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MOSL: DEEPAK NITRITE: Margin pressure persists in a volatile inflationary environment

.  DEEPAK NITRITE: Margin pressure persists in a volatile inflationary environment 

(DN IN, Mkt Cap USD3.4b, CMP INR1964, TP INR1887, 4% Downside, Neutral)

• DN reported a miss on our estimates. EBITDA came in 12% lower than our estimate at INR3.6b. EBITDA margin, at 17.3%, was also below our estimate of 20.5% – the lowest since 3QFY19. The miss was largely led by the Advanced Intermediates segment. EBIT margin declined to 18% in the Advanced Intermediates segment.
• The operations of the group have been reclassified under two business segments: Advanced Intermediates and Phenolics. Advanced Intermediates include Basic Intermediates, Fine and Specialty Chemicals, and the Performance Products segment. Sanjay Upadhyay has been elevated to the post of Executive Director (Finance) and Group CFO. Mr. Somsekhar Nanda has been appointed as CFO of the company in his place.
• EBIT mix for the Advanced Intermediates segment fell to 41% from 55% in 4QFY22, with the contribution from Phenolics at 59% (up from an average of 56% in FY22). In the revenue mix, the share of Advanced Intermediates declined to 35% from 41% in 4QFY22, while the share of Phenolics stood at 65% (up from an average of 62% in FY22).
• The prices of all petrochemical building blocks were high in 1QFY23, with benzene prices crossing USD1,400/t in 1QFY23. Prices of other key raw materials like nitric acid rose 2.5-3x in 1QFY23. Its performance was also affected by the fire incident at its Nandesari plant. We raise our FY23/FY24 revenue estimate by 8% due to expected strength in phenol prices.
• The company has committed to a capital investment of INR15b over the next two years in new upstream/downstream products (MIBK, MIBC, and polycarbonate), besides debottlenecking projects at its existing product lines, bolstered by strong end-use demand, an expanding Indian economy, and a China+1 strategy. It also plans to get into new chemistries like fluorination and photo chlorination.
• The stock trades at 24x/23x FY23E/FY24E EPS. With the pricing environment remaining volatile and limited earnings growth opportunities till the time greenfield expansions get commissioned (phenol downstream products will result in a captive phenol consumption of 35-40%), we maintain our Neutral rating. Valuing the stock at 22x FY24E EPS, we arrive at our TP of INR1,887.

 

Miss on EBITDA as margin remains suppressed

• Revenue was in line at INR20.6b, up 35% YoY and 10% QoQ, led by the Phenolics business. EBITDA fell 21% YoY and 13% QoQ to INR3.6b, 12% lower than our estimate. EBITDAM stood at 17.3% (v/s 21.9% in 4QFY22) – the lowest since 3QFY19. Gross margin fell 430bp QoQ to 33.9%, while the conversion cost stood at 17% (v/s 16% in 4QFY22). PAT fell 22% YoY and 12% QoQ to INR2.3b, translating into an EPS of INR17.2.
• The EBIT margin in Phenolics stood at 14% (v/s 16% in 4QFY22), with EBIT at INR1.9b. The EBIT margin in Advanced Intermediates stood at 18% (below 20% for the first time since 3QFY19) v/s 27% in 4QFY22, with EBIT at INR1.3b.
• In the revenue mix, the share of Phenolics/Advanced Intermediates stood at 65%/35% in 1QFY23. EBIT mix for Advanced Intermediates fell to 41% from 55% in 4QFY22. Contribution from Phenolics stood at 59% from 45% in 4QFY22.