balance rising above ₹300 crores would enhance financial flexibility
- Technical Reversal: Stock reclaiming 50-day MA (₹1,267) would signal potential trend change
RED FLAGS
- Further Margin Decline: Operating margin falling below 12% would indicate worsening competitive position
- Rising Debt: Long-term debt increasing beyond ₹4,000 crores would strain debt servicing capacity
- Interest Coverage Deterioration: Operating profit to interest ratio falling below 3.0 times would signal financial stress
- Continued FII Selling: Foreign institutional holding dropping below 10% would indicate sustained overseas investor pessimism
- Technical Breakdown: Stock breaking below 52-week low of ₹888.25 would open further downside
The Verdict: Wait for Operational Stabilisation
Score: 36/100
For Fresh Investors: Avoid initiating positions at current levels. Whilst the valuation appears attractive at a P/E of 14.20x, the negative financial trend (profit down 43.56% YoY, margins at multi-quarter lows) and bearish technical momentum create an unfavourable risk-reward profile. Wait for at least two consecutive quarters of margin stabilisation and sequential profit growth before considering entry. The stock's sustained underperformance (negative alpha of 22.48% over one year) and high volatility (38.89%) make it unsuitable for risk-averse investors.
For Existing Holders: Consider reducing exposure on any technical bounce towards the 20-day moving average of ₹1,211. The deteriorating fundamentals (operating margin at 12.48%, lowest in seven quarters, and interest coverage at 3.66 times) warrant defensive positioning. Existing holders should reassess their investment thesis and consider whether better opportunities exist elsewhere. Set a strict stop-loss at ₹1,050 (5% below current levels) to limit further downside. Only long-term investors with high risk tolerance and conviction in management's turnaround capability should maintain positions.
Fair Value Estimate: ₹950-1,050 (14% downside from current price of ₹1,107), based on normalized earnings potential and sector average multiples. The stock needs to demonstrate at least two quarters of margin recovery and sequential profit growth to justify current valuations.
Note: ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The views expressed are based on data available as of January 29, 2026, and are subject to change.
