Specialty chemical stock may rally over 55% as Edelweiss bullish post Q1 results

Deepak Nitrite’s Q1FY23 results were impacted by a fire incident at Nandesari, Gujarat. Though EBITDA/PAT were down 22% each YoY, management remains confident about medium to long-term growth given the resumption in plant operations and aggressive capex plan of around 15 bn in FY23E, highlighted brokerage Edelweiss.

The brokerage house believes that Deepak Nitrite’s opportune entry into phenol and now aggressive expansion plan in phenol/acetone derivatives offers strong growth opportunity driven by import replacement. As capex commissioning begins from Q3FY23E, it expects earnings growth momentum to pick up in H2FY23E. 

Edelweiss has retained its ‘BUY’ rating on the specialty chemical stock with a target price of 3,127 per share, implying a potential upside of over 50% from current stock level. Deepak Nitrite shares are down about 20% in 2022 (YTD) so far.

Driven by strong realisation, the chemical manufacturer’s revenue growth was 36% YoY while EBITDA/PAT were down by 22%, each (above estimates). Despite a contraction in spread, the phenol business maintained profitability on a sequential basis, the brokerage had highlighted in earlier note on Q1 results.

Deepa Nitrite has an aggressive growth capex of 15 bn for FY23, aiming to increase capacity in advance intermediate and phenol derivatives. It is planning to enter solvents manufacturing, post commencement of the phenol derivatives plant. 

In the AGM, management guided for import replacement of different polycarbonates. Edelweiss believes, its entry into the value added segment of phenol will be a key positive in transitioning from a commodity player to a specialty manufacturer. Scale-up in fine and specialty business is also likely to keep margins in positive trajectory.

The company will be setting up manufacturing units for solvents such as MIBC and MIBK. It is looking to expand the phenol production through de-bottlenecking activities. Management plans to increase overall phenol production to 0.3mn tones by FY24E.

Deepak Nitrite has finalized three new products which are import replacement products used across gas liquid complex reactions. The company expects to derive 20-30% kind of EBITDA on these molecules.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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