Deepak Nitrite: Creating The Right Chemistry

Deepak Nitrite: Creating The Right Chemistry

With the Indian chemical industry considered an important component of the Indian economy since it accounts for approximately 2 per cent of the country's GDP and 15 per cent of India's manufacturing GDP, Deepak Nitrite, with its successful portfolio of chemicals, finds itself soundly established in this sector

Deepak Nitrite is acknowledged as a major manufacturer of chemical intermediates. The company has a diversified portfolio of intermediates that cater to the dyes and pigments, agrochemical, pharmaceuticals, plastics, textiles, paper, and home and personal care segments in India and overseas as well. Deepak Nitrite’s growing portfolio, which contains more than 100 products, consists of 42 per cent basic chemicals and 29 per cent each of fine and specialty chemicals and performance products. The company’s manufacturing units are located at Nandesari and Dahej in Gujarat, Roha and Taloja in Maharashtra and Hyderabad in Telangana while its research and development facility is located at Nandesari. The company gains around 35 per cent of its revenue from exports.

Industry Overview

The Indian chemical industry is considered as an important component of the Indian economy since it accounts for approximately 2 per cent of the country's GDP and 15 per cent of India's manufacturing GDP. One of the fastest growing industries in the world, currently it is ranked the fourth-largest in Asia and sixth in the world in terms of output after USA, China, Germany, Japan and Korea. The chemical sector in India is broadly classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers and fertilisers. One of the shifts in this industry is that the Chinese government has been focusing on environment protection since 2016 and has deepened its regulatory investigations to enhance production safety and moderate environment pollution.

As against such stringent environmental norms imposed in China, the Indian specialty chemicals sector has witnessed a strong performance on the back of a continued increase in demand from end-user industries and tightened global supply from China. For FY 2019, the Indian chemicals sector was around USD 160 billion with specialty chemicals contributing up to 20 per cent. Thus, it is expected that the specialty chemicals sector will grow at 10 per cent annually to almost double the market size by FY 2025.

The chemical industry is expected to be a key contributor and catalyst in achieving India’s target of USD 1 trillion manufacturing economy by 2028 from the current USD 380 billion. Currently, Indian chemical companies are enhancing capabilities and investing greater amounts in research and development to elevate their offerings, which will further help the industry to achieve the desired growth trajectory.

Business Segments

Basic Chemicals: As part of basic chemicals, the company manufactures nitrites, nitro toluidines and fuel additives. As these chemicals are high-margin, high-volume products with proportionately higher price sensitivity, cost leadership is considered a competitive advantage required for growth and profitability. For Q3FY20 the segment reported revenues of Rs 253 crore compared to Rs 219 crore in the corresponding quarter of the previous fiscal year, thus clocking a growth of 16 per cent. Owing to the company’s cost leadership position in the market as well as efforts towards widening its customer base, volumes for the segment increased by 23 per cent YoY for Q3FY20. For FY 2019, basic chemicals reported sales of Rs 893 crore – an increase of 17 per cent YoY.

Fine and Specialty Chemicals: Deepak Nitrite’s fine and specialty chemicals’ segment manufactures products such as xylidines, oximes and cumidines, among others. Products pertaining to this segment are customised as per requirements of the clients and typically manufactured in low volumes as they tend to enjoy higher value on account of the company placing extra emphasis on product quality, sustainable operations and relations between suppliers and customers. Revenues from the fine and speciality chemicals (FSC) segment for Q3FY20 increased by 17 per cent to Rs 173 crore as compared to Rs 148 crore in Q3FY19 as a result of solid realisation gains as well as favourable product mix in the export markets. By benefitting from backward integration initiatives and capacity expansion for established products, the company reported a growth of 16 per cent YoY in the segment’s revenues at Rs 536 crore for FY 2019.

Performance Products: Performance products are application chemicals consisting of optical brightening agent (OBA) and its precursor, DASDA. Deepak Nitrite is a fully integrated manufacturer of OBA with vertical integration from toluene to PNT and further into DASDA and OBA. These products are generally known to have stringent requirements in terms of performance and technical specifications. For Q3FY20, the company’s PP segment witnessed a strong growth of 76 per cent with revenue at Rs 176 crore. Since the performance of the segment is driven by a combination of factors such as focused re-orientation of customer industries and geographies, shutdown of capacities in China and enhanced operational performance, the company’s position as a fully integrated supplier of OBA has allowed it to gain from the changes in the industry. This has resulted in performance elevation with the company reporting 35 per cent YoY growth in this segment’s revenues of Rs 403 crore for FY 2019. 

Deepak Phenolics Limited
Deepak Phenolics Limited (DPL) is a wholly-owned subsidiary of Deepak Nitrite Limited which has commenced commercial production since November 2018 at its mega greenfield production facility of phenol and acetone located at Dahej in Gujarat. The facility is equipped to manufacture 200,000 MTPA of phenol and 120,000 MTPA of acetone as well as 260,000 MTPA of cumene for captive consumption. With this venture into the phenol and acetone business, the company has been able to capture the growing domestic demand while striving to substitute its imports. Despite challenges in the phenol and acetone market globally and also sluggish economic growth in the domestic market, it has still been able to increase sales volumes to sustain its leadership position in India. 

Hence, fuelled by positive growth, DPL performed extremely well on volumes, reporting capacity utilisation of over 100 per cent for the quarter ended December 2019 which resulted in gaining revenues of Rs 550 crore and a maiden quarter of PAT. As global commodities, prices of both phenol and acetone are cyclical in nature. The company has stated that it has been navigating this phase of the phenol and acetone cycle and is also investing in developing value-added derivatives through forward integration. As its trigger for growth and expansion, DPL envisions developing a comprehensive basket of downstream derivatives. 

Financials
On the financial front, considering the consolidated quarterly trends, net sales of Deepak Nitrite for Q3FY20 were Rs 1,119.86 crore, which is an increase by 46.08 per cent compared to net sales of Rs 766.63 crore reported for Q3FY19. A stable growth across the company’s business units of basic chemicals, fine and specialty chemicals and performance products resulted in the company being able to display robust performance during the quarter. Broadly, this immense growth was supported by an encouraging demand for its products in the export markets. The company’s PBDT for Q3FY20 increased by 197.43 per cent to Rs 246.03 crore from Rs 82.72 crore in Q3FY19.

The company witnessed robust PBDT growth as a result of operating leverage from higher volumes, realisation gains across most products and also due to the efforts of the management for optimising production schedules while increasing its focus on high-value, high-margin products. Subsequently, the company gained a net profit of Rs 156.71 crore for Q3FY20 which is significantly higher than the net profit of Rs 39.70 crore gained in Q3FY19.

Domestic revenues for Q3FY20 were calculated to be Rs 331 crore compared to Rs 293 crore reported for the same quarter of the previous fiscal year, thus clocking a growth of 13 per cent. This growth can be attributed to production efficiencies and recalibration of product mix as well as higher realisations for select products. Meanwhile, export revenues witnessed an increase by 63 per cent for Q3FY20 at Rs 251 crore for Q3FY20 as compared to Rs 154 crore for Q3FY19.The company stated that it has leveraged its deep expertise and high backward integration in certain products so as to capitalize on the tailwinds in the global supply chain for chemical intermediates. 

Looking at the annual trends, net sales for FY 2019 stood at Rs 2,699.92 crore, which is an increase by 61.08 per cent from the net sales of Rs 1,676.18 crore reported for FY 2018. As a result of supply disruptions in China, the company was able to increase its market share for some of its key products, further resulting in an increase in demand volumes. For FY 2019, its PBDT expanded by 111.54 per cent from Rs 163.45 crore to Rs 345.77 crore with the support of a positive performance delivered by DPL. Deepak Nitrite’s net profit for FY 2019 rose by 119.78 per cent to Rs 173.66 crore compared to Rs 79.02 crore gained in FY 2018.

Domestic revenues, which continue to remain a major part of the company’s turnover, contributed 68 per cent to the company’s total revenue, while export revenues represented 32 per cent contribution. Domestic revenues witnessed 25 per cent YoY growth for FY 2019 owing to robust demand from agrochemicals and pigment applications. Meanwhile, export revenues grew by 14 per cent on account of growing demand for the company’s products in the global markets.

Conclusion

Since the company has expanded its product offerings and has also enhanced certain capabilities for allowing it to develop products catering to the growing needs of the consumers, the FSC segment is expected to deliver strong performance in the coming years. In spite of the challenges that have been stirred up due to the ongoing virus pandemic, which has led to lockdowns and a drop in global demand as well a continuation of the poor economic environment, the company is expected to maintain stable operations with a positive revival. An improvement in product mix of both basic chemicals as well as FSC would partially alleviate the impact of lower volumes, which is a result of the economic slowdown. Even though margins may slightly feel the effect, lifting of trade restrictions and resuscitation of crude oil prices is expected to drive gradual recovery.

Recently, DPL commenced its commercial production of isopropyl alcohol (IPA) at its manufacturing plant at Dahej that has a manufacturing capacity of 30,000 MT of IPA annually. IPA product being a solvent which is majorly used by pharmaceutical companies and for manufacturing sanitizer, it has a positive growth trend. Deepak Nitrite also commenced the production of 2 ethyl hexyl nitrate (2EHN) which has application as one of the essential raw materials or additives used in the refining process of diesel oil produced by various refineries.

Since the company enjoys a market leadership position and also for the fact that various companies now intend to move out of China and look for establishing operations in other alternate markets, Deepak Nitrite is well-placed to find favour. Defending itself from the pandemic’s effects, the company has secured itself on the raw material front as it sources most of its requirements locally and also has a well-integrated facility. The company stands to gain from its strong technical skills, established supply chain capability, expansion in global footprint, etc., which will drive the company’s positive growth. Hence, we recommend a BUY.

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