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Weak quarter, but prognosis remains strong

Our View

DN’s reported 2QFY23 operating profit at Rs 2.7bn (-30% YoY & -24% QoQ), stood below our and street estimates, on weaker than expected margins in the phenol segment (DPL). Volatility in raw material prices, along with volatile forex and muted demand impacted the EBIT margins for DPL at 8% (from 14% in 1QFY23 and 19% in 2QFY22). In addition, the plant operation at Nandesari, continued to be restricted on account of repair work post fire accident in Jun’22, leading to muted volume in AI segment. The plant however is now fully operational, Oct’22 onwards.

The earnings prognosis however appears strong due on going investment of Rs 15bn in a) capacity expansion of Phenol plant (DPL) by 50%, by the end of FY24, b) debottlenecking of existing capacities at DNL, c) addition of 40ktpa of MIBK and 8ktpa of MIBC capacities as part of Rs 7bn investment in Phenol-Acetone derivatives, d) introduction of import replacement, high margin products for Pharma segment, based on complex but efficient Gas-liquid reaction and e) plausible foray into Polycarbonates, where the plan contours are being chalked out. In our view, expansion of Phenol capacity and foray into value added downstream solvents would provide renewed momentum to DN’s earnings, with prospects of revenue doubling over next 3-4 years. 

Result Highlights

* Revenue: The consolidated net-revenue stood at Rs 19.6bn (+17% YoY; -5% QoQ). The YoY growth was led by improved volumes in the phenol segment (DPL), while the standalone volume growth remained muted on account of plant outage at Nandesari, post fire accident in Jum’22. The plant however now is repaired and fully operational since Oct’22 onwards.

* Consolidated Ebitda & PAT: Consolidated Ebitda stood lower by 30% YoY and 24% QoQ at Rs 2.71bn. Consol. PAT stood at Rs 1.75bn (-31% YoY; -26% QoQ). As volatility in raw material prices, forex and utility (energy) costs impacted margins. In addition, lower plant utilization at Nandesari, post fire also weighed on margins .

* Standalone Ebitda & PAT: Standalone Ebitda stood at Rs 1.4bn (-1% YoY; +1% QoQ) and PAT at Rs 1.6bn (+64% YoY & QoQ). Higher other income resulted in stronger PAT.

* Phenolics (DPL): Revenue at Rs 12.8bn stood higher by 13% YoY but lower by 4% QoQ;. EBIT at Rs 1.02bn stood lower by 53% YoY & 45% QoQ ; Ebit margin stood sequentially lower at 8% (1Q: 14.1%) , on volatile raw material (benzene) prices.

* Advanced Intermediates (AI): Revenue at Rs 6.85bn stood 26% higher YoY but 6% lower QoQ. EBIT at Rs 1.38bn stood 6% higher YoY and 4% QoQ. The margin profile stood QoQ higher at 20% (from 18% in 1QFY23).

* Capex Update: During the 2Q, DN commissioned three products, one meant for agrochemical markets with a 5-7 year contract and two targeted at Europe, one of them being a margin accretive and other a replacement for a banned chemical. The Capex in other de-bottlenecking, brownfield as well as greenfield projects is on track. Additionally, DN has also announced setting up a manufacturing unit at Oman, where energy costs are favorable.

Valuation

We value DN at Rs 2515/sh on SOTP basis, where value of AI segment is estimated at Rs 1072/sh and the valued of DNL is estimated at Rs 1445/sh. Our TP implies a P/E of 19x FY24e, vs 16x stock is currently trading at.

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