0% found this document useful (0 votes)
193 views9 pages

Deepak Nitrite - Joindre

The research report from Joindre Capital Services provides a buy recommendation for Deepak Nitrite Limited (DNL). DNL manufactures chemicals across three segments: bulk chemicals, fine specialty chemicals, and optical brightening agents. Key points include DNL reporting strong financial performance in Q3 FY19 with sales up 22% and PAT up 57% YoY. DNL has three business segments that include bulk basic chemicals, fine specialty chemicals, and optical brightening agents. DNL is also undertaking a large expansion project worth Rs. 1400 crores to produce phenol and acetone.

Uploaded by

rohan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
193 views9 pages

Deepak Nitrite - Joindre

The research report from Joindre Capital Services provides a buy recommendation for Deepak Nitrite Limited (DNL). DNL manufactures chemicals across three segments: bulk chemicals, fine specialty chemicals, and optical brightening agents. Key points include DNL reporting strong financial performance in Q3 FY19 with sales up 22% and PAT up 57% YoY. DNL has three business segments that include bulk basic chemicals, fine specialty chemicals, and optical brightening agents. DNL is also undertaking a large expansion project worth Rs. 1400 crores to produce phenol and acetone.

Uploaded by

rohan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 9

JOINDRE CAPITAL SERVICES LTD.

SEBI REGN NO. INH000002061 / INZ 000174034

RESEARCH REPORT 11th Mar 2019


DEEPAK NITRITE LIMITED
BSE : DEEPAKNI Sector: SPECIALITY CHEMICALS BSE: 506401

View - BUY
CMP : Rs. 251
Target Price: Rs 370 (In next 12 to 18 mths)

BUSINESS BACKGROUND KEY DATA


FACE VALUE Rs 2.00
Deepak Nitrite Limited (DNL) is one of India's leading chemical
companies. DNL manufactures almost several products across 3 major DIVD YIELD % 0.51
categories: bulk & commodity chemicals, fine & specialty chemicals, and
optical brightener agents. 52 WK HI/LOW 305/204
DNL holds a strong market position in India in several of its chosen
niches within the chemical industry. DNL’s inhouse R&D has recently NSE CODE DEEPAKNTR
helped add successful new products to its line-up and a strong export
base to more than 30 countries with exports accounting for ..% of BSE CODE DEEPAKNI
revenues.
INVESTMENT HIGHLIGHTS MARKET CAP RS 3429 CRS
Strong Financial Performance in Q3 of FY19 –

DNL reported a steady set of FY18 numbers with net sales at Rs 1651 SHAREHOLDING PATTERN
crs as compared to a revenue of Rs 1370 crs last year, with EBIDTA
placed at Rs 196.19 crs from Rs 135.47 crs last year with the PAT PROMOTERS - 45%

placed at Rs 79 crs from Rs 96 crs.(inclusive of extraordinary gains of Rs BANKS, MFs & DIIs - 13%
70 crs) DNL has declared a dividend of 65% for FY18.
FIIs - 11%
For DNL in Q3 of FY19 Sales are up by 22% at Rs 452 crs with EBIDTA
PUBLIC - 31%
up by 25% at Rs 65.51 crs with PAT at Rs 31.25 crs up by 57% YoY.
EBIDTA margins in Q3FY19 stood at 14.38% KEY FUNDAMENTALS

DNL is a well diversified player operating in the BC (Basic YE FY19 FY20 FY21
vScore: vScore (Value Score) is our proprietary company rating system f
Chenicals), FSC (Fine Speciality Chemicals) and the OBA (Optical
Brightning Agents) business segments – Rev Gr% 57 44 15
DNL started with the production of basic chemicals like Sodium Nitrite
EBIDTA Gr% 98 54 15
which finds its applications in Dyes, Pigments, Pharma Intermediaries,
Food Colors, and Colourants among others. Over time, DNL has also PAT Gr% 96 61 30
added other products like Nitro Toluenes & Fuel Additives in the FSC
division that find application in Colourants, rubber chemicals, pharma, EPS Gr% 96 61 30
explosives, DASDA, agro chemicals and petroleum products. DNL also
gradually started manufacturing performance products like Fluorescent EPS (Rs) 11.37 18.34 23.,84
Whitening Agents commonly known as Optical Brightening Agent (OBA).
DNL is a fully integrated manufacturer of FWA. OBA has wide
ROE % Precise
16 21 Advice
23

Assured…
applications in varied industries Paper, Detergents ,Textiles ,Coating ROCE % 10 13 14
Applications in Printing & Photographic Paper etc. As on Mar 2018 BC,
FSC and Drivers
Long term OBA accounted for good
for DHFL look 51%,24% and
in view 25%
of the of revenues
follow18 P/E(x) 14 11
respectively.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

DNL has 3 key business segments. These include


1.Bulk Basic Chemicals
2. Fine Speciality Chemicals
3,Optical Brightning Agents

Basic Chemicals Segment –


In the basic chemicals segment this product is largely a high volume and moderate
margin products across organic and inorganic chemicals. Organic chemicals produced
include nitro toluene and ortho toluene which are used to manufacture intermediates
for colourants, rubber production, pharmaceuticals, explosives, dyes & agrochemicals
and fuel additives used in refineries.

Inorganic chemicals produced include sodium nitrites & sodium nitrates with sodium
nitrite used in colourants, pharma, electroplating & rubber chemicals and sodium
nitrate used in industrial explosives, glass industry & heat-treating chemicals. As on
first 9 months of FY19 the BCS accounted for 51% of consolidated revenues.

Fine Speciality Chemicals Segment (FSC) –

The FSC segment includes niche products manufactured at relatively lower volumes
and are customised to specific customer requirements. This segment produces
xylidines, cumidines, oximes, nitro oxylene, etc., which find application as ingredients
in colourants, pigments, pharmaceutical intermediaries and agrochemicals.

DNL is focused 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 players.

The agrochemical intermediates business in particular has witnessed robust demand


growth as well as improved realisations due to China-related issues. Capacity
expansion enabled volume growth, while backward integration initiatives boosted
margins

Presently DNL is among the top three global suppliers for products like Cumidines and
Oximes and caters to diverse set of global players in colourants and agrochemicals
space. This segment provides the company with much better margins due to the
customised nature of these chemicals.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

To further steer growth in fine and speciality chemicals, DNL is now focussing on
increasing product basket for pharma and personal care where the company sees
large potential that can nearly double the revenue of this division with sustained
increase in margins. In FY18 the FSC accounted for 24% of consolidated revenues for
DNL.

Optical Brightening Agents (OBA) Business Segment –

As a part of forward integration exercise, DNL constructed a new OBA plant with a
capex of Rs. 300 crs that got operational in FY14. This plant used DNLs DASDA as an
input to produce OBA and caters to the international end-user markets of Paper,
Detergents and Textiles.

The ramp up of this plant did not happen the way it was envisaged as a result of
increased competition, falling industry demand and high switching costs for the
potential clients. In FY18 total sales from this segment totalled around Rs 400 crs
accounting for 25% of consolidated revenues.

Mega-expansion of import substitutes –Phenol and Acetone

DNL has created a wholly owned subsidiary named, Deepak Phenolic Limited through
which the company is going through a green field expansion of Rs. 1400 crores for the
production of 200,000 MT Phenol and 120,000 MT of co-product Acetone. This
expansion has funded as follows

Rs 80 crores in Jan2016 QIP done @ Rs 70.9

Rs 80 crores in April 2016 Land Sale

Rs 720 crores = Term Debt Already Tied Up

Rs 150 crores = Second QIP done in Jan 2018

Balance from internal accruals of around Rs 370 crs.

Why Phenol & Acetone Projects Makes Sense? India currently exports the raw
materials, Benzene and Propylene and imports Phenol and Acetone. As of today, more
than 80% of the current demand for both products is fulfilled by imports
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

Phenol and acetone are organic compounds derived from benzene and propylene
(crude derivatives). Both compounds are versatile in nature and used as intermediates
for diverse applications. While phenol finds application in laminates, paints, automotive
lining, rubber adhesives, pesticides, mouldings, among others, acetone is used in
healthcare, paints, thinners, inks, acrylic sheets, etc.

The market for phenol and acetone is estimated to clock 8.5% and 6.0% CAGR over
FY17-21, respectively, riding robust demand from end-user industries.

Globally, about 50% of phenol is used for Bisphenol-A, which is subsequently used in
plastic products. However, domestic demand is majorly concentrated in phenolic resins
used as an adhesive and binding agent in various industries. Nearly 30% of global
demand for acetone emanates for solvents which are used as thinners across
industries. However, domestic demand is largely driven by pharmaceuticals paints and
thinners.

India imports phenol and acetone and over 80% requirement is imported. Taiwan,
Korea, Thailand, Singapore and the US comprise major exporting countries with Asian
countries contributing lion’s share due to significant capacity additions. There are only
two entities manufacturing these products in India which include Hindustan Organics
(HOCL) and SI Group (earlier known as Herdilia).

To take advantage of this demand-supply gap, DNL is setting up an acetone-phenol


plant in India with 200,000 MTPA phenol and 120,000 MTPA acetone capacities under
its wholly-owned subsidiary Deepak Phenolics Dahej. DNL expects to plug in to
domestic demand via efficiency gaps & economies of scale.

DNL has already commissioned the phenol plant on 1-Nov-18, wherein DNL has
already successfully ramped up utilisation to 85%, leading to Rs3.2b in revenues, Rs37
crs in Ebitda and Rs 12 crs in PBT in 3QFY19 itself.

The management has also indicated that the plant is EBITDA & PBT positive in its first
two months of operations itself. The management has also guided to achieve 90%
utilizations in FY20. It has stated that it has managed to replace a majority of phenol
and acetone imports in the domestic market and has also succeeded in making
pharma grade acetone as well as the first export of acetone from India.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

The management aims to operate the phenol plant at 85-90% capacity utilisation
during FY20. Going ahead DNL plans to expand into downstream products of phenol
and acetone, and an announcement in this regard is expected soon once the company
successfully runs the phenol-acetone capacities near optimal utilisation for a couple of
quarters. This was clearly indicated at the company’s interaction with analysts post the
Q3 FY19 concall.

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.

DNL has performed well on all parameters across all its business segments in
Q3 of FY19 –

DNL reported a robust bottomline of Rs 31.60 crs – up by 55% YoY largely due to
strong growth across segments. Some of the Key Business Highlights include

The Basic chemical (BC) segment revenue increased by 16% YoY to Rs INR 2.2bn

The Fine & Specialty Chemical (FSC) segment reported a revenue growth of 21% YoY
to Rs 1.48bn

The Performance Products (PP) segment revenue grew 48% YoY to 0.99 bn, as the
segment continued to turn around.

The EBITA margins in the Basic Chemicals, Fine Speciality Chemicals and
Performance Product segments stood at 15%, 23% and 18% respectively.
.
The greenfield phenol project at Dahej (Deepak Phenolics) was commissioned on 1
Nov 2018 and has already tested 85 to 90% utilization ahead of schedule.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

DNL enjoys a strong balance sheet and both Topline and Bottomline growth is
likely to remain strong going ahead –

DNL has maintained a strong balance sheet over the years with reasonable debt of
around Rs 1300 crs as on date (Dec 2018) on a consolidated basis on a consolidated
networth of Rs 900 crs plus as on Dec 2018. The company has also enjoyed healthy
operating cashflows. Operating cashflows between FY12-FY18 has grown at a CAGR
of 15%, while a large part of the capex is complete which should enhance the free
cash generation going ahead.

DNL has also reported average RoE of 10-11% during the past 5 years, which in the
next two years is likely to cross 23% by FY21. Hence going ahead we expect that DNL
has the capability to sustain the robust financials performance given its strong
business performance and significant cash generation from the newly commissioned
Phenol and Acetone facility.

Further as capacity utilsation improves here we expect the consolidated RoCE in the
next 2 years to average 14-15% with significant rise in cash flows expected ahead.
This should also help the company to utilize the cash to fund further capex for new
investments.

We expect that going ahead overall bottomline growth in the next 3 years starting FY19
onwards should easily increase at a CAGR of 50-60% and going ahead also we
believe that net cash flows generated will remain healthy going ahead.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

Business Outlook & Stock Valuation –

On a rough cut basis, in FY19, Topline will see a steady rise wherein Topline is
expected to touch Rs 2600 crs in FY19E.

On the bottomline level we expect the company to record a PAT of Rs 155 crs in
FY19E. Thus on a conservative basis, DNL should record a EPS of Rs 11.37 for
FY19E. For FY20E and FY21E our expectation is that earnings traction for DNL would
continue to be strong wherein we expect a EPS of Rs 18 and Rs 23 respectively.

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.

In conclusion we believe that DNL is supported by a competent management team and


promoters, wherein DNL enjoys a strong execution track record and is well positioned
to ride the next wave post the commissioning of its Phenol and Acetone project which
will significantly ramp up its operating profitability and hence we believe that DNL is
well positioned for long term sustainable growth.

Hence we believe that the DNL stock should be purchased at the current price for a
price target of around Rs 370 over the next 18 months.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

FINANCIALS
For the Year Ended March Rs Crs FY17A FY18A FY19E FY20E FY21E
Net Sales 1370.7 1651.45 2600.70 3750.20 4312.73
EBIDTA 135.47 196.19 390.00 600.03 690.03
EBIDTA % 9.88 11.88 15.00 16.00 16.00
Interest 34,12 45.14 91.00 140.00 145.00
Depreciation 48.03 52.6 80.00 115.00 125.00
Non Operational Other Income 10.9 12.4 7.00 10.00 11.00
Profit Before Tax 134.56 110.85 226.00 355.03 431.04
Profit After Tax 96.31 79.01 155.00 250.00 325.00
Diluted EPS (Rs) FV Rs 2 7.37 5.79 11.37 18.34 23.84
Equity Capital 26.14 27.27 27.27 27.27 27.27
Reserves 688.72 894.85 1028.85 1253.85 1548.85
Borrowings 594.00 881.00 1600.00 1600.00 1600.00
GrossBlock 935.10 1542.1 1800.10 1850.00 1950.00
Investments 118.10 31.8 100.21 100.21 100.21
Source Company our Estimates

KEY CONCERNS

The profitability in the acetone-phenol business is closely linked to the spread between
global prices of acetone-phenol and benzene propylene. Hence, any major fluctuation
in the spreads can negatively impact profitability

Acetone-phenol project, being driven by import substiution demand, could face price
competition from countries such as China and Thailand. In this case also if imports
become cheap then this will impact the company negatively.
JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ 000174034

DISCLAIMERS AND DISCLOSURES


This document has been prepared by Joindre Capital Services Limited SEBI REGN NO. INH000002061 / INZ 000174034 and is meant for the
recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. Recipients may
not receive this report at the same time as other recipients. The information contained herein is from the public domain or sources believed to be
reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based
thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be
relied upon as such. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness
cannot be guaranteed. Opinions expressed are current opinions as of the date appearing on this material only. While we endeavor to update on a
reasonable basis, the information discussed in this material, Joindre Capital Services Limited,its directors, employees are under no obligation to update
or keep the information current. Further there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and
others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Joindre Capital Services
Limited, its directors and employees and any person connected with it, will not in any way be responsible for the contents of this report or for any losses,
costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any
information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or
behaviour of investors or recipients or provide any investment/tax advice. This report is for information only and has not been prepared based on specific
investment objectives. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision
based on their own investment objectives, goals and financial position and based on their own analysis. Trading in stocks, stock derivatives, and other
securities is inherently risky and the recipient agrees to assume complete and full responsibility for the outcomes of all trading decisions that the
recipient makes, including but not limited to loss of capital. Opinions, projections and estimates in this report solely constitute the current judgment of the
author of this report as of the date of this report and do not in any way reflect the views of Joindre Capital Services Limited, its directors, officers, or
employees. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose
possession this document may come are required to inform themselves of and to observe such restriction.

CONTACT DETAILS

Mr. Avinash Gorakshakar (Research Head) Tel.: 4033 4766, Email: [email protected]

Mr. Vikas Khandelwal (Research Sr. Executive) Tel.: 4033 4900 Email: [email protected]

COMPLIANCE TEAM

Mr. A. P. Shukla (President & COF) Tel.: 4033 4723 Email: [email protected]

Mrs. Sujata Poojary (Sr. Executive ) Tel. : 4033 4567 Email: [email protected]

Mrs. Nikita Shah (Sr. Executive) Tel. : 4033 4567 Email: [email protected]

You might also like