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Margin pressure to persist in the near term

* Deepak Nitrite (DN) delivered a beat in 1QFY25 led by a strong performance in Deepak Phenolics (DPL) driven by improved realization. EBITDA was above our estimate by 12% in 1QFY25 and stood at INR3.1b (+47% YoY). Adj. PAT was INR2b (estimate of INR1.8b, +35% YoY). EBIT margin contracted YoY in Advanced Intermediates (AI). Management highlighted that there was continued inventory destocking while logistical challenges led to an export slowdown to the US and EU.

* In the AI segment, DN introduced a new novel OBA product to address a specific market demand. Volume growth in select products was seen led by debottlenecking initiatives coupled with yield improvement in existing products. DN maintained its market share in most of the products in 1Q. In DPL, management expects it to gain more traction with the commissioning of the downstream products. The demand pressure on Benzene and Propylene could be a factor affecting the near-term Phenol spreads.

* Margin contracted significantly in the AI segment due to the current environment and challenging circumstances. Specific to performance products, margin dipped due to high ocean freight costs (this phenomenon was opposite for DPL), making it difficult to compete with domestic manufacturers. Margin pressure would persist in the short term due to reduced single customer or single geography dependency.

* Management highlighted that while demand recovery in agrochemicals continues to be soft, various other end-user segments, including dyes & pigments, paper, homecare, etc. are indicating marginal signs of improving demand. There are multiple projects set for commissioning in FY25 for DN, and with the expectation of Chinese destocking getting over by the end of FY25, this positions DN well for sustained growth and profitability from a longterm perspective.

* Despite the outperformance, we cut our EBITDA/EPS estimates by 7%/6% for FY25 due to the management guidance of near-term margin pressure. We broadly maintain our estimates for FY26. Our EBITDAM stands at 15.3%/17.8% for FY25/26. The stock trades at ~40x FY26E EPS of INR76 and at ~26x FY26E EV/EBITDA. We reiterate our Neutral rating, valuing the stock at 40x FY26E EPS to arrive at our TP of INR3,060.

Beat led by better performance in DPL YoY

* Revenue was at INR21.7b (our est. INR18.6b, up 23% YoY). EBITDA was at INR3.1b (our est. of INR2.8b, up 47% YoY).

* Gross margin was 30.8% (flat YoY), while EBITDAM stood at 14.3% (v/s 11.9% in 1QFY24).

* Reported PAT stood at INR2.0b (our est. of INR1.8b, up 35% YoY). Segmental details

* Phenolics’ EBIT margin stood at 14.2%, with EBIT at INR2.1b. AI’s EBIT margin came in at 9.3%, with EBIT at INR665m.

* Revenue mix of Phenolics stood at 67% in 1QFY25, with AI’s share at 33%. EBIT mix for AI was 24%, down from 57% in 1QFY24. The contribution from Phenolics came in at 76% (vs. 43% in 1QFY24).

Other highlights

* In May’24, Deepak Chem Tech Ltd (DCTL) entered into a share purchase agreement with Narmada Thermal Power Pvt Ltd (NTPPL) to acquire 100% paid up share capital of NTPPL for INR617m. NTPPL has been considered a step down subsidiary of DNL in 1QFY25.

Valuation and view

* The company aims to become the largest player in Solvents, with a play on import substitution. It is foraying into Methyl Isobutyl Ketone (MIBK, 40ktpa), Methyl Isobutyl Carbinol (MIBC, 8ktpa), Sodium Nitrite/ Nitrate among other products. These are taking shape and would be commissioned as per plan. 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 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 ~40x FY26E EPS of INR76 and at ~26x FY26E EV/EBITDA. We reiterate our Neutral rating, valuing the stock at 40x FY26E EPS to arrive at our TP of INR3,060.

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