SMF - Just Installed!
Started by Michael Gonsalves, Aug 25, 2021, 02:24 PM
QuoteFocus on advance/high value products intensifiesDeepak Nitrite (DN) is an intermediate chemical company, with a diversifiedbusiness of Basic Chemicals, Fine and Specialty Chemicals, and PerformanceProducts. It manufactures phenol, acetone and isopropyl alcohol (IPA)through its subsidiary, Deepak Phenolics (DPL).Achieved huge success with DPL: To substitute imports, DN startedcommercial production of phenol, acetone, and IPA in CY18 through DPL. Ithas established itself as the most reliable player, with a domestic marketshare of ~65% in the first year itself. Huge opportunities lie ahead for DPLas phenol plants in the US are facing challenges. China has also startedimporting phenols. Imports into India are seeing strong growth due to lackof supply and higher freight rates (expect domestic demand CAGR of 10-12%). We believe debottlenecking capex or additional expansion would leadto huge growth in this segment. Further, with objective of moving intovalue-added downstream products, with captive raw material consumption,DPL is doubling its IPA manufacturing plant capacity to 60ktpa (likely tocommission in 1HFY22), which would result in further import substitution.Fine and Specialty Chemicals to drive growth for DN: Backed by adiversified portfolio mix, DN continues to leverage export demand for Fineand Specialty Chemicals as large global customers shift to high-qualityproducts and diversify away from China. It recently launched two productsin Pharma and Agrochemicals, respectively. The management expects thissegment to deliver stellar performance in coming years, realizing the solidgains accruing from further integration initiatives and capacity expansion inestablished products. In Basic Chemicals, it would continue leveraging itscost leadership position to drive market share gains.Transition to an advanced products company: DN aims to transition from achemical intermediates company to an advanced products one (it is leaningtowards Life Sciences, which is the need of the hour). It would continue tofocus on launching more products under the Fine and Specialty segment andclose the gaps in its production value chain. Around 125 acres of land atDahej (called Dahej-II) would be developed to focus primarily on advancespecialty/intermediates in the Life Sciences segment, especially inFluorination. In addition to an annual capex plan of INR4b in DN, the boardhas approved further investments in DPL: a) INR3.5b in specialtyintermediates, and b) INR7b in downstream products (for higher productionof Solvents). It aims to be the largest player in Solvents and capitalize onimport substitution. The increased focus on advance/high value productswould aid margin expansion, sustainability and may even command a highervaluation multiple.Valuation and view: DN has the most lucrative profile in the entire SpecialtyChemicals space. The management said it would facilitate importsubstitution, with further integration in current processes. Thecommissioning of IPA expansion and the captive power plant are expectedby the end of 1HFY22. The captive power plant would increase DPL'scompetitiveness in this segment. A recovery in demand in OBA and DASDA(i.e. Performance Chemicals) is expected over FY22, while demand forAgrochemical and Personal Care products continue to remain robust.Despite a capex plan of INR18b over the next three years, it is expected toturn net cash positive by FY23E, with an FCF generation of INR17.4b overFY22-24E. We maintain our Buy rating, with one of the best RoE profiles inour coverage universe.