Deepak Nitrite - Headwinds To Persist As New Capacities Are Added: Motilal Oswal

Motilal Oswal Report

The phenol/acetone spread over raw materials has declined 16% YoY to Rs 90/kg during H2 FY23 till date (versus Rs 107/kg in H2 FY22) on account of China’s Covid-related lockdowns, which resulted in stockpiling of Phenol and disruption in trade activities.

China’s steps toward self- sufficiency in phenol and increased competition in the region could result in a structural glut in the overall market, in turn leading to the downtrend in phenol margins to continue.

Deepak Nitrite Ltd.’s planned capex of Rs 15 billion in FY23-24 aimed partly for backward integration and partly towards downstream products of Acetone (MIBK/MIBC) should drive growth in the near term. Moreover, the recently announced Rs 10 billion expansion into polycarbonate compounding and nitrite project in Oman would drive growth in the medium term.

Although Deepak Nitrite has aggressive growth plans, the commodity nature of its products does not leave much upside for investors. If it forays into specialty products or complex commodities, it would certainly command a better valuation multiple.

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