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Buy Deepak Nitrite for target price of Rs. 2350

Started by Michael Gonsalves, Aug 25, 2021, 02:24 PM

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Michael Gonsalves

Aug 25, 2021, 02:24 PM Last Edit: Sep 16, 2021, 03:51 AM by Michael Gonsalves
The main stocks in my portfolio are Bajaj Finance, JB Chemicals. I also have some Deepak Nitrite though not as much as I would have liked.

The stock has been a great multibagger so far.

Motilal Oswal has seen more upside in the stock. They have recommended a buy of Deepak Nitrite for a target price of Rs. 2350.

This is the logic:

QuoteFocus on advance/high value products intensifies

Deepak Nitrite (DN) is an intermediate chemical company, with a diversified
business of Basic Chemicals, Fine and Specialty Chemicals, and Performance
Products. It manufactures phenol, acetone and isopropyl alcohol (IPA)
through its subsidiary, Deepak Phenolics (DPL).

Achieved huge success with DPL: To substitute imports, DN started
commercial production of phenol, acetone, and IPA in CY18 through DPL. It
has established itself as the most reliable player, with a domestic market
share of ~65% in the first year itself. Huge opportunities lie ahead for DPL
as phenol plants in the US are facing challenges. China has also started
importing phenols. Imports into India are seeing strong growth due to lack
of supply and higher freight rates (expect domestic demand CAGR of 10-

We believe debottlenecking capex or additional expansion would lead
to huge growth in this segment. Further, with objective of moving into
value-added downstream products, with captive raw material consumption,
DPL is doubling its IPA manufacturing plant capacity to 60ktpa (likely to
commission in 1HFY22), which would result in further import substitution.
Fine and Specialty Chemicals to drive growth for DN: Backed by a
diversified portfolio mix, DN continues to leverage export demand for Fine
and Specialty Chemicals as large global customers shift to high-quality
products and diversify away from China. It recently launched two products
in Pharma and Agrochemicals, respectively. The management expects this
segment to deliver stellar performance in coming years, realizing the solid
gains accruing from further integration initiatives and capacity expansion in
established products. In Basic Chemicals, it would continue leveraging its
cost leadership position to drive market share gains.

Transition to an advanced products company: DN aims to transition from a
chemical intermediates company to an advanced products one (it is leaning
towards Life Sciences, which is the need of the hour). It would continue to
focus on launching more products under the Fine and Specialty segment and
close the gaps in its production value chain. Around 125 acres of land at
Dahej (called Dahej-II) would be developed to focus primarily on advance
specialty/intermediates in the Life Sciences segment, especially in
Fluorination. In addition to an annual capex plan of INR4b in DN, the board
has approved further investments in DPL: a) INR3.5b in specialty
intermediates, and b) INR7b in downstream products (for higher production
of Solvents). It aims to be the largest player in Solvents and capitalize on
import substitution. The increased focus on advance/high value products
would aid margin expansion, sustainability and may even command a higher
valuation multiple.

Valuation and view: DN has the most lucrative profile in the entire Specialty
Chemicals space. The management said it would facilitate import
substitution, with further integration in current processes. The
commissioning of IPA expansion and the captive power plant are expected
by the end of 1HFY22. The captive power plant would increase DPL's
competitiveness in this segment. A recovery in demand in OBA and DASDA
(i.e. Performance Chemicals) is expected over FY22, while demand for
Agrochemical and Personal Care products continue to remain robust.
Despite a capex plan of INR18b over the next three years, it is expected to
turn net cash positive by FY23E, with an FCF generation of INR17.4b over
FY22-24E. We maintain our Buy rating, with one of the best RoE profiles in
our coverage universe.

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Michael Gonsalves

According to InCred Equities, Deepak Nitrite is a cyclical stock and is overvalued. They have also claimed that there is an oversupply of Phenol.