Reduce Deepak Nitrite Ltd For Target Rs. 2,900 By Emkay Global Financial Services
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We downgrade Deepak Nitrate (DN) to REDUCE from Add, as it has run up ahead of earnings; we raise our SoTP-based TP to Rs2,900/sh (implying 35x PER on Jun-26E). DN’s Q1FY25 EBITDA at Rs3.1bn (+47% YoY/+3% QoQ) was in line with our estimate. Revenue grew 23% YoY (flat QoQ) on volume growth from the standalone business, while DN’s consol. quarterly EBITDA has stayed stable at ~Rs3bn over the last 4 quarters. We believe the phenolics segment has reached maximum volume potential (excluding downstream) from the current plant, while the standalone business will see some volume growth in H2. We cut FY25E/26E EPS by 6%/8%, to factor-in the lower margins in the standalone business. We increase the phenolics business EV/EBITDA to 15x from 12x, on incremental contribution from the new downstream products going forward.
Standalone business witnesses volume uptick; phenol volumes nearing peak
The advanced intermediates (AI) segment saw improved domestic demand which led to volume uptick across select product categories, while realizations remained static. Debottlenecking activities were initiated, which lead to yield improvement in certain products. The Phenolics segment saw stable QoQ performance on the back of a favorable demand environment. We believe phenol-acetone capacities after debottlenecking are running at full capacity, thereby limiting volume growth for subsequent quarters. Agrochemicals demand remained soft in Q1, while contribution from other sectors such as dyes, pigments, paper, and homecare improved. The management anticipates revival of the agrochemical segment by H2FY25.
New projects under construction are on track; MIBK/MIBC project delayed
The management has guided for capex of Rs10-12bn in FY25, excl. any further growth capex during the tail-end of FY25. DN’s backward integration to nitric acid will commence in early H2, while photo-chlorination and solvent projects, and progress of hydrogenation and nitration plants is on track. MIBK/MIBC project engineering is complete, and the civil work is near finalization. The company expects commissioning by Q4FY25, with substantial revenue flowing to FY26. Also, DN has announced setting-up a world scale acetophenone plant in coming 12 months (global demand: 60KT).
New capex in the phenolics business to drive growth beyond FY27
Deepak Chem Tech (DCTL) signed an MoU worth Rs90bn with the state government of Gujarat in Jan-24, taking the total value of MoUs signed to ~Rs140bn (previously signed an MoU worth Rs50bn in May-23 for MIBK, MIBC, Bisphenol-A, and Polycarbonate Compounding). The management is evaluating the overall project plan for PC compounding—from technology to EPC activities—before committing capex plans to shareholders. DN has funded Rs7.1bn to DCTL, making progress in its polycarbonate (PC) compounding facility. We believe current valuations have factored in the next leg of capex announcements and will make us constructive on the stock at lower levels.
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