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MOSL: DEEPAK NITRITE (Downgrade to Neutral)-Margin normalization at the cost of near term earnings growth

DEEPAK NITRITE: Margin normalization at the cost of near term earnings growth

(DN IN, Mkt Cap USD4.4b, CMP INR2429, TP INR2300, 5% Downside, Downgrade to Neutral)

 

• DN reported a mixed bag result, with EBITDA 10% higher than our estimate at INR3.9b, while EBITDA margin was lower at 23% (est. 26.7%) – the lowest since 4QFY19. Phenolics continue to act as a drag on performance of other segments, as the EBIT margin in Fine and Specialty Chemicals dip for the fourth consecutive quarter and the same for Basic Chemicals normalize.
• EBIT mix continues to remain largely the same for the last three quarters, with contribution from Phenolics at 63% (up from an average of 51% in FY21). This comes at the cost of a decline in contribution from the most margin lucrative Fine and Specialty Chemical segment mix at 17% (v/s an average of 30% in FY21).
• With the tailwinds of demand-supply mismatch, force majeure at various plants, and China power outages (as the government takes various efforts like increasing domestic coal production quotas and lifting of the ban on Australian imports) getting gradually resolved, prices of Phenol seems to be peaking around current levels, while Acetone prices have normalized from its peak over the last two months.
• Product price normalization, combined with a continued increase in Brent prices, would result in a margin compression in this segment. The European Union, Singapore, and Korea have revoked Anti-Dumping Duty (ADD) on phenol, which as per our understanding accounts for ~10% of total phenol consumption in India. At our conference, the management had said that ADD doesn’t really impact it as importers switch to other sources of imports.