Maintain SELL on Deepak Nitrite - Deepak Phenolics driving growth - HDFC Securities

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities and Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

We maintain SELL on Deepak Nitrite with a price target of INR 1,600 (WACC 11%, terminal growth 4.5%). The stock is currently trading at 24.2x FY23E EPS. We believe that (1) further growth in DPL is capped as the Phenol plant is already running at over 110% utilisation since Q2FY21 and (2) IPA prices would fall as demand normalcy returns. Besides, DNL is entering into challenging chemistries vis-a-vis chemistries it is currently operating in. The fluorination and photochlorination chemistries will pave the way to tap agrochemical and pharmaceutical customers for the company. However, the company needs to demonstrate its competencies well over the period in these chemistries to seize business opportunities. EBITDA/APAT were 11/11% above estimates, owing to lower-than-expected raw material costs, lower-than-expected operating expenses, and higher-than-expected other income.

Financial performance: Revenue grew 126% YoY to INR 15.3bn in Q1, owing to recovery in standalone operations, especially BC and FSC segments, supported by the sharply improved performance of DPL. EBITDA grew 149% YoY to INR 4.5bn. EBITDA margin is higher by 265bps YoY to 30%, owing to operating leverage from recovery in revenue combined with benefits from higher realisation and cost management initiatives.

Basic chemicals (BC): Revenue/EBIT jumped 63/133% YoY to INR 2/1bn, despite the short term impact witnessed in the MSME sector due to resurgent second wave and challenges around logistics.

Fine & specialty chemicals (FSC): Revenue/EBIT jumped 48/8% YoY to INR 2/1bn. Disruption to export-import bound logistics has impacted in Q1. Further, profitability has been impacted by rising commodity prices.

Deepak Phenolics (DPL): Revenue/EBIT jumped 202/319% YoY to INR 10/3bn. The plant continues to be operated at high utilisation with the average utilisation at 110% despite constrained movement of manpower and materials during the peak of the second wave. This has allowed DNL to capitalise on favourable demand trends and attractive pricing for both phenol and acetone.

Capex: DPL plans to invest INR 7bn in downstream of phenol and acetone to make new import substitute solvents.

Change in estimates: We cut our FY22/23 EPS estimates by 0.8/4.2% to INR 83.5/87.3 to account for overall performance in Q1 and incorporation of the annual report of FY21.

Shares of Deepak Nitrite Limited was last trading in BSE at Rs. 2119.95 as compared to the previous close of Rs. 2108.55. The total number of shares traded during the day was 173872 in over 8480 trades.

The stock hit an intraday high of Rs. 2152 and intraday low of 2111. The net turnover during the day was Rs. 370425225.

Source : Equity Bulls

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