Reduce Deepak Nitrite; target of Rs 2717: Prabhudas Lilladher

Prabhudas Lilladher's research report on Deepak Nitrite

DN is on an aggressive path towards implementing its Rs140bn capex plan for specialty products, phenol, BPA, polycarbonate resin/compound and MMA monomer. However, phenol and polycarbonate markets in particular appear to be in glut, while some consolidation is likely in MMA. As highlighted in our earlier reports, China has added significant capacities in phenol in a move towards self-sufficiency and is expected to turn into a net exporter, thereby pushing down margins structurally. Our report highlights how global polycarbonate demand has failed to keep pace with capacity, resulting in 62-65% utilization in CY23. As these products are based on import substitution, domestic sales of these products would not be hampered. But the company would continue to witness margin pressure. As a result, the current valuation appears stretched. However, any possible antidumping duty on Phenol could be a risk to our call.

Outlook

We expect EPS CAGR of 7% during FY24-26E (consensus: 22%). The stock is trading at 30x FY26 EV/EBITDA and 47x FY26 EPS. Valuing it at 43x FY26 EPS of Rs63 (consensus: Rs88.3), we retain ‘REDUCE’ rating on the stock with a target price of Rs2,717.