Kotak Institutional Securities initiated coverage on Deepak Nitrite Ltd. with an 'add' rating, citing a vertically integrated business model, a longstanding and successful track record of import substitution, a sizeable export presence, and established relationships with leading global customers.
Deepak Nitrite is well-positioned for healthy growth due to its dominant market shares (typically 50%+) across its key products, the Rs 15,000-crore and growing opportunity for phenolic derivatives, and its strong balance sheet, the brokerage said in a July 23 report.
The next leg of growth for Deepak Nitrite is vertical integration into downstream products. The company is embarking on an aggressive growth plan to capture the Rs 15000-crore import substitution opportunity for phenolic derivatives, including polycarbonate and various pharma solvents such as Methyl Isobutyl Ketone and Methyl Isobutyl Carbinol, the brokerage said.
In terms of strategy, throughout its 50-year history, DNL has identified products with potential for import substitution and built up dominant (typically 50–80%) market shares in them, the report said.
The company has subsequently used its dominance in basic chemicals to further integrate into specialty chemicals, such as agrochemical and pharmaceutical intermediates, that are typically exported to global customers like Bayer AG and Syngenta AG, Kotak said.
The company has tripled its research and development team in the past few years and is now widening its portfolio of agrochemicals and pharma intermediates, according to the report.
DNL's key raw materials are all basic commodities that are almost invariably sourced from the Indian market itself. The company has hardly any dependence on imported raw materials. This makes it an import-independent producer, enhancing its reliability to customers, particularly in the current context of supply-chain disruptions across the world, the report said.
The brokerage estimates 14% CAGR for the Phenolics segment and 12% in AI over FY23–30E. It expects margins to expand in both segments, due to forward integration in phenolics and recovery in AI thanks to a depressed base in FY23 (which was hurt by input cost pressures and a fire accident).
DNL's backward integration initiatives for nitric acid and BTF/BTC will start to pay off, it said.
Ebitda margins are expected to stabilise at 20–22% versus 16% in FY23. DNL gets high scores compared to peers on revenue growth and RoCE, the report said.
Kotak Institutional Equities on Deepak Nitrite
Initiates coverage with 'add' rating and a target price of Rs 2,260 apiece.
Growth drivers include phenolic derivatives and a widening portfolio of specialty chemicals.
Estimates a 14% revenue CAGR for Phenolics and 12% for AI over FY23–30E.
Aiming to more than double revenues in 5–6 years.
Phenolic derivatives are a large addressable market, served entirely via imports.
Fine and specialty chemicals are the other key growth area for DNL.
Estimate revenue/Ebitda/PAT CAGR of 13%/18%/17%, respectively, for DNL over FY23–30 on the back of the company's aggressive expansion plan.
Advanced intermediate revenues will also grow at a healthy pace, along with expanding margins.
Robust internal cash generation should help finance an aggressive capex plan; the company is also generating operating cash flow of Rs 10–12 billion per year in FY24–25.
Earnings growth will resume in FY24–25.
Key risks include new phenol capacities in China, delays in project execution, and Indian players' foray into phenol manufacturing.
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