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Raw‐material supply & pricing impact earnings

Our View

DN consolidated operating profits at Rs 3.5bn (+5% YoY;‐9% QoQ), missed estimates by 14% as volatile raw material prices and restricted availability impacted margins, particularly in the FSC segment. Similarly, Phenolics segment suffered margin contraction on QoQ & YoY basis on account of higher energy prices/ cost of production.    The same was however offset by improved profitability in BI and PP segments on stronger pricing environment. As quite a few BI products also act as raw material for FSC segment, higher BI prices also impacted FSC margins.

Going ahead, while DN expects to restore margins in FSC segments, as higher costs get passed through, at the same time the strength in DASDA prices aiding PP profitability might be short lived. With phenolics segment operating at 117% utilization, while some improvement in revenue might come from de‐bottlenecking, but a meaningful improvement would only be possible after construction and commissioning of downstream capacities. DN has generated a strong 121% return over past one year, backed by a strong earnings CAGR of 75% (FY17‐21), which might be hard to replicate at least in near to midterm. Maintain REDUCE with a TP of Rs 2100/sh.

Result Highlights

* Revenue: The consolidated net‐revenue stood at Rs 17.2bn (+39% YoY; +2% QoQ) primarily propped up stronger pricing. While on YoY basis all segments (other than FSC) recorded strong growth due to base effect (3QFY21 impacted by COVID), the QoQ growth was largely led by BI and PP segments aided by higher prices.   

* Consolidated Ebitda & PAT: Consolidated Ebitda improved by just 5% YoY but stood 9% lower QoQ at Rs 3.52bn.  Consolidated PAT stood at Rs 2.4bn (+12% YoY; ‐5% QoQ)    

* Standalone Ebitda & PAT: Standalone Ebitda stood at Rs 1.59bn (+9% YoY; +12% QoQ), primarily on stronger earnings in Performance products even as Fine and Specialty segment disappointed.  

* Phenolics Segment: Revenue stood 38% YoY higher but 9% lower QoQ at Rs 10.3bn. Ebit stood 17% lower QoQ at Rs 11.2bn, on higher energy (coal) costs 

* Fine & Specialty Segment (FSC): Revenue stood at Rs 8.9bn (‐2% YoY; +5% QoQ) and EBIT stood YoY and QoQ weaker at Rs 2.8bn (‐41% YoY;  ‐11% QoQ). The weakness stemmed from limited availability and price volatility in raw materials.  

* Performance Products Segment (PP): Revenue stood at Rs 4.3bn (+88% YoY; +62% QoQ); EBIT stood at Rs 470mn (+476% YoY; +391% QoQ), reporting a robust performance compared to other segments, on backs of strength in DASDA prices.  

* Basic Intermediates Segment (BI):  Revenue stood at Rs 3.5bn (+76% YoY; +29% QoQ); EBIT stood at Rs 687mn (+47% YoY; +10% QoQ), aided by stronger price environment, the volume growth was nevertheless just ~10% YoY.

Valuation

We value DN at Rs 2100/sh, on SOTP basis, implying a target P/E multiple of 21.2x FY24e, as against 21.5x the stock is currently trading at.   

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