Why Deepak Nitrite’s Stock Is Outperforming Peers This Year

Shares of Deepak Nitrite Ltd. have risen more than 16 percent so far this year, outpacing peers, as analysts expect the chemical maker’s new phenol-acetone plant to boost its earnings.

The company commissioned the plant at Dahej, Gujarat, in November last year that can manufacture up to 200,000 tonnes of phenol and nearly 120,000 tonnes of acetone, a by-product, annually. The capacity utilisation is already at more than 80 percent, Chairman and Managing Director Deepak Mehta said during the earnings call for the third-quarter results. It tested 100 percent utilisation as of Jan. 16, ahead of schedule, he said.

The plant, Mehta said, generated revenue and profit after tax of Rs 320 crore and Rs 12 crore, respectively, during its operational period in the third quarter. Deepak Nitrite is yet to report the numbers of its phenol subsidiary, Deepak Phenolics Ltd., separately in its quarterly financials.

The potential to locally make phenol and acetone—used in a range of household and industrial products from dyes to pharmaceuticals—is huge as domestic production meets only 20 percent of demand, according to a report by HDFC Securities. The other two manufacturers are Hindustan Organic Chemicals Ltd. and SI Group Ltd. With the Indian phenol market expected to grow at an annualised rate of 6.5 percent by 2020 to Rs 2,800 crore, the report said Deepak Nitrite’s plant will make it the market leader.

Deepak Nitrite At A Glance

The company has three businesses:

• Basic chemicals: Dyes and pigments.
• Fine and speciality chemicals: Caters to agrochemicals, pharmaceuticals and personal care product markets.
• Performance products: Comprises two products: optical brightening and fluorescent whitening agents—used in paper, textiles and detergent manufacturing.

Deepak Nitrite has yet to respond to BloombergQuint’s queries on its growth.

Brokerage View

IIFL

• Capacity addition in standalone business and expansion into downstream derivatives of phenol-acetone business provides ample growth opportunities.
• Deepak Nitrite is on track for a sharp jump in earnings in the next financial year.
• The current spreads of Rs 40 per kilogram for phenol and acetone are higher than what’s expected in 2019-20.
• At current rates, the phenol plant can add an earnings per share of Rs 10.6, which could rise to Rs 15-20 if spreads move to Rs 45–50 per kilogram.

Antique Stock Broking

• Bullish on the prospects of incremental earnings contribution from the phenol project and the turnaround in performance products.
• The phenol project is likely to contribute around half of the operating profits in FY20.

Edelweiss

• The new phenol-acetone plant will propel the company into the next growth phase.
• Cash flows from this business would aid expansion of downstream derivatives and speciality chemicals business.

The company’s revenue averaged Rs 400 crore in the past five quarters, according to its exchange filings. It’s set to rise by an additional Rs 550-600 crore on a quarterly basis once the Dahej plant’s utilisation crosses 90 percent, according to BloombergQuint’s calculations based on the plant utilisation and market prices of acetone and phenol.

Other Growth Drivers

Deepak Nitrite is ramping up capacities of other chemicals, including sodium nitrite, nitro-toluenes and agrochemical intermediates, in its standalone business. It’s also planning backward-integration—or producing products instead of sourcing them externally—in some segments which could help sustain growth even during price correction.

Business Turnaround

The company turned around its optical brightening agents and fluorescent whitening agents business. The performance products segment, which reported losses till the quarter ended June 2018 started turning in a profit from the next quarter. That was aided by a shift from detergents and textiles towards higher-value products and customers in the paper industry. Favourable demand-supply trends resulted in improved realisations from di-amino stilbene disulphate acid, or DASDA, which is used to manufacture whitening agents and dyes.

Opportunities At Home

China’s crackdown on polluting units caused a disruption in supply, aiding Deepak Nitrite’s revenue growth as it shifted the focus to domestic market.

Key Risks

Phenol spreads, or the difference between phenol and acetone prices, declined nearly 20 percent quarter-on-quarter in the three months through December 2018. IIFL cited this as a key risk for the company, along with higher raw material costs, currency fluctuations and regulatory changes.

All the five analysts tracking Deepak Nitrite have a ‘Buy’ on the stock, with the Bloomberg consensus target implying a potential upside of 40 percent.