The Indian chemicals sector has been doing fairly well. The sector is up 12% in the past 90 days. Since the China+1 strategy (companies diversifying their business in countries other than China) and the shift of Indian companies focus on reducing import dependency on chemicals, this sector is seeing interesting changes. The chemicals sector is likely to clock a 9.3% CAGR growth by FY25. With the disruptions in the European markets, where European companies are unable to meet the output demand because of energy shortages, it is expected that the Indian chemicals sector has a chance to improve exports and its global market share.

Deepak Nitrite, one of India’s largest chemical companies, delivered a weak performance in Q1FY23 with its net profit falling 22.4% YoY to Rs 234.6 crore but seeing an increase in revenue by 34.7% YoY.

The revenue increase was a surprise as the company’s Nandesari plant was shut down for almost a month because of a fire incident on June 2. The plant shutdown did affect the EBITDA margin as it fell nearly 1,200 bps YoY to 18% in Q1. Margins were also affected because of high input costs thanks to fluctuating Brent crude prices and an increase in freight and logistics expenses.

The company also missed Motilal Oswal’s margin expectations. The brokerage says that the miss is because of the advanced intermediates segment as its share in the revenue mix fell to 35% in Q1FY23 from 41% in Q4FY22. (The company now classifies the advanced intermediates segment as a combination of basic chemicals, fine & specialty chemicals and performance products segments)

Despite this, the company’s revenues are on the rise and analysts at Motilal Oswal expect a further increase in revenue by 8% in FY22-23 because of the increase in prices of Phenol. For now, the Deepak Phenolics plant is already running at full capacity and it’ll be interesting to see how the company manages to increase its revenue further in Q2FY23. Trendlyne’s Forecaster also predicts an increase in revenue for Deepak Nitrite in Q2FY23.

Another concern is the company’s foray into new segments like fluorination and photochlorination. Although tapping into these segments will lead the company to market and sell more of its products in the pharma and agrochemical sectors, it will first have to prove its competency in these markets before it can think of taking on new business opportunities.

Deepak Nitrite’s last fresh foray was into the acetone and phenol segment and with the introduction of downstream derivative products, it is likely to increase its revenue from this segment. Hopefully, this remains the case with the new segments as well. Deepak Mehta, Chairman and Managing Director of Deepak Nitrite in its annual general meeting says that “the company is focused on minimizing risk by spreading into other business segments instead of being dependent on only one product line”.

Is Deepak Nitrite equipped to increase exports and capture a share of the global chemicals market?

The chemicals sector has been through a lot: it faced a shortage in raw materials causing prices to rise, supply issues, and high energy costs in FY22. Although the topline grew, margins were hurt because of rising costs and increasing expenses. According to Anand Rathi’s sector report on chemicals, pressure on margins will continue as raw material costs (power and fuel) are likely to remain high. While this was the scenario domestically, things were changing in the global chemicals market. There were supply-chain disruptions because of continuous lockdowns in China. This made companies rethink their production strategy leading to the China+1 strategy.

A second factor is the energy shortage affecting European chemical markets. Europe is the second largest producer of chemicals globally, after China. The chemical industry of Europe is among the top consumers of natural gas. To put a number to it, Europe’s chemicals market consumes 15% of natural gas production globally.

The prices of natural gas were already soaring even before the geopolitical conflict. And even though Europe may have enough energy supplies to meet production targets with their increased purchases of LNG, rising prices may force it to cut down output.

According to Anand Rathi and Motilal Oswal analysts, this is good news for Indian markets as it opens opportunities to increase exports and gain global market share. However, analysts are unsure whether these companies are well-equipped to capture the global market in terms of their capacity and output.

Analysts estimate that  Deepak Nitrite is already running at optimum capacity utilization. Its phenol plant is running at full capacity so the scope of expansion here is limited. Although Deepak Nitrite has capex plans of Rs 1,500 crore over the next two years it will still take time to ramp up production to meet demand. Numbers also suggest that the company’s export mix fell to 22% in Q1FY23.

Deepak Mehta says that the company’s focus will remain on the domestic market. Data also suggests that domestic sales as a percentage of revenue have improved for Deepak Nitrite to 78% in Q1FY23. The plan is to minimize their risk by expanding into various other business segments. So, for Deepak Nitrite, an increase in exports is not the focus in the near future.

Deepak Nitrite’s growth plans seem in place for FY23

Anand Rathi’s report suggests that the Indian chemicals sector stands to gain from the China+1 strategy and capture market share globally. Despite short-term issues, the brokerage is bullish on the sector’s long-term growth. Also, with Europe’s output likely to fall, Indian companies have a fresh opportunity to step into this geography. However, the feasibility of being able to cater effectively to global demand is still a question mark.

Although Deepak Nitrite’s export mix has dwindled, the positive from this was that the company saw lower freight and logistics costs. However, total exports see a rise of 19.7% QoQ to Rs 371 crore in Q1FY23. So, its position looks favourable in terms of growth. The company has also been working on debt reduction. It paid off debt worth Rs 280 crore in FY22. This has improved its cash and bank balance by 25% YoY in FY22.

Trendlyne’s Forecaster expects net profit to increase in Q2FY23 with an estimated net profit of Rs 266 crore. Margins are likely to reduce due to a reduction in the prices of acetone and phenol. However, the risk of Brent crude oil prices shooting up remains a major concern, with OPEC production cuts and global tensions around Russia.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.