Buy Deepak Nitrite Ltd for Target Rs. 1,800 by Emkay Global Financial Services Ltd
Deepak Nitrate’s Q1FY26 EBITDA at Rs1.7bn (down 44% YoY; up 11% QoQ) was in line with our estimate, albeit below consensus estimate. The AI segment saw muted global demand and delayed offtake of agchem intermediates (expected to normalize in ensuing quarters). The Phenolics business saw steady demand with better realization, buoyed by capacity augmentation; however, spreads have been under pressure since the last 3 quarters. The mgmt expects FY26 capex at Rs8-10bn (vs 12-15bn earlier) and plans to incur capex of Rs100bn by FY28 to set up an integrated phenol-BPA-polycarbonate plant. We cut FY26E/27E/28E EBITDA by 27%/23%/28%, factoring in lower spreads in the phenolics business in the medium term due to capacity adds in China and cheaper imports leading to sustained pressure on spreads. We retain REDUCE, while cutting our SoTP-based TP by 10% to Rs1,800 (from Rs2,000 earlier).
Advanced intermediates business faces slower agri demand
Advanced Intermediates (AI) segment revenue was down 15% YoY/7% QoQ at Rs6.1bn, owing to slow demand for agrochemical intermediates. Meanwhile, demand for dyes, pigments, detergents, glass, and home personal care was stable. The management is focusing on diversifying its customers base and reducing dependency on large customers. EBIT margin declined to 5.9% in Q1FY26 (9.3% in Q1FY25/6.9% in Q4FY25), on operating deleverage. The company is working on backward integration projects, and streamlining of operations should yield improvement of 200-300bps in margin. The company is creating an attractive pipeline of new products through various agreements.
Phenolics business sees marginal improvement in spreads
The phenolics segment posted adj revenue of Rs12.9bn (down 12% YoY/6% QoQ), owing to pricing headwinds and volatile feedstock costs. Adj EBIT margin improved to 7.8% sequentially in Q1FY26 (5.7% QoQ/14.2% YoY), largely due to better spreads. Variable cost optimization resulted in better profitability. The company recorded government incentive income (GII) of ~Rs170mn in Q1FY26. The management commented on debottlenecking certain capacities in Q1FY26 which led to volume expansion.
Certain projects to commission in H2; Phenol-2 capex to commission in FY28
The company is running trial production for the concentrated nitric acid plant, while commissioning activities are under way for weak nitric acid with technology partner on site. The management highlighted that MIBK, MIBC, and nitration plants are expected to be commissioned in the next quarter. Also, the R&D center near Vadodara is expected to commission soon. The management gave capex guidance of Rs8-10bn in FY26 (Rs12-15bn earlier), while FY27 should see capex of Rs30bn and the balance thereafter. They expect the new phenol-BPA-polycarbonate plant (total outlay of Rs85-100bn) to have a payback of 5-5.5 years at an IRR of 16-18%. We believe that the current limited scope for volume growth in phenolics, coupled with pricing pressure, has led to earnings cut.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
