Deepak Nitrite: Can new capacities of key raw materials give it margin advantage?

Deepak Nitrite is one of the fastest growing and trusted chemical intermediates companies in India with a diversified portfolio of products that caters to multiple industries with myriad applications. 

DNL is recognized globally as a ‘Responsible Manufacturer’ and as a ‘Supplier of Choice’ by marquee customers. Led by an able management team, DNL has leveraged process expertise, technological prowess, and operational excellence to capitalise on opportunities for growth and deliver sustained value for stakeholders.

Owing to increasing number of facilities catering multi-products, integrated production processes, similar economic characteristics of products and business scenario, the Chief Operating Decision Maker (CODM) evaluates the performance of the Group as two business segments and allocates resources based on value generated from these segments.

Company delivered a resilient performance this quarter enabling them to begin FY23 on an encouraging note with healthy topline growth. Stable demand and strong output, predicated on high plant efficiency served as the primary growth drivers. Company will continue to focus on extending their product portfolio by graduating new products from their R&D pipeline. Company is confident that their growing footprint across established and new chemistries will enable them to sustain the key momentum.

Given the increasing demand in the market on a worldwide scale, the company predicts healthy growth for India over the medium-to-long term. The company is well positioned to capture incremental demand and profit from the country's growing trend of import substitutions. The exciting pipeline of products encompassing solvents, amongst others, including MIBK and MIBC projects approved by the Board will enable us to capitalise on this trend.

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.

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.

For Advanced Intermediates, profitability was not commensurate with the revenue growth chiefly because of two factors - rising input prices and lag effect in passing on the prices to customers. Margins will improve in the ensuing quarters as periodic repricing of products is a regular business process.

For Phenolics Strong top-line performance steered by volume gains and maintaining customer wallet share across key products supported by the significant achievement of the plant clocking average utilisation of ~129%.

Revenue growth of 35% yoy has been achieved despite the loss of production at the Nandesari unit for nearly one month during the quarter due to the unfortunate incident of fire.

Update on projects

To enhance its backward integration capabilities, the company has proposed to add new capacities of key raw materials. This will not only ensure stable supply of key inputs but also offer a margin advantage.

The company is also expanding its capacity for captive treatment of waste. This will lead to a reduction in procurement of the targeted chemical from the open market and is expected to be commissioned in Q3 FY22. Brownfield expansion of key products are underway, and commissioning is targeted post completion of the captive waste treatment facility mentioned above.

For various projects under implementation at the new site at Dahej, engineering and other works, as well as formalities,the  are ongoing towards introduction of various derivatives of Phenolics products.

China+1 strategy to unfold opportunities

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.

Deepak nitrite will tend to significantly gain from immense opportunities unfolding in the sector through ‘Makethe the  in India for the World’ initiative as well as strong recurrence of China+1 strategy.

Moreover, Rs. 15 billion worth of projects lined up by the company across key product lines, is a testament to company’s focus on continued growth and profitability in medium-to-longthe a  term, and sustained shareholder value creation. The company will continue to be a partner of choice for leading Indian and global conglomerates by leveraging deep chemistry expertise and robust manufacturing set-up.

The company is well poised to drive incremental gains across both the segmentthe the  on the back of scheduled commissioning of key projects in this and next financial year. Brownfield expansion of select products. Strengthening backward integration capabilities of key inputs which will also enhance margins. Value-added downstream derivatives of Phenol and Acetone including solvents. Adding new chemistry platforms of photo chlorination and fluorination.

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment relatedinvestment-related decision.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar