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Entering into a transition phase amid project delays!

* Deepak Nitrite (DN)'s large-scale capex projects, announced with the Gujarat government (through MoUs), have faced delays, albeit some remain on track. The company’s INR50b Polycarbonate (PC) resins project, set for CY28 commissioning, aims to replace 240ktpa of imports with 165ktpa capacity in Phase-I. However, it has not finalized any BPA technology partner as yet.

* DN is executing large-scale capex for integration, with key projects like MIBK/MIBC in 1HFY26 and multiple plants in 2HFY25, alongside an R&D center commissioning in Mar’25. Through its subsidiary DCTL, it has committed INR140b over five years for specialty chemicals and polymers, strengthening its market leadership in India.

* DN's consol. EBIT margin contracted to 7.3% in 3QFY25, the lowest on record, with 9MFY25 at 10.3% vs. 12.6% in 9MFY24, driven by weak demand and pricing pressure. Blended Phenol-Acetone spread dipped 14% YoY/13% QoQ in 4QFY25YTD, signaling continued weakness in DPL’s performance.

* DN is expanding into certain import substitution and downstream products, with commissioning in FY26, while its fluorination and specialty salts units are already operational. Given its commodity-based portfolio and rich valuations (~29x FY26E EPS), we reiterate our Neutral rating with a TP of INR1,835 (premised on 25x FY27E EPS).

New projects delayed time and again!

* DN announced a slew of backward and forward-integrated projects a couple of years back with substantial capex and multiple MoUs signed with the Gujarat government as well. Although the management was confident about the initial commissioning timelines (with some timelines not disclosed until recently), there has been a delay in most projects almost every quarter. Some other projects have been in line with the given timelines (refer to Exhibit 4).

* Ten years back as well, when the Board of Directors had first approved the first Deepak Phenolic plant of DN, it took about four years for that plant to be commissioned. That being said, the phenolic plant (also an import substitution play) coincided with supply chain constraints globally that catapulted DN into its next leg of growth. Similarly, we expect the PC plant to take some time to become operational; however, it could present another golden import substitution opportunity for DN.

* Management announced a Polycarbonate (PC) resins capex of INR50b in 2QFY25 (initially planned and announced ~2 years back), which would be commissioned in CY28. The domestic demand is met completely by imports right now (240ktpa in CY23). There is no royalty that DN would have to pay to Trinseo (the company from which the technology and assets have been purchased) for the technology transfer as of now. DN is setting up a 165ktpa capacity in PC, but the company has not finalized anyone for the BPA technology transfer for PC manufacturing.

Huge investments lined up

* DN is executing huge capex for backward and forward integration, with phased commissioning from end-FY25. This includes MIBK/MIBC (Acetone integration) in 1HFY26 and Photochlorination, solvent, nitration, and hydrogenation plants in 2HFY25. The company completed Phenol and Acetone debottlenecking in FY24 and commissioned its fluorination plant in Mar’24 for agrochemical integration. Advanced process control has boosted Phenol, Acetone, and IPA output, driving sales. An R&D center in Savli, Vadodara, with advanced labs and pilot plants, is set for Mar’25 commissioning.

* DN, through its subsidiary Deepak Chem Tech (DCTL), has committed an INR140b capex over five years under an MoU with the Gujarat government to expand in specialty chemicals, phenol, acetone, and Bisphenol-A. DCTL plans to manufacture import-substituting polymers like Polycarbonate resins, MMA, PMMA, and Aniline at its new Dahej facilities, giving DN a first-mover advantage and positioning it as a market leader in India.

Margin deterioration continues

* Consol. EBIT margin for the company slipped to 7.3% in 3QFY25, the worst in the company’s history since we started tracking it. Subdued demand and pricing pressures continue to linger on for the company in the standalone business with the Phenol margin also at a trough. For 9MFY25, consol. EBIT margin stood at 10.3% vs. 12.6% in 9MFY24 and 12.4% in FY24.

* Phenol/Acetone prices are down 1%/ 20% YoY in 4QFY25YTD. Benzene prices are down 6% YoY, while Propylene prices are up by 8% YoY during the same period. The blended Phenol + Acetone spread is at INR70/kg (down 14% YoY in 4QFY25YTD, and down 39% from its peak in 4QFY22). Spread is also down 13% QoQ in 4QFY25YTD, which implies that DPL’s performance is likely to remain weak in 4QFY25 as well.

Valuation and view

* DN aims to become the largest player in the solvent market by focusing on import substitution. It is foraying into Polycarbonate (PC, 165ktpa), Methyl Isobutyl Ketone (MIBK, 40ktpa), Methyl Isobutyl Carbinol (MIBC, 8ktpa), and Sodium Nitrite/ Nitrate, among other products. These products are taking shape and are likely to be commissioned in FY26. Some other previously announced capex projects have already been commissioned (fluorination plant, specialty salts unit).

* DN is aggressively pursuing both backward and forward integration projects to de-risk its business model and expand its product portfolio. However, its entire product portfolio consists of commodities. The stock trades at ~29x FY26E EPS of INR66.2 and ~19x FY26E EV/EBITDA, which we believe is expensive for a commodity chemical company. We reiterate our Neutral rating on the stock with a TP of INR1,835 (premised on 25x FY27E EPS).

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