Markets
Deepak Nitrite seeks right formula to revive investor interest
Summary
- The heavy outlay towards its expansion plans will mean there will be a spike in Deepak Nitrite's debt burden in the near future after becoming virtually debt-free in FY23
Specialty chemicals company Deepak Nitrite Ltd has taken a step towards backward integration. It began operations at its fluorination plant in Dahej at an investment of ₹200 crore recently. The plant will ensure that the company does not depend on benzotrifluoride imports from China. However, the financial impact of this initiative is relatively modest.
It may add 6% to the Ebit of ₹1,171 crore seen in FY23, based on the company’s typical payback period expectation of three years. Hence, this may not renew investors’ interest in the specialty chemical stock in a big way. The stock hit its all-time high of ₹3,020 apiece in October 2021 but has traded below the peak for over two years now. It is currently trading at ₹2,134.
Recall that investors had started showing interest in specialty chemical stocks such as Deepak Nitrite post the covid-19 lockdown in China. The company had shown a steep rise of 500 basis points year-on-year in Ebitda margin to 29% in FY21.
There was a sharp re-rating of the stock with one-year forward price-to-earnings multiple reaching as high as 37.5 times during FY22 and FY23, as per Motilal Oswal Financial Services. This is much higher than the average P/E of 19.6 for the last decade. The surge in valuation could be because of the notion that the high Ebitda margin would sustain on the back of pricing power.
However, the high Ebitda margin seen in FY21 was a one-off and could be attributed to the significant fall in crude oil and its derivatives used as raw material and a temporary surge in chemical demand from India as China had shut down the manufacturing. China has reopened fully now for more than a year and the company’s Ebitda margin for FY23 fell to 16% and should stay there in FY24 as per the trend seen in the nine months to FY24.
Deepak Nitrite’s earnings growth is more correlated to capital expenditure-led volume growth rather than margin-led growth through pricing power. The company’s expansion plan is spread over the next five years, entailing investment of nearly ₹15,000 crore, largely aimed at import substitution opportunities for phenolic derivatives.
The heavy outlay will also mean there will be a spike in its debt burden in the near future after becoming virtually debt-free in FY23. Moreover, a significant improvement in profitability is far away in the future. Deepak Nitrite’s struggle to maintain Ebitda margin in a narrow band over a period due to the lack of pricing power and the consequent collapse in P/E multiple should make investors realize that chasing specialty tag in chemical companies may not always yield profit.
