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Phenol dented overall profitability

Deepak Nitrite (DN) Q3FY22 results came broadly in line with our estimates. DN delivered healthy top-line growth of 39% YoY, driven by pricing gains. However, margins remained under pressure amidst sharp escalation in raw material prices. Higher power cost, logistic challenges and inadequate availability of raw material restricted EBITDA growth to 5%.

We recently initiated coverage on DN with BUY (Deepak Nitrite-IC). We believe DN is on solid growth path driven by a favourable industry scenario and its aggressive capex plan in phenol/phenol downstream. We Maintain BUY with TP of INR 3,030(35x Q1FY24E EPS)

Basic intermediates segment reported strong realization gains

DN basic intermediate delivered strong realization gains, leading to 76% revenue growth. Strong performance in the segment was aided by volumetric growth during the quarter (volumes up 10% in 9mFY22). Performance in Fine and Specialty segment was impacted owing to logistical challenges and spurt in raw material prices. However, company has taken pricing hikes, which will ease the margin pressure in Q4FY22. Performance product segment reported a robust quarter with DN receiving benefits of higher DASDA realization. EBIT margins in the segment improved to 28% driven by integration benefits. Deepak Phenolics reported a revenue growth of 38% YoY driven by average capacity utilization levels of 117%.

Transitioning to value added segment with aggressive capex

DN has recently commissioned the brownfield expansion of additional 30,000MT capacity of IPA taking the total tally to 60,000MT. Company is value migrating into value added segment of phenol chain, which we believe is likely to captive consume 20-25% requirement of Phenol in the medium term. Also, company is planning to scale up FSC segment by investing INR3.5bn in the new products over next 18-24 months. We believe QIP raise up-to INR20bn, will open up avenues of a mega capex directed towards the phenol-acetone chain. Company’s focus on import replacement of chemicals is likely to provide new growth opportunities.

Outlook and valuations: Transitioning to specialty, Maintain BUY

We believe DN’s expertise in varied chemistries and leadership in product verticals will continue to drive growth. Its presence in high-growth potential businesses of phenol and its derivatives, and increased focus on speciality chemicals underpins growth visibility. Maintain BUY with TP of INR 3,030(35x Q1FY24E EPS).

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