Neutral Deepak Nitrite; target of Rs 2185: Motilal Oswal

Motilal Oswal's research report on Deepak Nitrite

Deepak Nitrite (DN) delivered a miss in 3QFY24, led by a weaker than expected performance in advance intermediate (AI). The quarter saw persistent pricing pressure by Chinese suppliers in chemical intermediates. EBITDA at INR3b missed our estimate by 15%, while PAT stood at INR2b vs. our estimate of INR2.5b. Margin also declined YoY due to the AI segment.  The management highlighted that global consumption trends have been hit as the chemical industry continued to face headwinds in 3Q. The AI segment’s weak performance was mainly attributed to the lack of demand in the agrochem, textiles, and dyes & pigments sectors; however, demand was healthy from the construction, infrastructure and home care segments. The robust performance in DPL was fueled by healthy sales volumes and better plant efficiency. The installed advanced process control system at DPL resulted in the highest-ever quarterly production figures of Phenol. However, EBIT/kg declined 7% YoY to INR12.6 in 3Q (as per our calculation). DN has undertaken debottlenecking activity at its Phenol plant both on the software and hardware fronts.

Outlook

Due to the underperformance in 3QFY24, we have cut our EBITDA/ EPS estimates by 6%/9% for FY24 while keeping our FY25/FY26 estimates broadly unchanged. The stock trades at ~30x FY25E EPS of INR77 and at ~20x FY25E EV/EBITDA. We reiterate our Neutral rating, valuing the stock at 25x Dec’25E EPS to arrive at our TP of INR2,185.