Q1FY24 Review: Deepak Nitrite: Phenolics business drags performance

9 Aug 2023 , 12:10 PM

Q1 earnings were below estimates, as Phenolics margins came under pressure. Mgmt expects the overall performance to pick up from hereon and remains confident of commissioning the ongoing projects worth Rs25bn during FY24/FY25. Additionally, it is also firming up Rs50bn capex in its subsidiary Deepak Clean Tech. While analysts of IIFL Capital Services cut FY24 EPS by ~20% on the back of weak Phenolics business in Q1, earnings downgrade for FY25-26 are limited to 11-12%, as they factor gradual recovery in standalone operations and the Phenolics business. Their TP, rolled over to Sep’24, gets marginally revised to Rs2,065 from Rs2,060, as they increase P/E multiple from 20x to 22x to factor the expected benefits arising from the impending capex approvals of Rs50bn. 

Phenolics business drags Q1 performance: 

DNL reported weak numbers, since revenue was impacted due to industry-wide challenges linked to de-stocking and persistent slowdown in EU and other markets. Aggressive opening up of China led to dumping of products, leading to sharp drops in sales realisation. Gross margins contracted 300bps YoY to 30.8%; mainly due to weak performance in the Phenolics business. Advanced Intermediates revenue declined 3% YoY, while Ebit declined 13.4% YoY. 

Capex intensity remains high: 

Ongoing capex worth Rs25bn in fine and specialty chemicals, including long-term supply of agrochemicals intermediates, backward integration in the fluorination space, solvents for the Life Science industry and phenol capacity expansion by 50ktpa — are progressing well and are expected to be timely commissioned. In addition, plans for polycarbonate (PC) include setting up of ~300ktpa of phenol and acetone capacities entailing large capex. Recently, the company has signed Rs50bn MoU with the Government of Gujarat. 

Valuations are reasonable: 

While there is weakness in the global market for dyes and pigments-based applications, plywood, construction and automobile demand are showing green shoots. Besides, normalisation of operations at Nandesari unit will cushion the adverse impact from slowdown in FY24. Consistently higher utilisation of phenol plant, along with completion of 50Kt debottlenecking will result in further volumes during FY25. At 21x 26 P/E, valuations are not expensive.