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Deepak Nitrite’s 4QFY23 earnings print was better than anticipated on account of sharp improvement in phenolics business profitability (after two quarters); in the preceding two quarters the company had to purchase its key raw material (cumene) from the market due to shutdown of the BPCL plant. However, the company‘s advance intermediates performance was weak on account of demand weakness in dyes and pigments segment. Going forward, we expect some moderation in phenol spreads for the company in line with benchmark spreads. However, additional phenol volume (from debottlenecking in 1QFY24) could partly offset the weakness in spreads. On the standalone side, photo chlorination and fluorination plants are expected to be commissioned in 3QFY24. Further, the polycarbonate compounding project is expected to come on stream in the next 18 months. Accounting for these projects’ timeline, expected weakness ahead in phenol spreads and gradual recovery in volume offtake of dyes and pigments segment, we lower our FY24/FY25 EPS estimates by ~4%. We maintain BUY with a revised Jun’24 TP of INR 2,660/share (from Mar’24 TP of INR 2,650/share) as we believe it will continue to maintain its leadership position in upcoming downstream products due to its inherent advantage of in-house basic chemicals’ capacities.

Improvement in phenolics EBIT a positive surprise: Deepak Nitrite’s 4QFY23 consolidated gross profit came in 6% below JMFe at INR 6.8bn (up 5% QoQ, down 5% YoY) on account of lower-than-anticipated gross margin recovery to 35% (vs. JMFe of 39% and 33% in 3QFY23) while revenue was 5% above JMFe at INR 19.6bn (down 1% QoQ and up 5% YoY). However, during the quarter, EBITDA was 6% ahead of JMFe/consensus and stood at INR 3.5bn (up 11% QoQ, down 15% YoY) as other expenses was lower than anticipated at INR 2.6bn (vs. JMFe of INR 3.1bn). Further, PAT came in 9% ahead of JMFe at INR 2.3bn (up 12% QoQ still down 12% YoY) on account of higher other income. Deepak’s phenolics EBIT was higher than anticipated and stood at INR 1.8bn (vs. INR 1.3bn in 3QFY23) as phenolics EBIT margin improved to 15% (vs. JMFe of 9.5% and 10.7% in 3QFY23) and revenue was also ahead of our estimates at INR 11.7bn (vs. JMFe of INR 10.2bn and INR 11.8bn in 3QFY23). This indicates that the company was able to make higher spreads despite the fall in global-benchmark-based phenol-acetone spreads.

Advanced intermediates’ performance not so good: Deepak’s advanced intermediates (AI) EBIT came in below our expectation at INR 1.4bn (vs. JMFe of INR 1.8bn and INR 1.5bn in 3QFY23) as AI revenue was 8% below JMFe at INR 8.0bn (down 2% QoQ and up 7% YoY) and EBIT margin was also below JMFe at 17.1% (vs. JMFe of 20.2% and 18.0% in 3QFY23)..

Expect 22% EPS CAGR over FY23-26E; maintain BUY: We cut our FY24/FY25 EPS estimates by ~4% to factor in expected weakness in phenolic spreads in the coming quarters and demand slowdown in dyes and pigments. Hence, our Jun’24 TP has been revised to INR 2,660/share (from Mar’24 TP of INR 2,650 earlier) (based on 25x Jun’25E EPS) as we believe Deepak will continue to maintain its leadership position in upcoming downstream products. Key risks: i) continued weakness in phenol spreads, and ii) delay in commissioning of downstream projects.

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