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Soft realizations keep margins under strain

Following the recent price correction, we upgrade the stock to ‘HOLD’ with a revised target price of Rs1,883, valuing it at 32x FY27E EPS. DN’s Q1FY26 adjusted revenue stood at Rs18.7bn, declining to 13.6% YoY and 7% QoQ. Operating performance was impacted by ongoing pricing pressure, oversupply from China, and a decline in spreads. The Advanced Intermediates segment witnessed stable volumes across most products, except agrochemical intermediates, which were affected. The Phenols segment reported steady volumes, but profitability remained subdued due to an influx of cheap imports. Going forward, spreads in the phenolics segment are expected to see some uptick. Projects such as CNA and Hydrogenation were commercialized during the quarter. WNA and the R&D centre are expected to be commissioned in Q2FY26, while Nitration, MIKB, and MIBC projects are likely to come online in H2FY26. The total planned capex for the polycarbonate value chain stands at Rs85bn; however, the management’s guidance of only Rs8bn-10bn capex for FY26 suggests the polycarbonate resin project is unlikely to be commissioned by Dec’27 as previously guided.

DN has been undertaking numerous growth initiatives, primarily in the Phenolics segment. While domestic demand for all products is expected to remain robust, the threat of cheap imports will likely keep margins under pressure. The agrochemicals business is expected to continue facing headwinds in the near term. The stock is currently trading at ~31x FY27 EPS. We upgrade to ‘HOLD’ rating.

• Adj consolidated revenue declined by 14% YoY: DN reported consolidated revenue of Rs18.9bn. Adjusting for government incentives of Rs172.3mn, revenue came in at Rs18.7bn, down 14% YoY and 7% QoQ. Topline growth was constrained by continued pricing pressure across the company’s portfolio.
• Adj EBITDAM declined to 9.2% during Q1FY26: Adj gross profit margin was 25% (vs 30.8% in Q1FY25 and 25.1% in Q4FY25), down 580bps YoY due to lower spreads. Adj EBITDA stood at Rs1.7bn, down 44.3% YoY, but up 11.4% QoQ (vs Rs3.1bn in Q1FY25 and Rs1.5bn in Q4FY25). Adj EBITDA margin came in at 9.2% (vs 14.3% and 7.7%).
• Segmental mix: Adj Phenolics revenue mix was 68% of total adj revenue with adj EBIT/kg at Rs8.7 (calculated), vs Rs17.3in Q1FY25 and Rs6.7 in Q4FY25. Advanced Intermediates’ revenue share was 32% with 6% EBIT margin. Phenolics contributed to 74% of overall adj EBIT, while Advanced Intermediates’ contribution was 26%.
• Concall takeaways: (1) Domestic and export revenue mix stood at 86%:14% in Q1FY26. (2) Recovery remained muted in a few agrochemicals’ intermediates, revival expected in upcoming quarter. (3) Dumping from China continued to keep realizations under pressure. (4) Phenolics segment witnessed stable demand with better sequential realization during the quarter. (5) Short-term benefits are visible from the transition to renewable energy; the company has target to meet 60–70% of power consumption from renewable sources by FY27. (6) The US tariff is expected to have a limited impact on the company, as exposure to the US market is only 2.5–3%. (7) Products with application in dyes and pigments space, volumes have remained intact with marginal growth. (8) Hydrogenation and CNA plants are currently undergoing trial runs. (9) WNA commissioning activities are in progress, with completion targeted for Q2FY26. (10) Nitration and MIBK/MIBC projects are expected to be commissioned in H2FY26. (11) Nitric acid plant will help in margin improvement by 200-300bps for the AI segment. (12) Polycarbonate compounding will meaningfully contribute from FY27- FY28, approval cycles are close to 18 months for these products.

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