Deepak Nitrite

Stock Opportunities Untested - but worth a good look
1

Here is a short write-up on Deepak Nitrite.

Established in 1970s by Mr. C.K. Mehta

Market leader in India for Sodium Nitrite / Nitrate & Nitro Toluenes.

DNL is a top 3 global supplier for products like Cumidines and Oximes

On par with global players in colour intermediates business

Exports are around 44% of sales (FY12) & 29% YTD (FY13)

Manufacturing of hazardous chemicals is shifting from developed economies to developing economies due to environmental hazards. India is benefiting from this trend.

Diversified customer base consisting of some of the largest chemical companies in the world, including Sygenta Global, Bayer Crop Science, BASF, Kemira, Lanxess, Clariant, Isochem, Lonza, IOC, Reliance & Essar.

Fuel additives & Solar Salts are expected to be significant growth drivers in the future.

Fuel additives grew by 56% in Fy12. It was 98 cr in FY12. In 9mFY13, it is already 130 cr with Q3 35cr. Company is expecting 150-160 cr from this segment this year.


Segments

Organic Intermediates

Inorganic Intermediates

Fine & Specialty Chemicals

Product Categories

Nitro Toluenes, Fuel Additives, Nitro Chloro Benzene, Xylidines, Cumidines

Sodium Nitrite,

Sodium Nitrate

DASDA, Oximes, Fuel Additives, Specialty chemicals

Applications

Agro-chemicals,

Pigments, Dyestuffs, Fuel

Pharmaceuticals

Pigments, Dyes,, Rubber

Chemicals, Explosives,

Food Colour, Electro

Plating Glass

Paper, Detergent, Textiles,

Agrochemicals, Fuel Additives, Pharmaceuticals

% of revenue

57%

16%

27%

Financials

Market Cap: Rs. 273.42 Crores

Current Price: Rs. 260.40

Book Value: Rs. 267.78

Stock P/E: 7.20

Dividend Yield: 2.30%

Stock is Rs. 10.00 paid up

52 Week High/Low: Rs. 325.00 / Rs. 139.00

Dividend Payout Ratio: 16.54%

Debt to equity: 1.18

(high... key monitorable)

Price to book value: 0.97

EPS FY12 = 22.06

9M EPS FY13

= 27.14

Fy13 EPS (exp) = 31-32

FY14 EPS (exp) =

38-40

For the next 2 years, earnings can grow 30%. If there is a moderate PE re-rating (only possible if the mid/small cap market sentiment improves) to 9-10, the price in a year can be around 350-400.

Disclosure: I am invested in Deepak Nitrite and my views are likely to be biased.

Views invited.


11 Likes
2

Deepak Nitrite has a very poor average ROE of ~10%. At a DE ratio of 1.2, and PE 7, it seems fundamentally expensive to me. Btw, why are they paying dividend when they have a very big debt in their balance sheet.

3

The financial numbers are low but is on a improvement track. I am expecting RoE to be closer to 20% by FY14, with a increase in asset turnover as well as shift to higher margins. I think the business has got good traction in some of its core segments and is likely to do pretty well in the future. In fact, of all the chemical / intermediate companies, this is looking one of the best to me for a 2-3 year perspective.

2 Likes
4
Call was addressed by Mr. Umesh Asaikar CEO and Mr. Sanjay Upadhyay CFO

Key highlights by Capital Mkt;

For Q3 FY'14, fuel additives, colors, heat treatment, water treatment and agrochemical industry were the main growth drivers. Exports stood about 39% of total sales and grew by about 17%. Entire export growth was purely value added growth as the shift towards value added products is happening. This together with rupee depreciation also aided the growth.

As per the management, despite domestic slowdown and world economy at stagnant stage, the company is getting the benefit of outsourcing and shifting of base from the rest of the world to India. Also China has become uncompetitive due to high labour and power costs and its own domestic issues.

The existing business is in good shape and management expects the momentum to continue. New customers both domestically and internationally are being added.

OBA business stood about Rs 37 crore for first 9 months in FY'14 and management expects the same to be around Rs 75 crore for full year. For FY'15, management expects revenue of about Rs 225 crore from OBA business. So far it's largely domestic, but in FY'15, it would be largely export driven.

At full capacity the OBA plant can generate turnover of about Rs 500 crore and about 65% of revenue will come from exports.

A total of about depreciation and interest for FY'14 will be around Rs 55 crore of which about Rs 8-10 crore is due to rupee depreciation as the company has taken an ECB for funding the project.

Phase 1 of OBC is fully capitalized but the project is scaling up gradually. Also phase 2 will be capitalized by end of FY'14 or early FY'15. Total of about Rs 125 crore will be spent in Phase 2 and total of Rs 140 crore is already been capitalized in Phase 1.

Exports which stood about 37%of revenues in FY'13 is expected to be around 43% of total revenue by FY'14 and going forward the trend will be to about 50:50 of export and domestic sales contribution respectively.

Overall net debt is about Rs 500 crore and most of the large capex is done. FY'15 will see the Balance Sheet improving and debt will gradually come down.

Raw material costs are expected to remain steady given the stagnant world economy. Plus the new business has higher operating margins. Overall, management is optimistic on scope for further margin improvement from here.

5

I have been hearing good things about Deepak Nitrite too from some savvy investors. If I remember correctly the bet was on big scale-up opportunities in Chemical/Agro-chemical manufacturing in India as China norms have become very stringent.

The numbers will look much better if significant scale-up opportunities exist/happen. We should study this in more detail.

Will ask for a summarised view from these savvy investors.

6

My approach to Deepak Nitrite is more a top down approach. The thesis is built around the fact that India is gaining competitive advantage in chemicals over china

  • Chinese Yuan has gained over 41% against the Indian Rupee in the last 5 years

  • There is huge wage inflation (Entry level worker wages have doubled in the last 3 years)
  • There is a huge backlash against pollution (air & water) and that has resulted in very stringent pollution norms being applied (Refer to latest Geremy Grantham Quarterly Letter)
  • There is acute credit crunch, and that is constraining any kind of capacity expansion

Given all these factors in play, India is bound to gain global competitiveness is certain manufacturing segments. The 3 segments that come to mind are Textiles, Light Engineering & Chemicals

So using this macro logic I tried to see which are players and Deepak Nitrites seem to be a good fit

POSITIVES

  • Their promoters have a good reputation
  • The company truly believes in R&D and constantly tries some small innovations which at times grow into good products. Case in point is Fuel Additives. From being a R&D project it is hitting 200 Cr runrate and they are only now tapping the export market
  • The company has forayed into a downstream product OWA (Optical Whitening Agents). They have done a Capex of Rs 260 Cr, and will attain a peak production of Rs 500 Cr with much better operating margins
  • The management is clear that the growth in the next few years will be better than what has been achieved in the last 2-3 years
  • The reported numbers are after absorbing the additional interest and depreciation of the new OPA plant. So once OWA start contributing from next year the reported margins should increase
  • The company is moving more intofinished product formulations, where the lead times area higherand volumes are smaller but realisations and margins are much better. Over time this will result in lower cyclicality of business and better operating margins
  • The company is a good hedge against the falling rupee (If Rupee falls which our portfolio will suffer, this stock will gain)

NEGATIVES

  • Statistically it is not the cheapest stock out there, there has been a runup in the stock
  • There is an overhang of additional capitalisation which will result in higher depreciation and interest costs, without corresponding increase in sales
  • Cyclical nature of business resulting in historically low valuation multiples
  • Their foray into CSP (Concentrated Solar Power) projects by providing Sodium Nitrate salts for heat storage medium, did not pan out as CSP as a technology has become more expensive than Solar Panels. They have had to divert into other product lines resulting in lower profitability

The company does a regular concall and it would be easy to track the progress of the company. I logged in the last call and felt the overall tone of the management wasquite positive.

2 Likes
7

Gaurav

On your China logic

What is the raw material as part of the total costs and how much is labor part of the costs?

Thanks

8

Hi Gaurav…

I don’t think there is credit crunch in China… Can you point me to the source… As you have mentioned its due to currency, labour wage etc…

Can you help me in finding the size of opportunity in Textiles and Chemicals for India for individual companies… And also, am finding it difficult to visualize the sustainability of textiles/chemicals and market re-rating the stocks…

Regards

mallikarjun

9

@excelmonkey

Haven’t done any such kind of analysis. But will dig deeper into this line of thinking.

Im not concerned about which aspect will dominate about this shift from China to India, but I do feel that collectively this trend could play out. Check out this article from latest BT issue

http://businesstoday.intoday.in/story/india-benefits-china-begins-to-lose-manufacturing-edge/1/203040.html

@Mallikarjun,

From what I read, thereseems to be a credit crunch. The call money market shot up recently duesqueeze on liquidity.There is an active Shadow bankingeconomy out there, where the unofficial rate of interests are as high as 24-36%. Check out the following links

http://www.cnbc.com/id/101364585

http://money.cnn.com/2014/01/21/investing/china-credit-crunch/

Also just do a search on CREDIT CRUNCH CHINA on google. Ull be surprised at what all is being written on it.

Rest I am not a big data cruncher. I follow large trends and see if there is an emerging opportunity or mispriced stocks. I find Textile too debt heavy, and so not too comfortable. In chemicals I am open to the idea that some of the companies could scale up in India. But whether there is a big market opportunity or there will be rerating of stocks, only time will tell.

10

Thanku Gaurav… Since China invests huge amount in other countries and usually outbids India, thought there will no credit crunch in China… They are tightening the monetary policy which where eased due to recession…

Regards

mallikarjun

11

http://m.economictimes.com/news/news-by-industry/indl-goods/svs/chem-/-fertilisers/safeguard-duty-on-import-of-chemical-used-by-pharma-industry/articleshow/31272034.cms

Good news for Deepak nitrite.

Just wondering how was a single player able to pull this off with a govt authority. Does it have political connections?

12

Call addressed by Mr. Umesh Asaikar CEO and Mr. Sanjay Upadhyay CFO

Key highlights by Capital Mkt;

Excluding FWA (Fluorescent Whitening Agents) operations on like to like basis, revenue for FY’14 grew by 19% YoY. Domestic revenue which stood at 60% of total sales, grew by 37% while exports which stood at 40% of total sales, grew by 11% YoY. Based on end user applications, strong growth was visible in industries such as fuel, colour and agrochemicals. Company saw both better volumes and realizations in domestic market, while export volumes though was stable, blended realizations was positive. Company was also able to increase its market share both domestically and in international market in FY’14.

As per the management, despite domestic slowdown and world economy at stagnant stage, the company is getting the benefit of outsourcing and shifting of base from the rest of the world to India. Also China has become uncompetitive due to high labour and power costs and its own domestic issues.

The capacity utilization at Roha and Taloja plant was at optimum level and company had to incur some de bottleneck exercise to increase the volumes and to enhance the product quality in FY’14.

OPM for FY’14 improved by 190 bps to 8.8% YoY due to improved product mix, higher efficiencies and consolidation in raw material prices. Raw material costs are expected to remain steady given the stagnant world economy. Plus the new business has higher operating margins. Overall, management is optimistic on scope for further margin improvement from here.

Revenue of FWA from Dahej facility, which is the only fully integrated plant worldwide stood at Rs 52 crore in FY’14. There was some orders for which the delivery has spilled over in Q1 FY’15.

FWA caters to major industries such as paper, detergents and textiles and enables the company to customize the formulations and allows it to offer performance solutions to large customer across the globe. The management expects the plant to take minimum 3 years to reach the peak utilization levels. At peak level, the revenue can rise to around Rs 450-500 crore.

Of the total investment of around Rs 260 crore for OBA facility about Rs 185 crore is incurred in FY’14 and the balance will be completed in FY’15. This together with normal capex on de bottlenecking the plant will be incurred in FY’15 to the tune of around Rs 40 crore.

The interest and depreciation will continue to increase further in FY’15, as the capacities gets further capitalized.

Subsequently, management expects normal capex of about Rs 40 crore. The company is open for inorganic growth opportunities as and when available.

Overall, the existing business is in good shape and management expects the momentum to continue. It expects about 15-17% growth in FY’15 of the existing businesses, while FWA business will add further turnover and margin in FY’15. New customers both domestically and internationally are being added.

Overall net debt is about Rs 505 crore with debt equity ratio of about 1.64.

The company adequately hedges its foreign currency exposure and there are no positions that are kept open, unless there is a natural hedge.

Overall, the management is confident of the company and is poised to pursue the next chapter of growth.

1 Like
13

**Call was add. by Mr. Umesh Asaikar CEO & Mr. Sanjay Upadhyay CFO.**Key highlights by Capital Mkt;
Exports contribute about 39% of total revenue in H1 and grew by about 23% YoY. Based on end user applications, the strongest growth in volumes has come from products catering to the industries of petrochemicals, dyes & pigments and fluorescent whitening agents.
Overall management is confident about the future outlook of the company.
The company was able to widen the base of Fluorescent Whitening Agents (FWA) within the paper, textiles and detergents segment. Management expects to reach 40% capacity utilization of Optical Brightening Agent (OBA) within the FWA division, by the year end FY 2015 where the segment will cash break even. Ramp up happening of OBA division every month. The company exports to countries like China and EU. Margins of OBA are improving every quarter. Margins in Q3 and Q4 FY 2015 will improve further.
For the new Acetone and Phenol plant, the ground work will start from Dec 2014. The company has entered with Kellogg Brown & Root (KBR) of USA__for technology agreement for Acetone and Phenol plant. Further details on capex and funding arrangements will be shared by the management by the year end.
Fine and Specialty chemicals caters to Agrochemical industry and in H1 FY’15, there was some uneven monsoon which resulted in skewed growth. Going forward management expects better margins in this segment in H2 FY’15. Thus overall, at company’s level, the margins will be even better in H2 FY’15.
Total debt stands at Rs 558 crore as on Sep’14 with debt equity ratio of 1.55
There was a marginal foreign currency gain during the quarter
Overall, management continues to remain positive about existing business and margin outlook and is gearing itself for the future.

14

Call addressed by Mr. Umesh Asaikar CEO and Mr. Sanjay Upadhyay CFO. Key highlights by Capital Mkt

There was a continuous moderation in prices of Bulk Chemicals and some specialty chemicals and fuel additives as well due to continuous fall in crude oil prices. What happens is in a downward spiral of raw material prices, there is a destocking of inventory and demand compression starts taking place. Demand generally gets postponed during such times. So while fundamentals remain unchanged, no company would like to lock in the inventories. This resulted in lower sales and profits for Q3 FY’15. Once crude price stabilize, sales growth will improve

While situation continues, there is some improvement on QoQ basis. Management is hopeful for things to be better from February 2015 end onwards. Overall Q4 will be better than Q3 FY’15 but will continue to be tepid compared to Q4 on YoY basis.

OBA business is not affected in any way by crude oil. Also US which is major markets for OBA, continues to do well. Current production of OBA stands at 22% and it will take about 55% of capacity utilization to break even, which the management expects to happen in H2 FY’16. Company recorded net sales of about Rs 125 crore of OBA for 9 months ended Dec’15.The company has a debt of about Rs 595 crore with 1.73 as debt equity ratio

Total costs of the Phenol and Aceton project will be about Rs 1200 crore of which about 60% will be funded by debt and rest by equity and internal accruals. For equity, the company will raise an amount upto Rs. 200 crore by way of Qualified Institutional Placement of Equity Shares.The agreement for technology and engineering services has been tied up with Kellogg, Brown & Root International, Inc. (KBR). M/s. ThyssenKrupp Industrial Solutions (India) Pvt. Ltd. (formerly known as UDHE) has been selected as the EPCM contractor.

There has been moderation in prices of certain raw materials especially the petrochemical intermediates which are linked to the price of crude oil. Company will get the benefits of the lower raw material costs, once inventory issues are over and things stabilizes.

15

CONFERENCE CALL - from Capital Markets

Confident of improving margins further

Deepak Nitrite held its conference call on 18th May 2016 which was addressed by Mr. Umesh Asaikar CEO

Key highlights

  • The company sold its land in Pune in April’16 and realized around Rs 69 crore. Also it surrendered its lease hold right on an adjusting land which generated around Rs 9.66 crore. These funds together with around Rs 83 crore from QIP proceeds will contribute towards the funding requirements for the green field project of Phenol and Aceton in Dahej.

  • Already around Rs 67 crore has been deployed on the project. The company has also started the seed marketing of Phenol and has achieved good response.

  • The company will have a Phenol capacity of around 2 lakh tons. The total market demand of Phenol in India is around 2.6 lakh tons and is growing around 5-7% every year 80% of the total requirements is imported. There are 2 local players who are smaller in size and capability and one of them is earning Ebidta of around 15%. Thus the demand in local market will absorb entire production of the company.

  • Currently, Phenol is imported largely from US, EU and China in India. Further Indian government has already imposed anti dumping duty on imports of Acetone and Phenol in India in lieu of Make in India concept. Management expects the demand of Phenol to increase further given the change in consumption trend of end user industry.

  • The company, within the fine specialty chemicals business, has been able to add new pharmaceutical and personal care customers which are high potential business. The revenues put together from these businesses were around Rs 40 crore in FY’16. Given the pipeline of expected business and interactions with the customers, management expects this business to reach to around Rs 300 crore in next 3 years.

  • OBA turnover stood at Rs 171 crore as compared to Rs 121 crore for Mar’15. OBA segment reached Ebidta break in Mar’16 quarter. Management expects a turnover of more than Rs 250 crore from this segment in FY’17, with break even at PAT level. Even at Rs 325 crore of turnover, the company will be operating only at around 65% of capacity utilization. The company is working with more than 100 clients predominately in Glass, Detergents and Paper segments.

  • No major capex planned for FY’17 barring Rs 50 crore for normal business and Phenol and Acetone green field projects.

  • Overall, going forward, management expects a minimum 100 bps margin improvement every year for next 3 years on an annualized basis, with higher margin and realization products share increasing and with OBA breaking even.

  • Overall, management is not worried that much due to global recession and is confident of higher volumes and margins going forward.

2 Likes
16

Guys, seems like this company is not attracting much attention from all boarders. Anyhow, wanted to highlight that GAIL is also setting up a phenol plant and given that the current demand is 2.6 lakh TPA while Deepak Nitrite is putting up a 2 lakh TPA plant, this might lead to crowding in the domestic market. Any views on this and on any other aspects related to the company?

Rgds
Ankit

17

@ankitkhemka7, could you please help me with link to GAIL’s phenol project? I tried to search for it but could only land up with tenders for the same, which were passed in 2014:

http://gailtenders.in/writereaddata/Tender/etender%201309_20140204_180330.pdf

I could not locate news of it finalizing these projects. Whereas, when I searched for same, there were many links about DNL’s phenol and acetone project.

Disc: invested in DNL. 7% of portfolio. Even planning to top up a bit @80 or so.

1 Like
18

http://www.gailonline.com/final_site/pdf/Analyst_PPT_FY15-16.pdf .This is the link to analyst presentation by Gail. The phenol project is upcoming as I mentioned in my previous post. The capacity is 1.08 lakh TPA, which is sufficiently large to ensure that neither of the two plants run anywhere close to capacity (since Deepak Nitrite itself mentions total demand at 2.6 lakh TPA).

Even if we assume the scenario of pent up demand coming in due to higher availability of phenol, it would have to be to the tune of 30% growth over the existing demand, which seems unlikely. Yet, this excess supply situation might not last beyond 2020 as 6% regular growth is also estimated in the demand for phenol. All this is of course contingent on no further capacity being added by any other player.

Rgds
Ankit

1 Like
19

Thanks for the link.
Incidentally, I noted that the place where they are setting up is Dahej and so is DNL. Both their tenders were floated in 2014, place is the same and rest all things also look similar. I asked one of my sources who has heavily invested in DNL and he said it’s a JV between the two. However, I would definitely want to confirm this from an authentic source, before I commit that statement. I shall write an email today to them and get back.
If it’s a JV then we need not worry about the capacity.

1 Like
20

Great, some clarity on this would be most welcome. Yet, if it were a JV, I am sure that Deepak Nitrite management would have mentioned it somewhere.

Rgds
Ankit