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Deepak Nitrite’s 3QFY24 earnings print was weaker than our and consensus expectations. This miss was primarily on account of sustained weakness in the advanced intermediates business and lower-than-anticipated jump in phenolic spreads. Although demand recovery is likely to be fragile, the company expects a better performance 4QFY24 onwards in advanced intermediates. Besides this, we believe the commissioning of capex worth INR 20bn in CY24 (likely one project every quarter with full benefit in FY26) should bode well for growth in FY25E-27E. Further, INR 140bn worth of projects getting commissioned by end-CY27 should augur well for growth starting FY28E. Accounting for 3QFY24 results and management commentary, we cut our FY24E EBITDA/EPS estimates by 2%/3%; our FY25E/26E estimates are largely unchanged. We maintain BUY with an unchanged Mar’25 TP of INR 2,565/share (based on 27x Mar’26E EPS) as we like the company’s concrete growth plans over the next 5-7 years although execution of such large projects remains a key risk.

* Phenolics spread jump lower than anticipated: Deepak Nitrite’s 3QFY24 consolidated gross profit came in 1% above JMFe at INR 6.4bn (up 4% QoQ while down 2% YoY) as revenue came in 11% above JMFe at INR 20.0bn (up 1%/13% QoQ/YoY) offsetting sequential gross margin decline to 31.7% (vs. JMFe of 34.7% and 34.4% in 2QFY24). During the quarter, other expenses were higher than anticipated at INR 2.4bn (vs. JMFe of INR 2.3bn). As a result, EBITDA was 3%/7% below JMFe/consensus and stood at INR 3.0bn (up 1% QoQ while 3% down YoY). Further, PAT came in 6%/8% below JMFe/consensus at INR 2.0bn (down 1%/3% QoQ/YoY). Deepak’s phenolics EBIT was lower than anticipated and stood at INR 1.8bn (vs. JMFe of INR 1.9bn, up 5%/42% QoQ/YoY) as phenolics EBIT margin declined to 13.3% (vs. JMFe of 16.2% and 15.2% in 2QFY24) while revenue was above our estimates at INR 13.5bn (vs. JMFe of INR 11.8bn and INR 11.2bn in 2QFY24). This indicates that the company was able to make lower spreads compared to the rise in global benchmark based phenol-acetone spreads.

* Advanced intermediates business performance not yet recovered: Deepak’s advanced intermediates (AI) EBIT came in below our expectation at INR 937mn (vs. JMFe of INR 1.0bn and INR 1.0bn in 2QFY24); AI EBIT margin was below JMFe at 13.9% (vs. JMFe of 15.8% and 15.4% in 2QFY24) more than offsetting higher AI revenue at INR 6.7bn (4% above JMFe, up 1% QoQ while down 18% YoY).

* Estimates largely unchanged; maintain BUY: To factor in 3QFY24 results and management commentary, we cut our FY24E EBITDA/EPS estimates by ~ 2%/3%, while our FY25E/FY26E estimates are largely unchanged. Hence, our Mar’25 TP has been kept unchanged at INR 2,565/share (based on 27x Mar’26E EPS). We maintain BUY as we see strong growth potential over the next 5 years from the commissioning of INR 140bn worth capex.

Key takeaways from post-results conference call

* Details of INR 140bn capex: The management highlighted that the completion timeline for this capex has been set as CY27-end. The company expects a payback period of 5 years for this project. Under this project, it will be manufacturing high grade of aniline and not the polyurethane foam grade. Currently, there is anti-dumping duty on aniline imports. The management is still exploring its fund-raising options for this capex.

* Details of INR 20bn capex: The company will be undertaking projects such as i) polycarbonated compounding, ii) Oman phase I capex, iii) nitric acid, iv) hydrogenation, v) MIBK and MIBC, and vi) photo chlorination and fluorination. Besides this, there could be additional capex for specialty chemicals as well.

* Power plants benefits captured in phenolic spreads: The company indicated that power plants benefits are fully captured in the current phenolic spreads. Its current capacity is around 350,000MT.

* Volume growth: The company highlighted that annualising 9MFY24 to FY24 and comparing it with FY22 volume, on a consolidated basis volume would have seen 17- 20% growth (including phenolics).

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