Deepak Nitrite

[Siddhantnautiyal]

Deepak Nitrite Q4FY21 Con Call

Business:
• Revenues in Q4FY21 were ₹1,469 crores (Up by 39% YOY & Up by 19% Q on Q). This was bolstered by volumes as well as realisation gains in the phenolics business that witnessed an incrementally favourable environment in the end user industries.
• Revenue growth was supported by basic chemicals & Fine & Specialty Chemicals Segment which witnessed volume growth & price firming.
• EBITDA stood at ₹ 461 crores in Q4FY21 (Up by 75% YOY & 36% Q on Q) EBITDA Margin improved to 31%( versus 25% in Q4FY20) as a result of increased productivity & operating leverage. DNL was able to build on the buoyant realisation for the phenolics product basket led by improvement in plant productivity in the operating team which was supported by efficient material handling & logistics.
• PBT stood at ₹ 390 crores (Up by 94% YOY) Primarily owing to strong results in BC, F&F & Phenolics businesses. Apart from DNL’s positive performance, PBT improved due to lower interest rates & substantial debt reduction over the last year
• PAT ₹ 290 crores in Q4FY21 (Up by 68% YOY ) as result of better operational & financial efficiency further aided by the revenue growth.
• Segmental Performance: Basic Chemicals segment revenue stood at ₹ 244 crores in Q4FY21 (Up by 9% compared to Q4FY 20 with ₹ 226 crores ) supported by strong volume growth as a result of a sharp turnaround in key end user industries along with higher realisation for specific products. This was achieved despite a significant increase in raw materials almost across the board and the company was able to pass on a lot of kickoff. EBIT increased by 27% to ₹71 crores (EBIT Margin of 29%)
• Fine & Speciality segment revenues grew by 30% to ₹ 206 crores as compared to ₹ 158 crores in Q4FY20 ,revenue growth backed by volume increment of 15%. The performance was propelled by strong demand and an appealing product line-up that is tailored to a broad diverse array of application. EBIT margin improved by 57% to ₹80 crores with an EBIT Margin of 39%.
• Performance Products segment reported revenue of ₹ 87 crores during the quarter. Performance Product segment reported lower revenues in Q4FY21 due to the impact of DASDA pricing in the base year which is exceptionally high & it is very very low at present. However, due to strong demand there us a segment volume increase of 12%. There has been significant impact in raw material price increases in performance products & the nature of the business here is that most of the revenue comes from contractual agreements which require either a price pass on or a review over a quarterly period or somehow at some point it is perfect for a 3 or 6 month period.
• Deepak Phenolics delivered an outstanding performance with revenue growth of 77%, EBIT expanded by 319% YOY translating to an EBIT margin of 28% as compared to 12% in Q4FY20. Plant efficiency measures culminated in utilisation levels exceeding 115% of defined capacity vs 98% last year as a result of healthy demand & firm realisations during the quarter, revenue for both Phenol & Acetone significantly increased to last year’s level.
• During the quarter, land development being our newly acquired Dahej site for 55 acres out of a total of 127 acres is nearing completion. The site will support capacity enhancement for key products in a standalone business & will be developed in stages.
• Plans for forward integration products based on Phenol & Acetone are being finalised & will be sharing them at an appropriate time.
• Deepak Nitrite throughout FY21, for almost all the products has maintained or gained market share for all the key accounts
• The company is reducing debt through cash flows & the Debt-equity is now at 0.5.
• In the end usage for Deepak Nitrite, Agrochemicals continued to see a strong demand for the whole year. The products which go into unique applications like personal care and in Q3FY21 & Q4FY21, we saw a resurgent in the demand for Dye Intermediates.
• Capex in Deepak Nitrite would be around ₹ 400 crores
• For Deepak Phenolics: Plans to grow in terms of our own capacity & go downstream but at the same time the right strategy would be to internally consume between 25%-30% of our basic chemical. That gives us resilience in our value chain also but at the same time we have successfully created a good niche for ourselves in our domestic market and we intend to maintain the market share.
• We are investing in greenfield production in the new sites and these will in addition to our existing technology platforms add fluorination & photo chlorination so what I want to clarify is that these are platforms. We put up the processes, we put up the towers, we put up the reactors and we have a good stable products that we look forward to making and the important point is that they fit very nicely with our existing value chains also.
• This is for us to integrate the new platforms with the existing core technologies that we possess so the investment is into products which will use all of these platforms in some permutations & combinations to give us value added new products.
• In the last 6 months we have done fantastic business selling to China also, so Deepak’s products are sold info China at very good margins.
• We are fine tuning on the long-term arrangement on a very advanced level for Contract manufacturing
• There is a bias towards fluorination & photo chlorination

Management:
• CEO: Maulik Mehta, CFO: Sanjay Upadhyay
• Deepak in partnership with its philanthropic arm has put up a 40 bed covid center with ICU & oxygen beds purchased & deployed medium & large sized oxygen PFA plants at nearby facilities. This is an addition to expanding medical & life insurance coverage for all employees & workers.
• Despite a loss of 1 month of production last year due to the lockdown, Deepak was able to record growth in the second half to erase the effects of the first half.
• The company was able to maximise utilisation of its facilities resulting in higher earnings.
• The board has recommended a dividend of ₹5.5 per share in FY21 equal to 275% of Face value. It does include a 50% special dividend to mark the company’s 50th year of operation
• Believe that the growth trajectory will continue across all of the SBUs fuelled by increase in capacity from brownfield expansion, new products that come out of Greenfield capexes & continued strong demand from our target end segments
• “We can run the plant efficiently, we know our team. We can do much more than what anybody else is doing and if you run your plant beyond 100%. If you run your plant at 115% to 120% and that too on a continuous basis. This adds a significant advantage to your operating cost. Your overhead cost is spread over to a large volume sp it reduces that. Any component of cost will have a fixed & variable component both. The fixed component gets distributed over larger & larger volumes. The key over here is how you utilise your plant to the maximum. These product in Phenol are a bulk commodity, it is more important to run your plant efficiently. How efficiently you manage makes all the difference” - Sanjay Upadhyay
• “Mr.Mehta mentioned to a group of investors that Phenolics business seems like a logistics company that happens to make Phenol & Acetone”-Maulik Mehta
• We are the largest benzene merchant buyer in the country
• “It all depends on a very simple question that we ask ourselves- what is the right to win that the company has ? Is it by going downstream because we have a particular relationship with the customer and then working upstream or is it going upstream because we have a better relationship with the supplier and what is the technology that is used? Is it something with familiarity which gives us the benefit or not. So nothing is a one trick pony. In Phenol we certainly took the decision of starting with the basic and then move downwards instead of the other way around. Luckily there is a lot of downstream application of Phenol which are all import substitutes. Many of them are now manufactured in India but there’s ample opportunity which is around”- Maulik Mehta
• China is now importing Phenol
• The volume uptick in Deepak Phenolics will happen in the first half of FY22, the one that we announced last year ( Power plant & IPA) and we have not yet announced capex in Phenolics.
• “We have a very strict template that we follow, any new investment which we call ‘Deepak’s right to win’ and that means that there must be a good reason for Deepak to invest in this product not just because it is currently looking very attractive. When we do our internal evaluation, we ask ourselves at the lowest price of the last 3 years and the highest raw material price of the last 3 years, would we still be able to make enough money to have between a 3-4 years of free cash flow position.
• There is raw material price increase
• Looking at 1.75x to 2x asset turns.
• Expecting to see a tepid demand for fuel additives in the coming quarters

Risk:
•Impact by raw material cost

[Malkd]

Thanks siddhant. I’d just like to add a few additional notes from the concall. This concall highlighted the confidence in the management regards the business model and the total lack of understanding of the “analysts” regards the business model who almost embarassed themselves with the questions asked. However, the management turned those questions into a treasure trove of info for anyone interested in understanding the business model. I will try and avoid any overlap in the brilliant summary of the concall above so will avoid talking about debt/profit etc from the concall

Basic chemicals:
Management outright said the investor community has misunderstood this term basic. Behind the scenes there’s a lot of work done juggling their products and they cater to a lot of sectors to de risk. For eg dyes, intermediates etc have had low demand but it was made up elsewhere. Basically, If one sector goes down the other comes up to make up for demand and this will always be the case. Also, a lot of downstream products can be made and hence they are automatically decreasing operational costs downsteam vs competitors.

Spec chem:
Agro and pharma has seen huge demand. They have a small number of clients but medium term visibility is good here and they are adjusting accordingly.

Performance products: the right margins here are 18 to 20 percent on average. There will be boom and bust periods but these are the average margins expected in the long run. Before deepak nitrite makes any decisions regards a new product they always check If they can still make money even when raw material cost is the highest possible and when prices are the lowest and only then they go ahead with it. This is playing out right now with performance products. Even in the current worst case scenario of contracts under low prices they are managing a profit(however small)

Phenolics:
Again, it’s just genius juggling here. IPA took up most of the demand first 2 quarters. Since then they slowed down ipa and pushed towards phenol and acetone. They can produce about 1100 tonnes per day(700 phenol and 400 acetone) and as long as they can manufacture it they can sell it either in India or abroad depending on demand. There are big downsteam plans for these too in the future. Capacity utilisation at 115 percent on average vs 90 percent from last year.

Capex:
300 crores capex planned but they can’t commit to dates since they care about their employees and the labour and covid may delay this since construction may slow down since health and safety is their primary concern. This could be a short term issue but they know and understand it and are keeping their eyes on the long term. Their capex is based only on the factors mentioned above(ie deepaks right to win) and is based on a lot of complex factors that management plans brilliantly.

China +1: They basically outright said that this is just mumbo jumbo that analysyts come up with and they don’t look at. Demand for chemicals has been up since a decade and is not because of anything in the last 1 year and even if it is they don’t make plans on short term trends. They had some interesting things to say regards aatmanirbhar too regards how our aim should be to be a global supplier and not just national and how they exhibit this with phenol.

In short, the usual parameters that analysts track ie sustainability of margins/growth plans(no guidance given. They ll just continue growing wherever they see opportunity. This underpromising and confidence is refreshing) etc just wont work here. One needs to bet on the jockeys and expect a few short term hiccups but a steady growing long term vision.

On a personal note: Of all the companies I’ve studied and tracked I’ve never seen a more genius management at tackling uncertainty and cycles using understanding of their domain(process chemistry) and pure understanding of demand and supply of their products and de risking of their business model which removes all those worries from the mind of the investor(I personally will stop tracking prices of phenol/dasda etc from now on)

Deepak Nitrite Earnings Call for Q4FY21

Disc: invested since lower levels. 25 percent of my portfolio… no transactions in the last 8 months. Not a sebi advisor

[Tar]

Just to add to above two summaries, they also hinted that they are in late stages of signing a CDMO kind of opportunity. This won’t be anything big to start with but expect sticky customers and shows how diversified the management want to make the business.

[guggillarohith]

The main MOAT of the company is its Management itself. They are able to adapt to the surrounding conditions and even take advantage out of it. If we look at DNL’s phenol plant it was an opportunity and one which they successfully grabbed. The company seems to be agile on product mixes and hence agile on their focus. But they are not venturing into products with short term benefits (due to price hikes) they are looking for products with sustainable margins and a short payback period. The Management execution capabilities are such that after selecting the product (through Deepaks right to win which is the Decision making process for Management) they not only execute they also develop MOAT along the way either through process innovation (Like running the plant at 115 percent utilization) or by developing expertise in chemical processes or in supply chain. This is helping the Company to be a low cost producer while also maintaining quality and hence they are gaining market share. I feel it all comes down to the management they deserve some credit and faith.

Disc : Views may be biased, Invested.

[shubh0496]

CBIC Notifies Continuation Of Anti Dumping Duty On Phenol From European Union And Singapore till 31st October 2021

[jeewangarg]

Bharat Shah Sir (ASK Investment Managers) ask the following question in 4Q21 concall of Deepak Nitrate, But it was not answered. If any one have any clue on that please guide us.

“I was looking at profits reported for phenolics in this quarter, it is Rs. 267 crore and then I look at the four quarters of the last year not the current year, those numbers are Rs. 59 crore, Rs. 24 crore, Rs. 41 crore and Rs. 64 crore, adding all up to Rs. 187 crore for the year 2019- 2020 so that means a single quarter is made almost 40% more profit than the entire last year. Similarly, when I see the performance products profits in the current quarter it is a tiny sum of Rs. 3 crore and last year it was Rs. 419 crore and for the current year it is hardly 5% of the entire last year’s earnings for the performance products, so is this some kind of a wide swinging lottery or there is some greater predictability about how the businesses would behave over period of time. I mean there can be some acute swings at a particular point of time I can understand but given the really large kind of swings in two businesses in opposing direction”

[a0132256]

Hi
Last year dasda is one off year as some capacity was under shut down in China and prices shooted unusually higher and mgmt indicated it was not the level to sustain . And this year the pbm happened in demand side as end user industry affected by corona so that high price of dasda came down to historical low . As this is all commodity chemical this tend to happen. Same holds true for phenol division last year spread was 400$ and now around 1300-1500$. Plus acetone and ipa all are record high level. Generally phenol follow 2-3 years commodity cycle, luckily for deepak the down cycle lasted only one year .but as mgmt always said the chemical prices are not their control, and whatever under their control they were doing excellently. In commodity business cost leadership and moving up value chain as quickly as possible Is key. That one deepak is doing rightly. As you rightly said they were catering to lot of end user industries and lot of different product so some or other products will be in upcycle and other products will be down cycle any point of time. All their plants are multi products and multi purpose capable so they can quickly change the product mix according to demand

[Chins]

My notes from the annual report. A lot of information was already known from the Q4 presentation, mentioned above around post #321. I’m reading this with a lens to understand RM risks and the smaller details about their culture that don’t make it to the investor presentation:

Supply Side

• Reading about the increased shipping expenses reported by many export driven companies, this caught my eye:

Pre-emptively tied up logistic contracts and port storage facilities in anticipation of supply chain constraints.

• Swapped credit-based raw material purchase for discounted prices to improve net costs. (Will track RM costs in Q1FY22 to see its effects, given Benzene prices are up)

• Vendor managed inventory to mitigate supply risks to key customers.

• Reducing lead time to 48 hours to address customer queries.

• Ensuring order confirmation and delivery schedules based on demand, and expected/anticipated marked prices.

• Pre-emptive updates on supply chain issues beyond the Company’s control.

• Fulfilled 100% of all orders in FY21, even during the national lockdown impacting the plants. Lost no customers.

• Goal is to develop medium-term anchor customers for key products, plan to increase R&D spent by about two times in ensuing period (FY22?)

• Target TFS score of 90% and above at all plant locations by the end of FY 2021-22.

Together for Sustainability is a joint initiative of chemical companies, founded in 2011. It focuses on the promotion of sustainability practices in the chemical industry’s supply chain, currently gathering 30 companies around a single standard of auditing and assessment.

• Committed ~ 300 Crores as a first tranche into new products for agrochemical and pharmaceutical intermediates.

• Fast-tracked capex to double IPA capacity which will help grow both topline and bottomline. ( IPA plant was commissioned by in house team during lock down and without licensor support for start-up and stabilisation )

Outlook related

• The industry valued at USD 178 billion in 2019, is projected to compound at 9.3% to USD 304 billion by 2025.

• R&D culture, PLI, India as a new destination for chemicals are the key pillars of industry development. Government has revamped policy in petroleum and chemicals to target attracting investments of 20 trillion rupees by 2035.

• (Known from previous quarters) Further developed our competency in nitration, reduction and diazotisation – and also added new platforms like fluorination and photochlorination.
  Key products:
  1,2,4 Triazinone - Herbicide from my understanding
  3-amino benzotrifluoride, 2-amino benzotrifluoride used as intermediaries to prepare herbicides.

• 5 products under development nearing commercialisation.

DNL-Product-Portfolio.pdf (336.1 KB)

Out of interest, it looks like a lot of their products start with benzenes/aromatics, and they add on a lot of value by playing with downstream products that can be made from benzene derivatives. (Valiant Organics has a similar approach starting from phenols / anilenes.)

• The pilot facility facilitates seamless scale-up from R&D trials
  to commercial production. The process safety lab has been established to support safer and faster commercialisation of new products. The environment laboratory is driving utility reduction and value from waste, aligned with our focus on sustainable chemistry.

• Page 47 highlights how important each stage of the process is to them, from their analytical team’s efforts on efficiency and purity, to the way their digital adoption has helped them:

Deploying disruptive digital tools. […] It is
helping in better monitoring of the progress at each stage and
evaluating large data to provide insights, thus making the product
development process more efficient and effective. Further, a
process simulation software was deployed to achieve first time
right scale-up of new products

Electronic Lab Notebook software (ELN) was developed
in-house for recording experimental data. This will facilitate faster
data traceability and retrieval. Artificial intelligence and machine
learning tools are enabling us to leverage the power of data
science and gain valuable insights from our internal database. A
robust roadmap has been developed for the implementation of
proprietary data.

@Tar

Just to add to above two summaries, they also hinted that they are in late stages of signing a CDMO kind of opportunity. This won’t be anything big to start with but expect sticky customers and shows how diversified the management want to make the business.

We also aim to become a partner of choice for long-term contract manufacturing activities of multinational companies.

• To those investors that value green chemistry, here are the measures they’ve taken that I think are significantly non trivial in the long term (and the additional TfS measures):
  
  

I won’t summarise the MD&A as it’s a joy to read and as usual, places Deepak Nitrite’s different business segments / leadership into context, explaining where and why they have cost leadership, and where they have high value add.

Disclosure: Invested.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/828b91cf-fc29-432f-82c1-cf30cc678c57.pdf

[KS16]

Quarterly results https://www.bseindia.com/xml-data/corpfiling/AttachLive/b2d15b59-3a41-4500-b93b-c33b2776d6ea.pdf
Came out, post-market;;; time stamp in BSE 1755 hours.

At first glance, looks a great result…

[Rafi_Syed]

A good summary by the company on the quarter passed and the future plans

[Krishna1]

Talking Point With Deepak Nitrite’s CEO Maulik Mehta:

Talking Point With Deepak Nitrite's CEO Maulik Mehta

[GARP_niveshak]

Was thinking of sharing key highlights from Q1 concall but soon realized that the entire concall was full of highlights. Even after all these years I learn something new every time this management talks and it only reinforces my belief that they will keep adding new products, new chemistry(fluorination is just the start), for years to come. Excited to see what the future holds

Disc: Invested

[Southern_Cross]

Deepak Nitrite hits record high amid reports of power outage in China

[Rationalinvestor]

Now i am really regretted !! Based on report of phenol proce drop influenced me and sold my position,kindly make sure your conviction those who hold the position . Market taught me on this !!

[nityanandparab]

There will always two sides of the story. There will be few investors/analysts who will tell to sell a stock and on other side it will be buy for few analysts. In Deepak it is not a pure play commodity player. It has done backward and forward integration for many products and they will benefit immensely from the same.

Please refer below video from SOIC for Deepak Nitrite explaining the same

Deepak Nitrite| Stock Analysis: A Diversified Chemical Company

[bimalb]

I think Deepak Nitrite has more tailwinds than other chemicals companies bcos its catering to import substitution chemical products. Due to skyrocketing logistics cost most companies will prefer Deepak rather than going for imported products even if the imported product pricing is lower. Logistics cost internationally has gone through the roof which has tilted the balance towards domestic companies like deepak positively.

On the other hand chemical companies which has majority of its business from exports will face huge cost pressure due to logistics cost which has skyrocketed.

Disc - Holding Deepak and adding more.

[mahesh.kalkar]

Last heard, phenol produced by Deepak was about 15% cheaper than imports. Hence, it could export to China. Yes, this Co has tailwinds.

Dis: Invested, recently added

[Aniesh7]

When i bought DN around 280 . Same bearish views came from few analysts and next day stock crashed to around 250 …

Rather than listening to views (- or +) , better to go by numbers… Quarter to quarter , YOY …
If it’s consistent enough , better to remain invested

Bullish and bearish views keeps coming in every stock…

Still Invested in DN …

[dhruv11]

As per Motilal Oswal top picks report and Q2 earning estimates, Deepak Nitrite Sales can grow 33% to 1318 cr. YoY and Net profit can rise 33% to 226 Cr. YoY

Disc: Invested

[dhruv11]

Mahesh, do you have the link to this information or report.