Buy Deepak Nitrite; target of Rs 2504: CD Equisearch

CD Equisearch's research report on Deepak Nitrite

Sorted into advanced intermediates and phenolics, DNL’s product portfolio comprises organic, inorganic and fine chemicals - for use in detergents, colorants, paper, agro chemicals, rubber etc. Despite fire around the warehouse section of Deepak's Nandesari plant in Q1 which led to damage of certain property, plant and equipment and inventory, Deepak managed to report all but 26% growth in revenues of its advanced intermediates business though on little growth in its EBIT. EBIT margin thus declined to 20.2% from 23.6% in the same quarter a year ago as overall volumes dipped 15% when compared to that in same period a year ago. Accentuated by energy crisis in Europe, Deepak's phenolics business - despite decent volume growth in Q2, was badly impacted by fall in phenol prices. Margins, thence, declined to 8% from 19.3% in Q2 of previous year (14.1% in Q1), thus precipitating 53.4% drop in EBIT of phenolics segment. Rising benzene prices also spoilsport last quarter.

Outlook

The stock currently trades at 29.5 x FY23e EPS of Rs 67.22 and 22.2x FY24e EPS of Rs 89.43. Thanks to fire at its Nandesari plant and gutwrenching meltdown in margins of phenolics business - precipitated by fall in phenol prices globally - earning estimates for the current fiscal has been cut by quarter. Yet launch of new products post gradual commissioning of new integrated projects would doubtlessly support earnings next fiscal – estimated to grow by a third, though on a low base. Balancing odds, we believe that the stock merits a buy rating with revised target of Rs 2504 (previous target: Rs 2723) based on 28x FY24e earnings, over a period of 6-9 months.