Reduce Deepak Nitrite Ltd For Target Rs.2,600 By Emkay Global Financial Services
AI segment weak; steady performance in phenolics business
DN’s Q2FY25 EBITDA at Rs3bn (-2% YoY/-4% QoQ) was in line with estimates. Revenue grew 14% YoY (-6 QoQ), on strong growth in the phenolics business, which offset the weak performance in the AI segment. We expect AI business to be strained in the near term, given pricing as well as margin pressure, while the phenolics business is likely to continue posting a steady performance. The company has signed an agreement for acquiring assets and license the technology for manufacturing Polycarbonate (PC) resins from Trinseo PLC; it has committed capex of Rs50bn for the project, with commissioning expected in FY28 (165,000ton). We cut FY25E/26E/27E EPS by 4-6%, to factor-in the weak near-term demand and have built-in gradual ramp up in PC volumes in FY30E numbers; maintain REDUCE and cut TP to Rs2,600 (from Rs2,900).
AI demand environment remains challenging; phenol business steady
Advanced Intermediates (AI) segment revenue was down 11% YoY/15% YoY, owing to order deferments from EU customers because of high inventory levels due to weak agrochemical demand and muted realizations. We believe that the agrochemical demand will be muted in the next two quarters, leading to volatility in this business. The Phenolics segment saw stable QoQ performance on the back of a favorable demand environment and realizations. Phenol-acetone capacities are running at nearly full capacity, thereby limiting volume growth for subsequent quarters, till derivatives start contributing. Phenol-acetone spreads volatility will keep absolute EBITDA range-bound.
Polycarbonate resins to drive growth beyond FY27
Deepak Chem Tech (DCTL) approved capex of Rs50bn for manufacturing polycarbonate resins as a greenfield project. It will be funded via a balanced mix of debt and equity, contingent on detailed engineering. For this, DCTL has signed agreements for tech and asset transfer with Trinseo Plc, for USD52.5mn. DCTL will acquire Trinseo’s German assets with 165KTPA capacity and targets commissioning in H1FY28 (FY23 domestic demand: 240KTPA; growing more than India’s GDP growth rate). Trinseo will support the transfer and commissioning of this facility in Dahej and during the initial offtake to itself and its customers. This tech and asset transfer will help DN reduce its project timeline by 12M. Capex for phenol-BPA will be announced at an appropriate time by the mgmt. BPA for polycarbonate will be sourced externally, in absence of captive capacities.
New project commissioning in next 6 months; MIBK/MIBC project delayed
We build in capex of Rs11/16/24bn for FY25/26/27E; DN’s spends as of H1FY25 (largely in subsidiaries) stand at Rs4.8bn. DN’s nitration block will commence in H2FY25, while photo-chlorination and hydrogenation will commence simultaneously in H2. MIBK/MIBC is delayed for commissioning, and will now be commissioned in H1FY26, with major ramp up expected from FY27. Acetophenone plant will commission by H1FY26. Such capex will aid backward integration-led improvement in margins from FY26/27.
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