PL Stock Report: Deepak Nitrite (DN IN) - Q2FY24 Result Update – Major growth expected post FY24 - Reduce

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

Rating: REDUCE | CMP: Rs2,076 | TP: Rs1,935

Q2FY24 Result Update – Major growth expected post FY24

Quick Pointers:

♦ Phenolics utilization stood at 135% in Q2FY24.

Deepak Nitrite (DN) reported sluggish numbers YoY (topline down 9%) on account of inventory destocking, slowdown in EU & other markets and dumping of products by China. Management expects Advanced Intermediates segment & phenolics division to recover only in H2FY24, however major volume growth to be seen post commercialization of downstream products. While we remain positive on the long term story, phenolics margins will remain under pressure due to capacity additions in China, in our view. We thereby forecast EPS to decline to Rs 61 in FY24 before recovering to Rs 88 in FY26. We anticipate ~12% EPS CAGR over FY23-26E. Considering large commodity nature of business, we value the stock at 22x P/E on FY26E EPS of Rs 88 and retain ‘Reduce’ rating with TP of Rs1,935 (earlier Rs1,803).

♦ Topline performance impacted by realizations: Revenue was at Rs17.8bn (-9% YoY/ +1% QoQ), on account of lower realizations YoY across business segments. Phenolics division impacted by 13% YoY on account of disproportionate imports from China. Inventory destocking and slowdown in EU & other markets led to lower demand across both businesses. QoQ, topline improvement of ~1% was on account of uptick in phenolics division.

♦ Bottomline up both YoY & QoQ driven by operational efficiency: EBITDA came in at Rs 3bn up ~44% QoQ on account of uptick in phenol production and optimized capacity utilisations. EBITDA margin stood at 17.0% for the quarter vs 13.8%/11.9% in Q2FY23/Q1FY24 respectively. PAT stood at Rs 2.1bn (+18%/+37% YoY/QoQ), while margins stood at 11.5% vs 8.9%/8.5% in Q2FY23 & Q1FY24 respectively.

♦ For H1FY24, topline dropped 3% YoY to Rs 13.8bn vs Rs 14.2bn majorly led by drop of 16% in phenolics division. Margins in phenolics division for the quarter came in at 11.8% vs 11.1% same period last year.

♦ Segmental Performance: Advanced intermediates revenue dropped 2%/5% YoY & QoQ to Rs 6.7bn, while EBIT margins stood at 15% for the quarter. Phenolics division was much impacted, down by 13% YoY. EBITDA margin for the business, maintained at 19% despite challenging environment and subdued demand from key industries such as agrochemicals, dyes, pigments and textiles. Phenolic’s EBIT dropped due to lowest phenol-acetone spreads witnessed in the quarter.

♦ Segmental mix of Phenolics stood at 55% in Q2FY24 with Advanced Intermediates share at 45%. Capacity utilization of phenolics division stands at ~135% for the quarter.

♦ Company has invested Rs 6bn in DCTL (wholly owned subsidiary), out of which Rs1bn was invested in Q2FY24. Also it invested approx. Rs 0.2 bn (USD 2 mn) in equity of Deepak Oman Industries; it holds 32% stake as part of financing equity to set up SNI/ SNA project at Oman.

♦ Concall takeaways: (1) Phenolics margins are usually at 15-16%; expect it to be maintained at these levels (2) Domestic to Exports mix stood at 81:19 (consolidated basis) while for standalone it was 55:45 for the quarter (3) Phenol plant achieved capacity utilization of approximately 135-136% and this is expected to go up in H2FY24 (5) Commissioning of brownfield projects will be done within 6 months except for hydrogenation brownfield which will take 8 months (6) Management’s guidance of doubling the turnover remains intact. (7) Phenolics margins sequentially improved, performance to be at similar levels of 15-18% going ahead. (8) According to management, company’s R&D team focuses on operational excellence and better product development. (9) In fine and specialty portfolio, destocking still persists; expect recovery going ahead. (10) Also certain softness in demand is seen in agrochemicals while industries such as HPC & thermal paper also saw weak demand. (11) Capex spent for H1FY24 stands at Rs 3.1bn.

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