PL Stock Report: Deepak Nitrate (DN IN) - Q1FY24 Result Update - Bleak Outlook in near term - Reduce

Deepak Nitrate (DN IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: REDUCE | CMP: Rs2,092 | TP: Rs1,803

Q1FY24 Result Update - Bleak Outlook in near term

Quick Pointers:

♦ Lower Phenol & acetone spreads led to drop in Phenolics margins.

♦ Management expects recovery in H2FY24, however, major volume growth to be driven by downstream products post FY24E.

DN reported sluggish numbers on account of inventory destocking, slowdown in EU & other markets and dumping of products by China at cheap prices. Management expects Advanced Intermediates segment & phenolics division to recover only in H2FY24, however major volume growth to be seen post commercialization of downstream products. Company’s aggressive growth plans for backward as well as forward integration, entry into solvent & polycarbonate business to keep long term growth story intact, however near-term demand headwinds persists. While we remain positive on the long term story, we believe, phenolic margins to remain under pressure given lower phenol realizations. We thereby forecast EPS to decline to Rs 62 in FY24 before recovering to Rs 82 in FY25. We value the company at 22x FY25 EPS and recommend a Reduce rating on the stock with a target price of Rs1,803.

♦ Topline performance impacted by realizations: Revenue at Rs17.68bn (-14% YoY/ -10% QoQ) on account of lower realizations across its business segments. Phenolic division impacted on larger extent due to disproportionate imports from China, however also factors in annual shutdown (~15 days) taken by company in its facility. Inventory destocking and slowdown in EU & other markets led to lower demand across both businesses.

♦ Bottom-line down both YoY & QoQ: EBITDA dropped ~40% YoY & QoQ to Rs 2.1bn for the quarter on account of lower topline. EBITDA margins stood at 17.1% for the quarter. PAT remained impacted and stood at Rs1.5bn (-36% YoY & QoQ) while margins stood at 12.3% vs 17.2% & 18.3% kin Q1FY23 & Q4FY23 respectively.

♦ Segmental Performance: Advanced Intermediates revenue dropped 3%/12% YoY & QoQ to Rs 7.1bn while EBIT margins stood at 16% for the quarter. Phenolic division was much impacted, down by 20%/ 9% YoY & QoQ and margins dropped to 8% vs 14% & 15% in Q1FY23 & Q4FY23 respectively. Phenolic’s EBIT dropped due to lowest phenol-acetone spreads witnessed in the quarter. The revenue mix of Phenolics stood at 60% in Q1FY24, with Advanced Intermediates share at 40%. Current capacity utilization of phenolics division stands at ~135% as of Q1FY24.

♦ Concall takeaways: (1) Management guided, Revenue and EBITDA decline was in-line with contraction of Phenol spreads during the quarter on Y-o-Y basis due to disproportionate imports from China. (2) Management guided phenolics division to report better numbers YoY & QoQ while Advanced Intermediates division to recover YoY basis in Q2FY24(3) Phenol plant achieved capacity utilization of approximately 135% and this is expected to go up (~150%) post debottlenecking (4) Capex of Rs 50 bn will be funded by debt, equity funding or internal accruals, as per management. Amongst the mentioned capex, Rs 15bn to be spent on fine and specialty products while Rs 35bn towards Bis-phenol & phenol derivatives (5) Amongst the user industries, textiles, agrochemicals, dyes & pigments and paper seem to be much affected, recovery expected over medium term. (6) Margins for FY24E for Deepak Phenolics Ltd to be 12-15%, for standalone DNL to be 20-22% while overall to be around 15-18%, according to management. (7) Company’s working capital improved by Rs 1.21 bn viz Phenolics by Rs 0.82 bn and Advanced Intermediates by Rs 0.40 bn for Q1FY24.

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