Deepak Nitrite: Expansion drive

Share price of Deepak Nitrite rallied to their daily upward limit of 4.44% to Rs 451.60 on NSE after the company commenced production of 2 Ethyl Hexyl Nitrate (2EHN) at its Nandesari, Vadodara, Gujarat facility effective 6 April 2020.

The maker of basic chemicals, fine & speciality chemicals and performance products has kick-started its expansion drive.

The company’s new greenfield expansion plan at Dahej, Gujarat for manufacturing phenol and acetone has achieved operating levels of over 95% utilization.

In terms of profitability, the project has been able to operate profitably in the quarter at EBITDA levels despite lowest crack spreads in the recent past.

The company is also incurring capex on development of downstream products for Acetone and the same is expected to be commissioned by H1-CY20.

The Indian specialty chemicals is now one of the fastest growing industries globally (next only to China), delivering 13% annual average growth over the last five years reaching $25 billion in 2014.

Deepak Nitrite is expected to benefit from both macro and micro factors in future. At CMP the stock is trading at 10x times FY21E earnings.

The phenolics business to show improved profitability and any expected decline in temporary higher DASDA prices should offset the bottom line.

Also, the company’s forward integration in the form of Acetone derivatives opens up new value addition prospects for the company. The Covid-19 related impact has already been factored in. The company is currently attractive.

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1119.86 crore, up 11.61 per cent from last quarter sales of Rs 1003.33 crore and up 46.08 per cent from last year same quarter sales of Rs 766.63 crore.

The company reported net profit after tax of Rs 156.81 crore in the latest quarter.

We believe that there is a big opportunity for phenol derivatives in India, and using a significant portion of the company’s existing phenol-acetone production captively would further de-risk its operations.

Going ahead looking at the current pricing trends the management is hopeful of improving EBIDTA margins by 100 bps in the next 2 years largely coming in from operating leverage, high capacity utilization levels and the present crack levels enjoyed by the company

Hence its is likely that the phenol project is likely to significantly contribute to the consolidated EBIDTA for the next 2 years wherein its share could be around 40-45% by FY21.

Going ahead we believe DNL’s revised strategy for improving profitability has started yielding fruit in the last two quarters and will continue over the long term and help in achieving strong earnings growth.

The company’s investment in the manufacturing of phenols is a significant move and will scale up its business to the next level.

With commencement of the acetone-phenol project, DNL’s revenue is estimated to double and margins expand significantly enhancing the operating metrics of its business model

Also DNL is focusing on expanding its footprint in high-value intermediates, especially for the pharma API and personal care industry and also pursue contract manufacturing opportunities for agrochemical majors.

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