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CD Equisearch Pvt Ltd April 23, 2020

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Deepak Nitrite Ltd. (DNL)

No. of shares (m) 136.4

Mkt cap (Rs crs/$m) 6236/813.5

Current price (Rs/$) 457/6.0

Price target (Rs/$) 541/7.1

52 W H/L (Rs.) 543/255

Book Value (Rs/$) 103/1.3

Beta 1.2

Daily volume NSE (avg. monthly) 834780

P/BV (FY20e/21e) 3.4/3.2

EV/EBITDA (FY20e/21e) 6.1/8.5

P/E (FY20e/21e) 9.4/13.5

EPS growth (FY19/20e/21e) 151.3/222.7/-17.9

OPM (FY19/20e/21e) 15.5/23.3/19.5

ROE (FY19/20e/21e) 17.9/43.8/26.7

ROCE(FY19/20e/21e) 11.2/26.9/20.4

D/E ratio (FY19/20e/21e) 1.1/0.7/0.4

BSE Code 506401

NSE Code DEEPAKNTR

Bloomberg DN IN

Reuters DPNT.NS

Shareholding pattern %

Promoters 45.6

MFs / Banks / FIs 16.0

Foreign Portfolio Investors 10.2

Govt. Holding -

Public & others 28.2

Total 100.0

As on Dec 31, 2019

Recommendation

ACCUMULATE

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

Consolidated (Rs crs)

FY17 FY18 FY19 FY20e FY21e

Income from operations 1370.70 1651.45 2699.92 4223.85 4197.85

Other Income 81.39* 12.29 15.12 42.10 34.27

EBITDA (other income included) 219.28 210.87 432.32 1024.51 854.69

Profit after associate profit (adjusted for EO)

43.12 66.86 174.04 561.62 461.25

EPS**(Rs) 3.67 5.08 12.76 41.18 33.82

EPS growth (%) -38.3 38.4 151.3 222.7 -17.9

*includes Rs 70.48 crs profit on sale of land and surrender of leasehold rights; ** calculated on weighted average equity.

Highlights � Dazzled by all but miraculous showing of DNL's barely pretentious

performance products business in last few quarters, DNL's consolidated

PBT surged by all but astonishing 377.6% in the first nine months of FY20

compared to that in the same period a year ago. Thanks to pinched supply

of DASDA globally, DNL's performance products business EBIT

leapfrogged nearly tenfold in the reported period, though sales advanced

by a miserly 2x. Yet margins of performance products have moderated in

last few quarters, declining to 54.1% in Q3 from 58.1% in Q1, with further

scope of moderation in coming quarters.

� Varied factors explain scarcely puny gains in margins in both basic

chemicals and fine & specialty chemicals ranging from improved product

mix to cost control to debottlenecking of existing capacity. EBIT margin of

basic chemicals, for instance, zoomed to 23.3% in Q3 (Vs 15.4% in the year

ago period), while that of FSC leapt to 33.9% (Vs 23.1%), resulting in over

55% growth in its EBIT over Q2. Basic chemicals' 23% volume growth in

Q3 did little to suppress its 74% growth in EBIT in Q3. Its expansion plans

have profusely accommodated discernible gains achievable from higher

capacity utilization and debottlenecking of its existing infrastructure.

� Stung by slower economic growth and higher input prices - though

propitiously supported by record capacity utilization - Deepak's phenolics

business suffered the brunt of abysmal crack spreads- EBIT margin: 7.6%

Vs 8.7% ; though perceptibly higher than 5.6% n Q2 when planned plant

shutdown of two weeks resulted in lower sales and EBITDA. To immunize

this business from ever-throttling volatility, plans are afoot to build cost

leadership and seek forward integration into derivative products.

� The stock currently trades at 11.1x FY20 EPS of Rs 41.18 and 13.5x FY21e

EPS of Rs 33.82. Affable impact of expanding margins of DNL’s

performance products business has been partially circumvented by

narrowing spreads on its phenol and acetone businesses in last few

quarters. Relentless fall in global benzene prices would shield torpid

realizations of phenol bring forth by harrowing fall in global crude oil

prices. Improving product mix of both basic chemicals and FSC would

partially alleviate the impact of lower volumes emanating from perceived

economic slowdown. Post tax earnings as a consequence would decline

by some 18% on lower return on capital. Weighing odds, we reckon the

stock merits an accumulate rating with revised target of Rs 541 (previous

target: Rs 396) based on 16x FY21 earnings.

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CD Equisearch Pvt Ltd


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Sourece

Outlook & Recommendation

Global Phenol Update

According to a latest report of Expert Market Research, the global phenol market is estimated to grow by 5.4% during 2020-2025

reaching $29 bn in the terminal year. The demand for phenol has been rising globally thanks to growth of its end-user industries,

rapid urbanization, changing lifestyles and rise in disposable incomes. Demand for phenol has been fueled, the report states, by

strong demand from emerging economies. Phenol market growth has also got a boost from the technological advancement in

the techniques of its production.

The report also posits that downstream uses of phenol in automotive and construction sectors would also boost demand for

phenol. Phenol market is getting a leg up from growing demand for phenol derivatives like polycarbonate and epoxy resins in

the automobile and construction sector. More pertinently, the global phenol demand is being driven by the rising demand for

alkyl phenyl, which have several industrial uses including precursors to detergents, additives in fuels and lubricants,

components of phenolic resins and tyres, coatings, adhesive, and high-performance rubber products.

Phenol prices ($/MT) Global phenol market forecast ($bn) 29

Source: echemi.com Source: www.expertmarketresearch.com

But corona virus scare has blighted the short term demand. Auto market closures in Europe due to corona virus has taken a toll

on European phenol contract prices which plummeted to 11 year low in April and spot prices to the lowest level since 2002. The

slump in prices followed a 70% decline in benzene contract prices for April to a record low. These automotive closures have

battered demand for phenol used in caprolactam (capro), but are also expected to hit bisphenol-A (BPA), depending on how

long such shutdown s and factory closures last. Corona virus-related issues have also led producers Borealis and INEOS to

postpone planned turnarounds, which should add to supply pressure.

Acetone prices ($/MT)

Source: ICIS Source: echemi.com Source: ICIS

With several countries across the globe enduring lockdown in battle against COVID 19, IHS Markit expects phenol/acetone

demand to be hit significantly, especially in the automotive, aerospace and construction sectors. It reckons that disruption in

global supply chains - shutdown of port clearances and truck and train transportation between countries - would force larger

phenol exporting countries such as South Korea, Thailand and the Middle East to look for alternative markets. In addition, the

closure of companies and businesses due to country regulations or labor shortages will inevitably lead to declining global trade,

and even more so for phenol and acetone which have low trade volumes to begin with, it contends.

20.1

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Financials & Valuation

By partially commencing operations at its plants at Nandesari, Roha, Taloja and Dahej recently, Deepak Nitrite would barely

circumvent the dreadful impact of over a month’s national lockdown on consumption. Gut-wrenching disruption in global

supply chains exacerbated by lockdown in several economies across Europe, North America and Asia, has brutally pummeled

global crude oil prices to historic lows in last few weeks. Petrochemical prices, including phenol and acetone prices, have also

swooned. Auto market closures in Europe coupled with halt down of construction activities in several countries have done

little to alleviate demand stress prevailing in global phenol market.

Notwithstanding excruciating economic stress in Q1 of current fiscal, DNL along with other Indian specialty chemical

manufacturers would gain from increasing access of global chemicals manufacturers to alternate markets other than China.

Betraying signs of tapping global markets, DNL has lined up investments of some Rs 400 crs for the current fiscal which

includes setting up solvent isopropyl alcohol (IPA) capacity at its Dahej facility, a power plant , though risks to cut in capex

looms large on account of perceived demand stress due to COVID-19. Eying future expansion, it recently bought 125 acres

industrial land at Dahej, Gujarat for nearly Rs 100 crs.

After having shoveled record profits in first nine months of FY20 ( Rs 439 crs Vs Rs 82 crs; and a meager Rs 174 crs for full year

in FY19) piggy riding on its performance products business, post tax earnings are estimated to fall by some 18% in FY21 on

barely imperceptible fall in global phenol and acetone prices and moderation in prices of DASDA and on dreadful fall in

consumption due to national lockdown; though fully assaying the impact on COVID 19 on domestic consumption is dubious

at this stage. Wherefore, return on equity would peak at ~44% in FY20 before savagely moderating to ~27% in FY21. Nerve-

wracking fall in global crude oil prices would doubtlessly pinch realizations of crude linked chemicals (read: basic chemicals;

phenol; acetone), partly reflecting in subdues asset utilization ratios for FY21.

The stock currently trades at 11.1x FY20 EPS of Rs 41.18 and 13.5x FY21e EPS of Rs 33.82. Perilous impact of the virus has

shrouded near term business visibility, precipitating some 15% cut in FY21 EPS on lower revenues; Peaking of its performance

products margins would doubtlessly take the spin from its current year earnings. Yet partial lifting of trade restrictions and

resuscitation of crude oil prices would support a gradual recovery. Commencement of acetone based downstream products

sometime in the second quarter of current fiscal would prop up revenues and so would recovery in cracks of phenol and

acetone. Balancing odds, we advise accumulating the stock with revised target of Rs 541 (previous target: Rs 396) based on 16x

FY21 earnings. For more info refer to our November report

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Cross Sectional Analysis

Company

Equity (Rs crs)

CMP (Rs crs)

Mcap (Rs crs)

Inc. from ops. (Rs crs)

Profit (Rs crs)

OPM (%)

NPM (%)

Int. coverage

ROE (%)

Mcap / IO P/BV P/E

Aarti Inds. 87 911 15874 4401 490 22.9 12.9 6.3 20.0 3.6 5.4 32.4

Atul Ltd 30 4559 13524 4186 638 21.9 15.2 95.8 22.7 3.2 4.5 21.2

Deepak Nitrite 27 457 6236 4179 531 22.9 12.7 7.0 43.1 1.5 4.4 11.8

Sudarshan Chem 14 409 2832 1689 93 15.3 5.5 12.0 16.0 1.7 4.9 30.3

calculations on ttm basis; Aarti income from operations approximated Companies not truly comparable due to product dissimilarity

Aarti's plans have scarcely wavered to put forth capex of some Rs 1000 crs in FY20 followed by at least half that amount in the

current fiscal. Yet shutdown precipitated by corona virus scare could delay project commissioning by some months. NCB

capacity expansion from 75000 tons to 108000 tons is not expected to see light of the day before FY21. Dire fall in crude oil prices

would cap expansion of revenue growth in FY21, though operating profit is projected to grow in low double digits all thanks to

entrenched focus on improving product mix of specialty chemicals. Expecting higher API demand from India, Aarti could

commission both API and intermediate facilities sometime in the current fiscal. Its new pharma capacities are aimed at higher

penetration in some key therapies such as antihypertension, cardiovascular, oncology, corticosteroids, etc.

Suppression in revenues of both life science chemicals and performance and other chemicals barely stymied margins for

operating profit of Atul in Q3 grew by 16.8% - OPMs expanded to 23.9% from 20.7% in the same quarter a year ago. PBT, as a

result, rose by a surprising 26.4% while post tax earnings advanced by a blistering 44.3%. Both the flagship performance and

other chemicals and life science chemicals businesses showed no little gains in margins for the former reported EBIT margin of

22.1% compared to 18.6% , while the latter disclosed 17.9% VS 16.3% in the same quarter a year ago. It recently notified stock

exchanges that all its plants, offices etc bar Ankleshwar plant would remain shut till May 3.

Helped by modest increase in raw material cost, Sudarshan Chemical managed to report 58.3% growth in operating profit in Q3

with OPM s expanding to 14.8% from 10.1% in the same quarter a year ago, resulting in 122.7% rise in PBT. Yet sales advanced

by a barely robust 8.3% to Rs 423.52 crs, largely buttressed by nearly 12% growth in pigments business revenues. Volumes

barely moderated for specialty pigments portfolio volumes grew by 13% while that of non-specialty portfolio increased 10%.

Exports scarcely dwindled for it accounted for 48% of total revenues in the first nine months of current fiscal from some 47% in

the same period a year ago. It has restarted production at both Roha and Mahad units in April after receiving government

approvals.

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Financials

Quarterly Results -Consolidated Figures in Rs crs Q3FY20 Q3FY19 % chg. 9MFY20 9MFY19 % chg.

Income from operations 1119.86 766.63 46.1 3174.17 1691.62 87.6

Other Income 14.74 1.09 1252.3 34.18 2.25 1419.1

Total Income 1134.60 767.72 47.8 3208.35 1693.87 89.4

Total Expenditure 861.61 659.19 30.7 2411.63 1467.22 64.4

PBIDT (other income included) 272.99 108.53 151.5 796.72 226.65 251.5

Interest 26.96 25.81 4.5 87.67 50.60 73.3

Depreciation 35.14 22.88 53.6 103.50 49.22 110.3

PBT 210.89 59.84 252.4 605.55 126.80 377.6

Tax 54.18 20.14 169.0 166.82 44.60 274.0

PAT 156.71 39.70 294.7 438.73 82.20 433.7

Extraordinary Item - - - - - -

Adjusted Net Profit 156.71 39.70 294.7 438.73 82.20 433.7 EPS (F.V. 2) 11.49 2.91 294.7 32.16 6.03 433.7

Equity 27.28 27.28 - 27.28 27.28 -

Segment Results Figures in Rs crs

Q3FY20 Q3FY19 % chg. 9MFY20 9MFY19 % chg.

Segment Revenue

Basic Chemicals 252.65 219.38 15.2 714.65 643.69 11.0

Fine & Speciality Chemicals 173.22 148.35 16.8 427.25 414.49 3.1

Performance Products 176.09 99.53 76.9 613.58 276.84 121.6

Phenolics 535.06 314.33 70.2 1469.91 385.58 281.2

Total 1137.02 781.59 45.5 3225.39 1720.60 87.5

Inter segment revenue 17.16 14.96 14.7 51.21 28.98 76.7

Income from operations* 1119.86 766.63 46.1 3174.17 1691.62 87.6

Segment EBIT

Basic Chemicals 58.98 33.89 74.0 153.48 102.27 50.1 Fine & Speciality Chemicals 58.73 34.23 71.6 124.50 99.99 24.5 Performance Products 95.31 18.12 426.0 343.24 35.33 871.5

Phenolics 40.50 27.22 48.8 123.71 18.99 551.4

Total 253.52 113.46 123.4 744.93 256.58 190.3

Interest 26.98 25.81 4.5 87.69 50.60 73.3

Other Unallocable Exp. (net of income) 15.65 27.81 -43.7 51.69 79.15 -34.7

PBT 210.89 59.84 252.4 605.55 126.80 377.6

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Financials

Income Statement - Consolidated Figures in Rs crs



Growth (%) -0.2 18.9 65.5 56.7 -0.6

Other Income 81.39 12.29 15.12 42.10 34.27

Total Income 1452.09 1663.75 2715.04 4265.95 4232.12

Total Expenditure 1232.82 1452.87 2282.72 3241.44 3377.43

EBITDA (other income included) 219.28 210.87 432.32 1024.51 854.69

Interest 36.54 47.42 86.55 119.30 93.59

EBDT 182.74 163.45 345.78 905.21 761.10

Depreciation 48.04 52.60 77.79 135.37 137.79

Tax 38.25 31.84 94.32 208.22 162.06

Net profit 96.46 79.02 173.67 561.62 461.25

Profit of associate -0.15 - - - -

Net profit after associate profit 96.31 79.02 173.67 561.62 461.25

Extraordinary item 53.19 12.15 -0.38 - -

Adjusted Net Profit 43.12 66.86 174.04 561.62 461.25

EPS (Rs.) 3.67 5.08 12.76 41.18 33.82

Segment Results Figures in Rs crs


Segment Revenue

Basic Chemicals 695.97 761.61 893.19 984.11 1033.32

Fine & Speciality Chemicals 374.82 463.24 535.64 587.25 628.36

Performance Products 264.71 300.00 402.89 773.58 657.54

Phenolics/ others 136.57 196.33 908.01 1947.19 1942.56

Total 1472.06 1721.18 2739.72 4292.13 4261.78

Inter segment revenue 17.35 45.00 39.80 68.28 63.93


Segment EBIT

Basic Chemicals 88.18 106.69 145.35 207.37 206.66

Fine & Speciality Chemicals 82.36 114.79 126.55 172.50 175.94

Performance Products -18.45 -8.14 83.23 420.04 230.14

Phenolics/ others 0.00 -6.41 95.79 157.12 174.83

Sub Total 152.10 206.93 450.92 957.03 787.57

Interest 34.12 45.15 83.25 115.08 89.39

Other Unallocable Exp. (net of income) -16.73 50.94 99.69 72.11 74.87

PBT 134.70 110.85 267.98 769.84 623.31

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Consolidated Balance Sheet Figures in Rs crs


SOURCES OF FUNDS

Share Capital 26.14 27.28 27.28 27.28 27.28

Reserves 688.72 894.86 1044.31 1499.05 1960.30

Total Shareholders Funds 714.87 922.14 1071.58 1526.33 1987.58

Long term debt 218.44 550.46 869.86 832.86 622.86

Total Liabilities 933.30 1472.60 1941.45 2359.19 2610.44

APPLICATION OF FUNDS

Gross Block 617.44 671.53 1876.26 2176.26 2506.26

Less: Accumulated Depreciation 31.51 83.97 160.43 295.80 433.59

Net Block 585.93 587.56 1715.83 1880.46 2072.66

Capital Work in Progress 349.19 954.51 33.87 50.00 40.00

Investments 118.08 31.77 2.40 2.37 2.37

Current Assets, Loans & Advances

Inventory 167.15 325.42 410.73 418.95 377.05

Sundry Debtors 360.33 411.77 574.96 661.21 694.27

Cash and Bank 14.49 48.20 25.77 30.37 39.42

Other Assets 94.27 178.07 150.26 123.93 128.55

Total CA & LA 636.24 963.46 1161.72 1234.45 1239.29

Current liabilities 803.20 1044.06 876.01 745.50 637.06

Provisions 4.10 3.54 7.62 7.29 7.65

Total Current Liabilities 807.30 1047.59 883.63 752.78 644.71

Net Current Assets -171.07 -84.13 278.09 481.67 594.58

Net Deferred Tax (net of liability) -39.08 -45.40 -77.46 -107.20 -130.53

Other Assets (Net of liabilities) 90.24 28.29 -11.28 51.89 31.36

Total Assets 933.30 1472.60 1941.45 2359.19 2610.44

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Key Financial Ratios


Growth Ratios

Revenue (%) -0.2 18.9 65.5 56.7 -0.6

EBIDTA (%) -11.8 29.3 123.3 136.7 -16.6

Net Profit (%) -32.5 55.1 160.3 222.7 -17.9

EPS (%) -38.3 38.4 151.3 222.7 -17.9

Margins

Operating Profit Margin (%) 10.2 11.1 15.5 23.3 19.5

Gross Profit Margin (%) 8.3 9.0 12.8 21.4 18.1

Net Profit Margin (%) 3.2 4.1 6.5 13.3 11.0

Return

ROCE (%) 6.0 6.1 11.2 26.9 20.4

ROE (%) 7.4 8.4 17.9 43.8 26.7

Valuations

Market Cap / Sales 1.3 2.1 1.4 1.2 1.5

EV/EBIDTA 15.4 22.2 11.3 6.1 8.5

P/E 35.8 49.0 21.5 9.4 13.5

P/BV 2.5 3.8 3.6 3.4 3.2

Other Ratios

Interest Coverage 2.8 3.0 4.1 7.5 7.7

Debt-Equity Ratio 1.0 1.1 1.1 0.7 0.4

Current Ratio 0.9 0.9 1.3 1.6 1.8

Turnover Ratios

Fixed Asset Turnover 2.3 2.8 2.3 2.3 2.1

Total Asset Turnover 1.8 1.4 1.6 2.0 1.7

Debtors Turnover 4.1 4.2 5.5 6.8 6.2

Inventory Turnover 8.2 5.9 6.2 7.8 8.5

Creditors Turnover 6.3 4.1 4.6 6.8 6.9

WC Ratios

Debtor Days 89.6 86.5 66.8 53.4 58.9

Inventory Days 44.6 62.1 59.0 46.7 43.0

Creditor Days 57.6 88.8 79.7 54.0 52.8

Cash Conversion Cycle 76.6 59.8 46.1 46.1 49.2

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Cumulative Financial Data Figures in Rs crs FY16-18 FY19-21e

Income from operations 4372 11118

Operating profit 489 2221

EBIT 374 1961

PBT 250 1662

PAT 174 1197

Dividends 57 168

OPM (%) 11.2 20.0

NPM (%) 4.0 10.8

Interest coverage 3.0 6.5

ROE (%) 9.3 28.2

ROCE (%) 6.4 20.9

Debt-equity ratio* 1.1 0.4

Fixed asset turnover 2.6 2.8

Debtors turnover 4.0 6.7

Inventory turnover 6.0 8.4

Creditors turnover 4.3 5.9

Debtors days 90.5 54.5

Inventory days 60.7 43.2

Creditor days 84.5 62.3

Cash conversion cycle 66.7 35.4

Dividend payout ratio (%) 23.9 14.1

FY16-18 implies three years ending fiscal 18; *as on terminal year; consolidated data

If it was not for the stellar turnaround of DNL's performance products business in FY20, demonstrating near seven fold jump

in cumulative PBT in three year period ending FY21 was well-nigh impossible see table). Against a cumulative deficit of some

Rs 35 crs in FY16-18, DNL’s performance products business is estimated to churn out EBIT of Rs 733 crs in FY19--21e period, no

mean feat by any scope of imagination. Yet this sublimity is not expected to last long for its margins are estimated to strikingly

fall in FY21; DASDA prices have already start to correct. Swift ramp up of Deepak Phenolics phenol and acetone project in

FY20 and to some extent roll out of its derivative products in FY21 would do little to stymie EBIT for this business is

estimated to incrementally add some Rs 428 crs to add to EBIT in FY19-21e period.

Aptly supported by largesse of DNL's FSC and basic chemicals , overall OPMs would jump to 20% in FY19-21e period compared

to just 11.2% in the preceding three period, thus flinging ROE to 28.2% - though off from over 40% in FY20. Higher free cash

flows would support a favorable financial leverage (debt-equity ratio projected to decline to 0.4 by FY21 from 1.1 in FY18) as

well as interest coverage ratio (see table). Thanks to gut-wrenching fall in crude oil prices, cash conversion cycle is estimated to

improve to 35 days from nearly 67 days in the preceding three year period.

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Financial Summary – US dollar denominated

million $ FY17 FY18 FY19 FY20e FY21e

Equity capital 4.0 4.2 3.9 3.6 3.6

Shareholders funds 107.3 138.5 150.2 202.5 251.3

Total debt 111.6 151.7 171.5 141.9 89.1

Net fixed assets (incl CWIP) 144.2 237.1 253.0 256.1 275.6

Investments 18.2 4.9 0.3 0.3 0.3

Net current assets -29.3 -16.2 35.4 63.9 69.6

Total assets 141.0 223.1 275.9 312.9 332.6

Revenues 204.3 252.8 385.8 595.9 547.7

EBITDA 22.3 30.1 61.9 144.5 111.5

EBDT 16.9 22.7 49.6 127.7 99.3

PBT 9.7 14.6 38.4 108.6 81.3

Profit after associate profit 6.4 10.4 24.9 79.2 60.2

EPS($) 0.05 0.08 0.18 0.58 0.44

Book value ($) 0.82 1.02 1.10 1.48 1.84

income statement figures translated at average rates; balance sheet and cash flow at year end rates; FY21 projections at current rates (Rs 76.65/$). All dollar denominated figures adjusted for extraordinary items.

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Exchange Rates Used- Indicative

Rs/$ FY17 FY18 FY19 FY20

Average 67.09 64.45 69.89 70.88

Year end 64.84 65.04 69.17 75.39

All $ values mentioned in the write-up translated at the average rate of the respective quarter/ year as applicable. Projections converted at

current exchange rate. Cumulative dollar figure is the sum of respective yearly dollar value.

cd equisearch pvt ltd › pdf › research-report › ...manufacturers would gain from increasing...

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