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Resilient operating performance amid industry headwinds

* Deepak Nitrite (DN) reported a strong operating performance on a low base. Its EBITDA surged 2.8x YoY to INR5.4b, led by 3.5x YoY EBIT growth in the Phenolic segment and 89% EBIT growth in the Advanced Intermediates (AI) segment. This growth was fueled by better product mix, operating leverage, and better phenol and benzene spreads.

* While near-term industry headwinds and evolving geopolitical developments may continue to weigh on performance, we believe the overall impact will remain contained, aided by ongoing process improvements, backward integration benefits, manufacturing efficiencies, disciplined cost optimization, improving customer inquiries across domestic and export markets, and the commercialization of new products.

* Factoring in the better-than-expected margin in 1QFY27, we increase our FY27/FY28 estimates by 20%/9% and expect a CAGR of 13%/22%/24% in revenue/EBITDA/PAT over FY26-28. We value the stock at 24x FY28E EPS to arrive at our TP of INR1,500. Reiterate Sell.

Phenolics and advanced intermediates deliver strong growth

* DN reported strong 1QFY27 revenue growth of 36% YoY to INR25.8b (vs. est. INR21.5b), driven by robust performance in both the phenolics segment (up 36% YoY to INR17.7b) and advanced intermediates (up 33% YoY to INR8.0b)

* Gross margin came in at 36.8% (up 880bp YoY), while EBITDAM stood at 21% (compared to 10% in 1QFY26). Employee costs as a % of sales stood at 4.6% (vs. 5.6% in 1QFY26), while other expenses stood flat at 11.3%.

* EBITDA grew 2.8x YoY to INR5.4b (our est. INR4b), and EBIT for Phenolics grew 3.5x YoY, while EBIT for advanced intermediates grew 89%.

* The EBIT margin for advanced intermediates stood at 8.3% vs. 6% in 1QFY26, while the same for Phenolics stood at 23.5% vs. 9% in 1QFY26.

* Adj. PAT stood at INR3.4b (est. of INR2.6b), up 3.1x YoY.

Valuation and view

* The industry continues to face pricing volatility, evolving geopolitical dynamics, and an uneven demand recovery. DN continues to focus on continuous process refinements and cost optimization initiatives, which are expected to drive operational performance and fortify its competitive positioning. Further, commercialization of new products, along with a healthy pipeline of new product launches, is also expected to drive earnings growth.

* Factoring in the better-than-expected margin in 1QFY27, we increase our FY27/FY28 estimates by 20%/9% and expect a CAGR of 13%/22%/24% in revenue/EBITDA/PAT over FY26-28. We value the stock at 24x FY28E EPS to arrive at our TP of INR1,500. Reiterate Sell.

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