Deepak Nitrite

Stock Opportunities Untested - but worth a good look
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DNL Q1 FY21.pdf (603.7 KB)

Q1 results are out. Consolidated Result:
Top line dropped by 36% vs LY. Similarly, PBT dropped by 34% vs LY.
Shortfall in topline was Rs. 381 cr. Of this, Rs. 170 cr shortfall is because of Phenolics.

Segment wise:
FSC revenue grew by 21% vs LY. This a good sign. However, other segments (Basic, PP and Phenolics) degrew. PP revenue fell by 76%.

However, if I look at profitability:
Basic chemical: Similar to LY
FSC: profit increased by 123%
PP: profit dropped by 95%
Phenolics: profit grew by 16%. This is a surprise given the drop in revenue.

Earlier in the posts, I read Phenolics will be a drag on margins. But it seems they have improved on it. (From 11% to 21%).

Inter-company sales is very negligible. So, it is not that they sold Acetone internally at high margin.

Disc: Invested 10% of portfolio.

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IPA capacity expansion from 30k TPA to 60k TPA announced… will be done through internal accruals.
Capex cost. 50 cr.

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A major Part of the company products being non-essential category, production and distribution seem to have got affected due to Covid19 lockdown…however long term story seems to be in tact…going by the consistent performance of the company in the past for several years…
Discl: Invested …may be biased

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Maybe I’m biased but I am ok with the results. Performance Products is the main reason the results are bad and that’s totally understandable considering the lack of demand during this quarter especially for textile. Was expecting a drop and not shocked by it at all. Basic chemicals are majority non essential ie dyes and pigments and considering the effect of lockdown considering its flat is a shock… expected worse . Specialtyy chemicals did brilliant … nothing more to say there. Expecting them to outperform for quite a while
Phenolics I’m confused about profits increasing but revenue dropping? The 30k to 60k expansion in IPA should get the revenue back on track whatever the issue was and the increase in margins may be a good thing though could also be a one off due to price fluctuations(not checked). Overall our job is to look into the future and with Specialty chemicals performing well, basic chemicals not affected much even during a lockdown and with increase in margins for phenolics(and the huge expected demand) and addition of more capacity for IPA the outlook looks good for the company and people panic selling may regret later in this FY. Performance products this and last quarter were a one off (Last quarter was too high due to dasda priced at 16 dollars and this quarter was too low due to lockdown, less demand and ultra low dasda pricing) . I believe the market knows all of this also so not expecting too much of a correction since markets look forward.
Disc: invested with a margin of 20+%. Will add more if there indeed does end up being a steep correction this quarter. I was looking for 1. The specialty chemical story playing out. 2. How they would capitalise on covid and the increased IPA capacity did that due to the sanitiser play. And that’s all my biased eyes saw. Obviously would’ve been happier with a bumper quarter but… oh well… trying times are when our resolve gets really tested. There is a reason Deepak is rated with a low PE and there’s a reason I bought it. For me The story has to change from it being a chemical company to a specialty chemical company so that it’s PE matches the likes of Rossari etc and its still on track for that story to play out this year with specialty contributing a lot more to the revenue and with IPA acting as a potential cashcow

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Anyone attended AGM? Please share notes if you have. Thanks!

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I attended the agm. Below is my notes.

[07/08, 1:37 PM] sathish kumar Jalantran: Deepak nitrite Agm
1. India’s current chemical industry size is 160bilion USD which will become 300billion USD in next 5 to 6 years
2. Given such huge demand supply is not coming up at the brisk rate
3. As improving living standards in india ,will help domestic itself will be very big demand driver for our chemical industry plus world over supply chain shift add more demand for our industry
4. Debottlenecking of agrochemicals vertical completed last quarter, large power plant will be completed at Q3 this financial year and additional IPA capacity will be coming up over q4 this financial year
5. Closely monitoring the how the priority of people changing after pandemic to decide on which vertical to give more priority to come next CapEx
6. Before pandemic infrastructure sector was given more priority but now more focus is towards life sciences, agrochemicals .
[07/08, 1:37 PM] sathish kumar Jalantran: 7. Due to not much phenol demand locally last quarter Deepak started exporting more phenol. From 8% export it went upto 25% phenol export in q1 fy21
8. Due to so much port congestion in q1 Deepak started moving lot of raw material from kochin to dahej and panipet to dahej. Seems lot of logistics issue , materials have to travel 1000km and different state with varied level of lockdown poses lot of challenges in q1 execuetion

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Free Cash Flow over last three of the company is showing very poorly at -283CR. Is there any reason for this?

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Investor Presentation

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This is because it was undergoing capex in its phenolics segment.

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Deepak Nitrite Q1 FY21 concall highlights:
-Global measures emphasizing production of chemicals out of china, looking for china plus one de-resking strategy.
-Deepak Phenolics : Demand and prices have declined.
-Isopropyl Alcohol(Critical commodity): capacity ramping up to 110%.
-Export contribution has increased, mainly to Asia and Europe and it will continue as per the management.
-Expanding IPA capacity from 30k to 60k, hope to complete it in next 9 months.
-R&D spend has doubled from last year.
-Recent brownfield expansions in Fine and Specialty segment are nearing to its end, will soon add revenue.
-Due to the impact on paper and textile industry, OBA and DASDA are in oversupply(Due to demand contraction).
-Debt to equity is 0.04 on standalone basis, and 0.45 on consolidated basis.
-Improved margins in Fine and Specialty chemicals segment(caters to Pharma and agro-chemical) would continue as per the management.
-Margins in basic chemicals have improved, due to low RM cost.
-No dependency on china for raw material.

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The Company generally tried to avoid giving finer details of earnings/margins(for IPA &DSDA)/capex (on current IPA and proposed expansion in IPA) when questioned by analysts.The Investor presentation given by the Company was below standard. When market is giving the Company valuation of 5 times Book Value, we expect more disclosure, details and clarifications from the company. But one thing that was good that they did not cut short the concall and answered almost all the analysts.
Deepak phenolics main margins was on account of IPA segment as Phenol prices are very low.
In Deepak Nitrite the main margin was earlier driven by DSDA, where as per management the demand as well as prices have drastically fallen.

My take :
DSDA high margin was one time event.
IPA high margins will continue for some time may be till Q4.
Phenol margins will be subdued for a some more time.
Large CAPEX done in Deepak Phenolics might not be generating sufficient ROCE.

Phenolics plant had been been commissioned but the main margin generator at Consolidated level was DSDA/OBA. Now with DSDA/OBA high margins being things of past and high IPA margins sustainable for short term, can body highlight on their major growth driver for sustaining current valuations as I find it to be on a higher side.

Disclosure : Invested for tracking purpose and forms 2% of my portfolio.

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What I’ve seen is the company knows that they can’t rely on dsda and phenol alone since the prices fluctuate so often. Next year/when the Corona situation improves dsda demand should return(not at 16 USD though) and phenol will return to being a cash cow soon enough again too… In the mean time IPA returns will cover this. Basic chemicals margins have improved and demand isn’t badly affected but it’s not a growth driver. However, what I’m happy about is the company knows all this… right now they are concentrating on specialty chemicals (agro and pharma) where margins and demand is increasing… they’ve also almost completed brownfield expansions in the same and their R&D has doubled too hence FSC contribution will only increase from now on. IPA is another example of how the management are capable to adjusting to short term opportunities and the numbers here will make up for the lower demand and margins in phenolics this year. What I see is a company moving seriously into fine and specialty chemicals as a growth driver , with basic chemicals as a predictable safe base, performance products as a wildcard which will average out to a decent return on average over a span of time and a phenolics venture that can return huge returns in both short(IPA) and long term post forward integration. I for one have been waiting for more concentration on FSC and I’m glad the management are doing the same. And tbh I did not find anything lacking with the company’s communication to investors either… we had a Q1 update, an AGM, a seperate investor update and a concall and after all of those I feel like they’ve given us too much information if anything :slight_smile:
Disc: invested. So I am very biased
Note: I have learnt not to bet against the management. They know how to adjust to any situation thrown at them in the past and have done admirably. They gave a hint regards how phenol would be handled… demand domestically went down so they increased exports since the demand outside India increased. Due to logistics issues with the lockdown it dint work out in Q1. I wouldn’t be surprised if it works in Q2(and already expecting FSC and IPA to outperform and basic to be consistent and PP to atleast recover a little from the one-off that was last quarter)

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If the Aectone and Phenol prices had improved between March and June, then why the improvement is apparently not reflected in Deepak Phenoilc number as major contributor had been IPA segment. Can any body throw some light on it.Further the improvement in price is structural or a blip due to the ongoing lockdown.
Further my take is that Capacity utilization of around 100% in first year of operation for Phenolics is a great achievement by any standards, but that will not change the Commodity nature of Phenol and Acetone and my assesment will have to adjust the same in valuation.
So stand alone Deepak Nitrite being an established business, its valuation was fully captured in the price (i.e at sub 300 level)before Commissioning of Phenol plant. The increase in Price rise post commissioning of Deepak Phenolics was mainly due to DSDA and OBA. Now since DSDA and OBA have normalized and phenol not generating sufficient margin the price to book value is expected to align with the commodity nature of buisness.

I am keen to increase my allocation in this company but I would like to justify the valuations before entering.

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Hey Value2017 . I’d hoped my post above would clarify this but il go into more details and il even use the management quotes from their concalls and AGM for the same in a paraphrased manner:

  1. Please read the investor presentation. Management mentioned that due to lockdown they missed about a months worth of revenue. They also mentioned that the paper and textile industry was hit badly due to the lockdown. There was low demand for Phenol domestically too due to the lockdown. Now even, with all these issues their revenue for this month was just 33 percent lower than normal. With oba/dsda/phenol in so less demand this quarter should have been a washout but it wasnt. You have to ask why was that? And then check what they’ve told us
  2. Phenol demand domestically was less due to lockdown. So they began exporting it to recovering countries in Asia and Europe. They have the capacity to continue doing this even when the domestic market recovers due to all their capex.IPA and Acetone had high demand domestically and this will not stop anytime soon and now IPA will have double capacity soon. If demand slows down
    it means covid has gone …which means oba and dsda is back… so win win. They had issues exporting last quarter due to the lockdown but those issues are gone now.
  3. Growth in Specialty chemicals was 20+ percent. Since it deals in pharma and agro chem this Will continue to increase for some time. Management has almost completed brownfield expansion for the same and even finished debotttling agrochem and will complete a powerplant for the same this year. They also mentioned that they will choose capex based on people’s needs and those are veering towards life sciences instead of infra. R&D has increased too…based on what the management is saying regards FSC expect it to be for this segment. So this will be a huge growth driver. Look at the margins in specialty chemicals and look at the PE of specialty chemical companies.
  4. Basic chem margins improved and results were surprisingly flat even with a lockdown. So there’s no major surprises expected here in either direction.
    Overall, when investing in a company like Deepak nitrite expect commodity based cycles… but look at how management plugs in the gaps in a down cycle to ensure that the results don’t fall off a cliff and infact still stay stable. IPA, FSC and Phenol exports will carry Deepak through this year . The textile and paper industry will slowly come back and so will domestic demand. Now imagine Deepak nitrite in a few quarters when the upcycle returns with a FSC segment contributing a huge chunk to revenue and PAT, Phenol with high demand in both India and abroad(+forward integration at some point), paper and textile industry fully functioning for dasda and oba to be back in fashion and basic chemicals offering a safe revenue stream.
    Note: I could be wrong about all this too and I am not a SEBI advisor. So please don’t take this as an investment call from me. Please flag and delete if this is considered a repetition and doesn’t add value to the thread
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Hi everyone,
The thread has been really insightful, thanks to everyone who contributed.
My viewpoints:

Management
I’m very impressed with the management, they seem to be ‘walking the talk’. Let me take a few instances which made me feel confident about the company:

  • In FY14, the management guided that for FWA, plant will take around 3 years to reach full utilization levels and breakeven and the management went on with the loss-making entity, turned it around completely in FY19 (yes, there was a delay) but to me, it shows that the management is capable of seeing the bigger picture and taking bold decisions.
    And as luck would have it, FY20 was driven by PP (Performance Products)

  • In the annual report of 2016, they mentioned that in the long run, the Phenol and Acetone plants would be used for speciality chemicals and they seem to have executed this starting from Q1FY21 (with an opportunistic bet on IPA (Isopropyl Alcohol), which is in huge demand because of its use in sanitizers and also as a solvent in pharma industry)

  • In Dec’16, they said they expect to grow the specialty chem business at 15% CAGR for next 5 years and the results are not bad (12-13% till 2020). I wouldn’t necessarily cut their points for missing this target

I believe the management knows what they’re doing, have skin in the game, capitalizing on every opportunity they get and this decade is going to be a super interesting one :slight_smile:

Having studied Vinati Organics before this, I find the management of Deepak Nitrite to be super-hungry (huge debt for expansion in Deepak Nitrite vs no-debt Vinati Organics), this does come with downside risks obviously

One thing which investors are betting on for Deepak Nitrite, except the whole transformation of chemical industry from West to East and the China Effect is the transformation from a commodity chemicals company to specialty chemicals company and a hopeful P/E re-rating :slight_smile:

I was quite curious about the sources of future growth for DNL, so decided to dig a bit further:

Phenolics
Example 1: Isopropyl Alcohol (already started)

Raw Material required - Acetone

Deepak Nitrite recently setup a 30K MTPA plant and is doubling the capacity by Q3 FY21, so even if we normalize the current super-high price realization of IPA, it should be able to capture a decent % of demand as ‘import substitute’

From Acetone to IPA, what is heartening to see is that the company is moving towards value-added products and is competing in a big market (emphasis on change in realizations in the below table, although the increase in value added will not be equal to the exact difference of realizations, my point is that the company is ‘doing more of what it does’)

→
(Acetone Imports to India ) on the left and (Isopropyl Alcohol Imports to India) on the right

(Acetone imports link https://phreakonomics.in/export-import/micro-individual?startDate=2015-08-01&endDate=2020-08-01&currency=inr&hscode_commodity=1639&type=imports&consolidation=fy)

(IPA imports link https://phreakonomics.in/export-import/micro-individual?startDate=2015-08-01&endDate=2020-08-01&currency=inr&hscode_commodity=1542&type=imports&consolidation=fy)

A huge opportunity which DNL has with Phenolics, is to go downstream with more value added products

The below 2 examples were mentioned in their annual reports (as well as on their website) as potential products, so I just wanted to know more about them in case they decide to go ahead with this)

Example 2: Bisphenol A

Raw Material Required- Acetone, Phenol
Major Use cases include making polycarbonates (a hard, clear plastic) and epoxy resins

According to 2018 Annual Report, the local demand for BPA was ~80K MTPA and similar figure can also be obtained from the table below:

(BPA imports link https://phreakonomics.in/export-import/micro-individual?startDate=2015-08-01&endDate=2020-08-01&currency=inr&hscode_commodity=9520&type=imports&consolidation=fy)

The good part seems to be Value-Addition + Big Market

(More about BPA here Bisphenol A market Size and Share | Industry Statistics – 2028)

Example 3: Methyl Isobutyl Ketone (MIBK)

RM- Acetone
Major Use cases are as solvent for manufacturing paints, as chemical intermediates and also used in semiconductor industry

According to Annual Report 2018, the local demand for MIBK was ~28K MTPA and as can also be seen from the data below, this also presents a good opportunity for the company (not as big as BPA or IPA but still)

(MIBK imports link https://phreakonomics.in/export-import/micro-individual?startDate=2015-08-01&endDate=2020-08-01&currency=inr&hscode_commodity=1641&type=imports&consolidation=fy)

*Another potential product from their website which caught my eye was Polycarbonate, which again has Bisphenol A as its raw material (Now I might be getting carried away when Deepak has not even started with Bisphenol A :slight_smile: )
This product also has a huge market size and is imported in vast quantities in India (also it seems like GAIL is interested in the space too https://www.chemanalyst.com/industry-report/india-polycarbonate-market-76)

image

(Source for all the above data is phreakonomics.in)

FSC

While FSC has pretty good EBIT margins (20-25%) and revenue growth has also been in the range of 12-13% CAGR for the past 5 years.

image
image707×81 4.54 KB

What I am unable to decipher is how much more revenue/what growth rate can be expected from this segment in the next few years and from where? (Since FSC caters to pharma and agrochem, both of which have tailwinds as of now, is there any visibility in terms of numbers?)

This segment seems a bit opaque to me and I do not understand this fully. If anyone can elaborate more on this, I’d be really thankful

Performance Products
a) DASDA
b) OBA

Vertical Integration:
Toluene → PNT → DASDA → OBA

Trying to understand the market size,

This gives us a rough estimate of DASDA global market~250M USD , out of which Deepak Nitrite has ~12.5% as mentioned. Deepak also has a majority market share in India.

What does the future look like in this segment? Exports? Because the global market seems to be pretty big as per these (north of $800 Million)
Optical Brighteners Market Share, Trend & Analysis Report, 2024.

https://www.globenewswire.com/news-release/2020/01/14/1970031/0/en/The-Global-Optical-Brighteners-Market-size-is-expected-to-reach-1-133-23-million-by-2025-rising-at-a-market-growth-of-6-17-CAGR-during-the-forecast-period.html

What exactly am I missing here?

Looking forward to hearing other’s views :slight_smile:

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Thanks for your viewpoints. Can you please share phreakonomics web pages links when you share screenshots?

Thanks again.

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@Ansh_Gupta … Cheers for the post . Regards your question regards FSC here is most of what I know

  1. Their main products were xylidine, cumidine, nitro xylene, oximes and their main plant was in Roha. Their margins improved over the past few years due to backward integration
  2. Once covid began however they began increasing their releases in fsc: https://www.godeepak.com/catalog/26-xylidine/#.
    They’ve mentioned R&D has doubled. I suspect the reason for r&d were these FSC releases
  3. They cater to agrochemicals and pharma and wood preservatives. 2 of those sectors have huge tailwinds. So imo it looks like FSC is getting fast tracked. They’ve increased capacity via brownfield extension and.mentioned debotttling of agrochemicals+ addition of power plant. I’d assume right now the reasons are to cater to increased demand and also to increase margins. Management also said they may be concentrating on lifesciences for capex ie depending on where the demand is. I suspect once they have a clear idea of where their capex will be directed we ll know more too.
    You are right though. That’s all I’ve found regards FSC. It’s easier to understand their other products so I need more help understanding these especially since I have no chemistry background. However, the “signals” ie R&D, capex, better margins, increased growth, new products, increasing revenue contribution all point to management planning something big regards FSC. A few more quarters and all this should be clear hopefully.
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On going through their Fy’20 annual report I noticed their revenue mix by application 62% is color industry, while the company in its communique mostly focuses on pharama and agri industry.
Any input on the impact of the COVID lead disruption in the colour industry and thus Deepak?
Further, I could not find any details on the near term performance on their concall (or did I miss something)…any views here?

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Thanks to all boarders for valuable information provided in this forum which will help all of us to have a better understanding of the Company.

So as per my understanding although Phenol and acetone are commodity in nature their downstream products like IPA,Bisphenol A(and then Polycarbonate),Methyl Isobutyl Ketone are more of Speciality in nature.
For IPA they have done the CAPEX for 30000 TPA and and further doing it for another 30000 TPA. In this regard we will have to keep in mind from a long term perspective that IPA segment was making loss for Deepak Fertiliser before COVID. The demand for IPA for Pharma industry is almost at the same level during COVID period ,however demand of IPA for sanitiser peaked at 24000 TPA (in India from 2000 TPA as per DFPCL concall) and is now at around 12000 TPA, Against this incremental demand of 10000 TPA (12000TPA -2000 TPA) we have supply coming of 60000 TPA. Although at India level the demnd is around 200000 TPA against supply of 134000 TPA( DFPCL 74000 + 60000 Deepak Nitrite). As per my observation IPA supply was in surplus becasue of which DFPCL IPA segment made losses in pre COVID, however there may be structural changes in COVID and Post Covid which may significantly increase the demand of IPA. One more point is that IPA diverted for sanitisation is only a fraction of over all IPA production. Apart from this Ethanol can also be diverted for making sanitiser. It would be helpful if any of the boarder could throw some light on the long term demand scenario for IPA.

Further we also need to analyse the CAPEX required for downstream products like Bisphenol A (and then Polycarbonate),Methyl Isobutyl Ketone. Further is any special technical capability required and whether Deepak Nitrite posses that technical capability and if they have then why they did CAPEX for Phenol and Acetone and not for Bisphenol A (and then Polycarbonate),Methyl Isobutyl Ketone which are supposed to high margin product (as Phenol and Acetone were available without any constraints). As both Phenol/Acetone and its downstream derivatives would have been import substitution , would it had not been advisable for the company to go for high margin down stream derivatives products directly as a better capital allocation.

My questions would look basic and repetitive but it helps me as the response which I get are very informative . Thanks to all the learned boarders.

(I had erroneously mentioned IPA demand in India as 20000 TPA instead of 200000 TPA, which i have since rectified )

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Hi,
Let me try to answer your queries

The imports to India for IPA were between 120K-140K MTPA for the past 2 financial years
https://phreakonomics.in/export-import/micro-individual?startDate=2000-04-01&endDate=2020-08-01&currency=inr&hscode_commodity=1542&type=imports&consolidation=fy

Considering the 70K capacity of Deepak Fertilizers, the demand would be much more, ~200K MTPA (not 20K as per your post), majorly driven by pharma and chemical industries (although IPA has quite diverse applications)

Quoting directly from the report attached below,

"The pharmaceutical segment held the largest share of 34.3% based on revenue in 2019. Proven the high ethanol content in isopropyl alcohol, it has widespread applications across a multitude of industries. Demand for the chemical is growing rapidly from the pharmaceutical sector, personal care and cosmetics, chemicals, food and beverages, and paints and coatings industries worldwide. The personal care segment is likely to grow rapidly post the virus outbreak in the first quarter of 2020. The cosmetics and personal care segment captured the second largest share in 2019 and is anticipated to witness the fastest growth over the forecast period.
"
image

(Isopropyl Alcohol Market Size, Trends | Industry Report, 2020-2027
https://www.researchandmarkets.com/reports/4536092/isopropyl-alcohol-ipa-market-growth-trends)

I tried to do a quick google search regarding this but couldn’t find anything conclusive. WHO does permit both the formulations (as per Hand sanitizer - Wikipedia) for making hand sanitizers, but IPA seems to be more popular

Regarding this, I think their idea might be to have a large pool of raw materials available first (instead of importing at higher costs), and then think about the possible downstream products in which they can venture (depending on demand and feasibility), have more options available as to the different products they can make rather than setting up a new plant for a specific downstream product without having the raw materials in the first place

While it’s hard to quantify the capex required for the plants or the special technical capabilities for producing these products, the company has recently increase its R&D expenditure and will only proceed with new projects as long as they give decent margins (roughly ~15%) as per their previous track record.

Disc: Invested, views may be biased

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