Q2FY24 Review: Deepak Nitrite: Phenol business improves

10 Nov 2023 , 02:35 PM

Deepak Nitrite reported in-line Q2 as softness in standalone business was got offset by improvement in phenolic business. Along with improving spreads, cost optimization and efficiency improvement measures aided profitability. Gross margins expanded by 420bps to 34.4% while Ebitda margins expanded by 320bps to 17%. Base business volumes have started to recover on the back of demand normalization in end-user industry while phenolic business is likely to hold on to its profitability in the near term. Capex plans worth Rs25bn for FY24/FY25 remain on track and is slated to get commissioned over next six-eight months. Additionally, it is also firming up Rs50bn capex in its subsidiary Deepak Chem Tech. Analysts of IIFL Capital Services largely maintain their FY24-26 earnings estimates EPS and their TP rolled over to Dec’24 goes up to Rs2,150. Maintain ADD. 

Phenol drives Q2 profitability: 

Deepak Nitrite’s Q2 performance was driven by improvement in phenolic business. The management attributed improvement to cost savings on raw materials and improvement in operational efficiencies. Sequential improvement was also on account of favourable base (three week shutdown in Q1). Demand for downstream segments remain healthy and the momentum is likely to sustain in H2’24.

Base business margins down due to weak realisations: 

Standalone business revenue declined 2%/5% YoY/QoQ due to weak realisations. Gross margins contracted 180bps YoY to 45.4% while Ebitda margins contracted 280bps to 17.6%. The management highlighted visible trends of volume recovery, particularly in products used in specific end-user industry like glass, paper and homecare. Demand from agrochemicals remains soft.

Capex projects remain on track: 

Projects such as Photo-chlorination, Fluorination, MIBK, MIBC, hydrogenation, the new R&D centre, and brownfield expansions are all progressing well and are expected to get commissioned over the next six-eight. Additional, the company is also firming up Rs50bn capex in its subsidiary Deepak Chem Tech and is in advanced stages to acquire land for the new projects. Higher utilisation of phenol plant, along with completion of 50Kt debottlenecking will result in further volumes during FY25. At 21x 26ii P/E, valuations are not expensive.