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Subdued performance in AI segment leads to miss

* Deepak Nitrite (DN) delivered a miss in 3QFY24, led by a weaker than expected performance in advance intermediate (AI). The quarter saw persistent pricing pressure by Chinese suppliers in chemical intermediates. EBITDA at INR3b missed our estimate by 15%, while PAT stood at INR2b vs. our estimate of INR2.5b. Margin also declined YoY due to the AI segment.

* The management highlighted that global consumption trends have been hit as the chemical industry continued to face headwinds in 3Q. The AI segment’s weak performance was mainly attributed to the lack of demand in the agrochem, textiles, and dyes & pigments sectors; however, demand was healthy from the construction, infrastructure and home care segments.

* The robust performance in DPL was fueled by healthy sales volumes and better plant efficiency. The installed advanced process control system at DPL resulted in the highest-ever quarterly production figures of Phenol. However, EBIT/kg declined 7% YoY to INR12.6 in 3Q (as per our calculation). DN has undertaken debottlenecking activity at its Phenol plant both on the software and hardware fronts.

* The management has reiterated that the Polycarbonate compounding, fluorination, acid, MIBK, and MIBC projects are expected to come online by end-CY24, and all these plants will run at optimal utilization from FY26 onward. New projects that are being undertaken would have an incremental margin of 2-3% from historical. The greenfield Phenol plant is expected to be commissioned in CY27.

* Due to the underperformance in 3QFY24, we have cut our EBITDA/ EPS estimates by 6%/9% for FY24 while keeping our FY25/FY26 estimates broadly unchanged. The stock trades at ~30x FY25E EPS of INR77 and at ~20x FY25E EV/EBITDA. We reiterate our Neutral rating, valuing the stock at 25x Dec’25E EPS to arrive at our TP of INR2,185.

Miss led by higher-than-expected RM costs

* Revenue stood at INR20.1b (vs. our est. of INR18.5b, up 1% YoY), including incentive income of INR85.9m.

* EBITDA stood at INR3b (vs. our est. of INR3.6b, down 3% YoY); adjusting for incentive income, EBITDA stood at INR2.96b (down 6% YoY). Gross margin stood at 31.7% (down 110bp YoY), while EBITDAM stood at 15.2% (vs. 15.8% in 3QFY23)

* PAT stood at INR2b (vs. our est. of INR2.5b, down 3% YoY); adjusting for incentive income, PAT stood at INR1.9b (down 7% YoY).

* For 9MFY24, revenue stood at INR55.6b (down 8% YoY); EBITDA stood at INR8.2b (down 13% YoY) and PAT at INR5.6b (down 10% YoY). EBITDAM stood at 14.7% (down 100bp YoY).

* Phenolics EBIT stood at INR4.4b (up 5% YoY) with margin at 12.4% (up 140bp YoY); EBIT in the AI segment stood at INR3.1b (down 25% YoY) with margin at 15.2% (down 350bp YoY).

Segmental details

* Phenolics EBIT margin stood at 13.3%, with EBIT at INR1.8b. AI EBIT margin stood at 13.9%, with EBIT at INR937m.

* Revenue mix of Phenolics stood at 67% in 3QFY24, with AI share at 33%. The EBIT mix for AI dropped to 34% from 54% in 3QFY23, with Phenolics contributing 66% (up from 46% in 3QFY23).

Other highlights

* In 3QFY24, DN raised its equity stake in Deepak Oman Industries (SFZ) LLC (DOIL) to 51% from 31.7% for a consideration of USD1.3m. It has now become a subsidiary of DN. The company has also provided a corporate guarantee, postacquisition, to secure a term loan of USD49m from EXIM Bank for DOIL, as well as to cover interest and other associated charges.

Valuation and view

* The company aims to become the largest player in solvents, with a play on import substitution. It has already announced its foray into MIBK (40ktpa), MIBC (8ktpa), Polycarbonate compounding, etc. These projects are taking shape and would be commissioned as per the plan as of now.

* DN is aggressively pursuing both backward and forward integration projects in order to de-risk its business model and also expand its product portfolio. However, its entire product portfolio consists of commodities, and the current valuation appears expensive.

* The stock trades at ~30x FY25E EPS of INR77 and at ~20x FY25E EV/EBITDA. We reiterate our Neutral rating, valuing the stock at 25x Dec’25E EPS to arrive at our TP of INR2,185.

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