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Margins improve, prognosis stronger

Our View

DN’s reported 3QFY23 operating profit at Rs 3.15bn (-11% YoY & +16% QoQ), stood below our but marginally above street estimates. The miss on estimates stemmed primarily form weaker than estimated margins as higher input cost environment posed a challenge. The Ebitda margins, nevertheless improved QoQ to 16% (2Q: 14%) driven by improvement in per ton margins for most products, as DN passed on the increase in raw material price to a large extent. The domestic demand environment was however healthy, with Phenol, DASDA and OBA productions reaching record levels. The earnings prognosis appears strong due on going investment of Rs 15bn in a) capacity expansion of Phenol plant (DPL) by 50%, by the end of 4QFY24, 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 by 4QFY24, d) agrochem expansion and commissioning of SAC plant by 4QFY23 and e) Rs 10bn foray into 35tmt Polycarbonates plant. 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; +1% 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 Jun’22. The plant however now is repaired and fully operational since Oct’22 onwards.

* Consolidated Ebitda & PAT: Consolidated Ebitda stood lower by 11% YoY but higher by 16% QoQ at Rs 3.15bn. Consol. PAT stood at Rs 2.1bn (-14% YoY; +20% QoQ), primarily on YoY weaker Phenolics and Advance Intermediate (AI) margins. The 9M operating profit at Rs 9.6bn stood 20% lower YoY and so also PAT at Rs 6.3bn (-21% YoY)

* Standalone Ebitda & PAT Standalone Ebitda stood at Rs 1.6bn (+1% YoY; +14% QoQ); Standalone PAT stood at Rs 1.13bn (+1% YoY & -29% QoQ).

* Phenolics (DPL): Revenue stood at Rs 11.8bn stood higher by 14% YoY but lower by 8% QoQ, as moderation is price was offset by higher volumes; Phenol plant maintained high utilization of 117% during the quarter, on strong domestic demand However EBIT at Rs 1.27bn stood lower by 31% YoY but 24% higher QoQ ; Ebit margin stood sequentially higher at 10.7% (2Q: 8%).

* Advanced Intermediates (AI): Revenue at Rs 8.2bn stood 19% higher YoY and QoQ. EBIT at Rs 1.47bn stood 1% lower YoY but 7% higher QoQ. The Ebitda margin stood QoQ lower at 18% (from 20% in 2QFY23), on higher input costs.

* Capex Update: In the on-going Rs 15bn expansion capex: a) Spent-SAC plant and expansion of Phenol plant will be completed in 4QFY23, b) backward integration in fluorination space & acid plant is expected by 2HFY24 and c) Engineering and design work of the MIBK, MIBC greenfield facility is underway, with expected plant commissioning by 4QFY24. In addition, DN’s board has approved an investment of Rs 10bn in a 35tmt polycarbonate plant.

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 14x stock is currently trading at

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