Motilal Oswal's research report on Deepak Nitrite
The phenol/acetone spread over raw materials has declined 16% YoY to INR90/kg during 2HFY23 till date (v/s INR107/kg in 2HFY22) on account of China’s Covid-related lockdowns, which resulted in stockpiling of Phenol and disruption in trade activities. China’s stepstoward self- sufficiency in phenol and increased competition in the region could result in a structural glut in the overall market, in turn leading to the downtrend in phenol margins to continue. DN’s planned capex of INR15b in FY23-24 aimed partly for backward integration and partly towards downstream products of Acetone (MIBK/MIBC) should drive growth in the near term. Moreover, the recently announced INR10b expansion into Polycarbonate compounding & Nitrite project in Oman would drive growth in the medium term.
Outlook
Although the company has aggressive growth plans, the commodity nature of its products does not leave much upside for investors. If it forays into specialty products or complex commodities, it would certainly command a better valuation multiple. We reiterate our Neutral recommendation with a target price of INR1,890.
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