By Suhani Adilabadkar
The Indian chemical industry is the seventh largest in the world, growing at 10% annually and\ expected to touch $300 bn in the next five years. Strict Chinese environmental norms have been a boon for Indian chemical space resulting in a bull-run since 2016. Market Leader Godrej Industries and Tata Chemical’s stock price has doubled whereas niche players such as Vinati Organics and Aarti Industries have more than quadrupled over the past two years.
Deepak Nitrite (DNL), which is in 21 stock screeners, has been another important player of Indian Chemical industry and has been on stock market radar for its strong expansionary growth plans especially after robust December numbers. The company had run up to 300 levels last year from lows of Rs. 60 in 2016. The company's results are due in May 3, and it is part of the upcoming results screener that tracks stocks that delivered strong profit growth in the previous quarter.
Quick Takes
- Deepak Nitrite evolved from being a Sodium Nitrite & Sodium Nitrate producer to one of the largest chemical intermediate manufacturers in India.
- Exports contribute 35% to total turnover with Europe as its largest export contributor of about 46% to total revenue basket.
- Deepak Nitrite promoted Deepak Phenolics in 2015 to leverage on the rising Phenol & Acetone demand in India.
- DNL would be able to cater to 60% of Phenol and Acetone demand in domestic market.
- Vinati Organics leads the pack with an operating margin of 28% followed by Aarti Industries at 18% whereas DNL lags at just 14% in FY18.
Deepak Nitrite – Robust & Diversified Profile
Deepak Nitrite began its journey as Sodium Nitrite and Sodium Nitrate manufacturer in Vadodara in 1972 after being listed on BSE a year before. Currently, one of the largest chemical intermediate manufacturers in India, DNL operates through its plants at Nandesari and Dahej in Gujarat, Roha and Taloja in Maharashtra, and at Hyderabad, Telangana.
The product profile has matured over the years comprising Basic Chemicals (BC), Fine and Speciality Chemicals (FSC) and Performance Products (PP) catering to more than 1000 customers across 30 countries and 6 continents.
Half of the revenue basket is filled by Basic Chemicals which are bulk chemicals and commodities as per standard specifications. These moderate margin, high volume products can be further classified as organic chemicals such as Nitro Toluene, Ortho Toluene etc and Inorganic Chemicals such as Sodium Nitrites & Sodium Nitrates where DNL is the leading domestic manufacturer.
In layman’s language, the Basic Chemicals segment makes intermediates for dyes and pigments, rubber, fuel additives, pharmaceutical, agrochemicals and explosives. Next revenue portion of about 30% comes from Fine and Speciality Chemicals which includes niche products and products customized as per customer specifications catering to agrochemicals, pharmaceuticals, pigments and personal care.
Moving on to Performance Products segment, DNL is the only fully integrated manufacturer of Optical Brighteners (OBAs) catering to 75% of domestic demand and has expanded its footprint internationally constituting one fifth of the total revenue basket. Exports contribute 35% to total turnover with Europe as its largest export contributor of about 46% followed by Asia putting in 30% and U.S comes third at 16%.
Expansionary Growth Plans
Deepak Nitrite promoted Deepak Phenolics in 2015 to leverage on the rising Phenol & Acetone demand in India. Phenol is utilized in laminates, paints, automotive lining, adhesives and pesticides growing at CAGR of 10% - 12%. Acetone, by-product of Phenol is used by the healthcare, paints, acrylic and inks segments and is expected to grow at 6% CAGR.
DNL aims to capture this market providing a local solution in a completely import dominated market. With an outlay of Rs. 1400 cr, Deepak Nitrite has set up state-of-the-art plant to manufacture 200,000 MTPA of Phenol and 120,000 MTPA of Acetone at Dahej in Gujarat. This Greenfield Plant of Phenol & Acetone commenced commercial production in November 2018 achieving capacity utilization of above 80% during Q3 FY19. Through this, DNL would be able to cater to 60% of Phenol and Acetone demand in domestic market, as a result Phenol prices crashed in November last year.
Strong Peer Group
Commercialization of Phenol and Acetone plant has already been priced in by the market as stock price has risen by 10% since early November 2018. This seems to be low with respect to the market opportunity captured by the company.
Relatively, peers like Aarti Industries and Vinati Organics have jumped 20% and 15% respectively during the same time frame. Deepak Nitrate after 50 years of existence lags younger lot of companies such as Vinati Organics and Aarti Industries which came in around 1985 both in market cap and profitability. DNL derived its growth platform in 2015 through Phenol and Acetone domestic demand opportunity whereas its strong peer group has been spear heading its growth trajectory right from inception. Differentiation also lies in the superior product profile which supports their growth. Vinati is the world’s largest producer of Isobutyl Benzene (IBB) and 2-Acrylamido 2 Methylpropane Sulfonic Acid (ATBS) with global market share of 60% and 40% respectively whereas Aarti Industries is the largest benzene derivatives producer in the country with global market share ranging between 25-40%.
Tata Chemicals, the industry runner up, is the third largest global soda ash manufacturer has also returned to profitability boosting strong operating ratio of 21% in FY18. Vinati Organics leads the pack with operating margin of 28% followed by Aarti Industries at 18% whereas DNL lags at just 14% in FY18.
Coming to domestic phenol market, DNL is not the lone player, SI group and Hindustan Organics have a combined market share of 25-30% and imports still fulfil 10-15% demand. Thus, DNL’s long term bet on CAGR of 10% for phenol demand has not enthused long term investors. Though fundamentals seem to be intact, DNL is on a weaker wicket when it comes to long term growth prospects especially relatively to its strong peer group.