Deepak Nitrite Likely Powered by Phenolics Biz

The company benefited from disruption in global supplies of these chemicals during the year. Having built India’s largest phenol-acetone plant, the company will continue to profit from the country’s growing demand and import substitution. Being a basic manufacturer, it also has a good edge over the cost competition.

While the investment logic remains strong, there will be challenges in the near future. Analysts at Motilal Oswal Financial Services said after Q2 results that phenol prices have peaked around current levels, while acetone prices have moderated from their peak in the past two months. Analysts said EBIT margins in fine and specialty chemicals declined for the fourth consecutive quarter and similar for basic chemicals.

Prices continue to improve further in the current third quarter. Recent chemical and petrochemical price data from Emkay Global Financial Services indicate that phenol and acetone prices in November are down 4.9% and 11.4% compared to October.

Thus, increasing receipts may not lead to profit. Besides, the company achieved its highest plant utilization rate of 120 per cent in 2QFY22, driven by limited growth in the segment to drive volumes, say analysts.

The long-term prospects are nonetheless strong and intact. Having fully integrated manufacturing facilities will help it in the management and production of chemicals with a competitive advantage. Analysts say Deepak Phenolics caters to a number of end-user industries such as agrochemicals, rubber, pharmaceuticals, paper, textiles, detergents, colorants, paints, etc., resulting in natural salvage.

Analysts at JM Financial expect “sales, EBITDA and earnings per share to post 18%, 18%, and 20% CAGR (compound annual growth rate) respectively over FY 2011-24E”. Despite the aggressive capex of 1,500 crore in FY23-24, they expect its return on capital employed (pre-tax) to be 32% as compared to FY23E-24E.