Deepak Nitrite's prospect continues to be driven by phenolics biz
Deepak Nitrite will continue to accrue benefits from the country’s growing demand and import substitutions. Being a basic manufacturer, it also has a good edge over cost competition
PremiumDeepak Nitrite is seeing strong investor confidence with its stock prices more than doubling year to date. The company, which is an established manufacturer of phenol, acetone, and isopropyl alcohol through its subsidiary Deepak Phenolics, has continued to benefit from rising prices of phenol derivatives.
Global supply disruption for these chemicals during the year benefitted the company. Having created India’s largest phenol-acetone plant, the company will continue to accrue benefits from the country’s growing demand and import substitutions. Being a basic manufacturer, it also has a good edge over cost competition.
While investment rationale remains strong, in the near term there will be challenges too. Prices of phenol seem to be peaking around current levels, while acetone prices have normalized from their peak over the last two months, said analysts at Motilal Oswal Financial Services post Q2 results. EBIT margin in fine and specialty chemicals dipped for the fourth consecutive quarter and the same for basic chemicals normalized, said analysts.
In the ongoing third quarter, prices continue to correct further. Recent chemical and petrochemical prices data by Emkay Global Financial Services indicates that prices of phenol and acetone in November are down 4.9% and 11.4% over October.
Thus, there may not be benefits from rising realisations. Also, the company had achieved its highest-ever plant utilization rate of 120% in 2QFY22, leaving limited growth in this segment for volume accretion, say analysts.
The longer-term prospects nevertheless remain strong and intact. Having fully integrated manufacturing facilities will help it manage and produce chemicals with a competitive advantage. Deepak Phenolics caters to several end-user industries such as agrochemicals, rubber, pharmaceuticals, paper, textile, detergent, colorants, paints, etc. resulting in a natural hedge, say analysts.
Analysts at JM Financial expect “Sales, Ebitda and Earnings per share to post 18%, 18%, and 20% CAGR (compound annual growth rate), respectively, over FY21-24E". Despite an aggressive capex of ₹1,500 crore over FY23-24, they expect its return on capital employed (pre-tax) to remain 32% over FY23E-24E.
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