Reduce Deepak Nitrite; target of Rs 2582: Prabhudas Lilladher

Prabhudas Lilladher's research report on Deepak Nitrite

Deepak Nitrite Ltd (DN) is working towards doubling its phenol capacity over the next 4-5 years through multiple forward integration projects. However, margins are likely to come under pressure due to the ongoing capacity additions in China, which may soon outpace demand. Deepak Phenolics' EBIT/kg has dropped from Rs23/kg in FY22 to Rs17/kg; we expect it to remain in the Rs16-17/kg range until FY27. Like DN, expansions in China are also in integrated fashion, thereby impacting margins across the value chain. While DN’s entry into polycarbonates and methyl methacrylate (MMA) targets import substitution to cater to the rising domestic demand, the influx of cheaper imports from China will pose a significant threat, potentially impacting margins.

Outlook

We anticipate ~8.7% EPS CAGR over FY24-27E. Considering largely commodity nature of the business, we value the stock at 36x FY27 EPS and retain ‘Reduce’ rating with TP of Rs2,582. Key risks to our recommendation would be imposing of anti-dumping duty, and diversification into value-added specialty chemicals.