Deepak Nitrite - Joindre
Deepak Nitrite - Joindre
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CMP : Rs. 251
Target Price: Rs 370 (In next 12 to 18 mths)
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
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.
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.
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.
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.
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
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).
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
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.
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
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]