Deepak Nitrite- Transformation into Specialty Player underway…
Written by- Amit Babbar (July 9 2020)
Putting basic chemistry in place and then building specialty blocks on top…this has transformed Aarti Industries from Benzene manufacturer to Specialty player supplying lucrative Benzene (and later Toluene) derivatives. PAT margins improved from 6% in 2014 to 13% in FY20- resulting in PE re-rating from 5x to 30x… Deepak Nitrite could follow a similar trajectory.
Chemicals manufacturer since 5 decades, Deepak Nitrite has history of ramping up market shares across chemistries- having dominant market share in most of its key products.
Started getting into Phenol few years back- commissioned a massive 1400 cr plant with textbook style execution.
Now sitting on an absolute goldmine as Phenol considered building block for vast number of high potential derivative products.
Company literally can pick and choose from a vast array of equally remunerative products, each with massive import substitution opportunity in India.
Opportunities include setting a polycarbonates (Bisphenol) capacity in India. Despite sizeable domestic demand, there is no domestic production of polycarbonates. These also include high margin Phenolic resins manufacturing opportunity- something no Indian manufacturer can produce at the moment.
Other big lucrative opportunities include use in agriculture and pharmaceuticals.
2 of the biggest drugs in India- Paracetamol and Aspirin- have Phenol as base material, and almost fully imported in India. Paracetamol is made by treating Phenol with Sodium Nitrate (leading to 4 Amino Phenol or PAP, the API) and Acetic Anhydride. Aspirin can be made by reacting Phenol with Salicylic Acid and Acetic Anhydride. Given the strong chemistry skills of Deepak Nitrite these should not be tough to master.
Strong chance most of the existing Phenol could get used entirely in high value derivatives itself- that would complete transition from a bulk commodity producer to a specialty chemicals producer.
Company already handpicked its first opportunity- announced capex on Isopropyl Alcohol (IPA), comes from Acetone- a co product in Phenol production facing strong tailwinds as Pharma localisation picks up. This is expected to hit peak utilisation levels in record time !
With these kind of opportunities it is baffling stock trades at a 10x (trailing) PE multiple !
Even the base product (Phenol) has zero competition as the only 2 other competitors are almost out of the market now ! New players cannot compete as tricky chemistry to master that most definitely requires outside technology- multiple players have tried in past and failed- a prominent player in west India tried with own r&d and failed miserably.
Interestingly even at this point financials for Deepak Nitrite are in much better shape than Aarti’s- with better margins and return profile and strong cash generation- almost 700 cr a year. While improved performance in DASDA segment can be argued, even on normalised basis a 1/3rd valuation difference is simply not justified.
Company recently bought a 127 acre new land for expansion, 2x the land bought earlier for Phenol- potential products’ market is so big just 1-2 product lines can potentially fill the entire 127 acres !