Deepak Phenolics ltd

Deepak Phenolics Ltd- ‘Bridging the Phenol-Acetone Demand-Supply gap’!

March 24, 20195:17 pm

Deepak Nitrite Ltd in 2014 announced the ambitious 2,00,000 TPA Phenol plant at Dahej, Gujarat. The plant was is constructed as a 100% subsidiary of Deepak Nitrite Ltd by the name of Deepak Phenolics Ltd.

Currently, India imports more than 80% of its phenol and acetone requirement from Taiwan, Korea, Thailand, Singapore, and the US comprise major exporting countries. 

In order to substitute the import as well as keep up with the growing demand of Phenol & Acetone, the company started working towards its Phenol plant capacity with a capacity of 2,00,000 TPA. Acetone is a byproduct of Phenol manufacturing process, approximately 0.6 units of acetone is produced per unit of phenol. Hence, Acetone will be having a capacity of 1,20,000 TPA. The project will also manufacture 2,60,000 TPA of intermediate product Cumene.

Demand Supply dynamics- Phenol Acetone

India overall is a net importer of Phenol. The dahej plant of Deepak Nitrite is meant to substitute the imports. 

Demand Supply dynamics before the launch of Deepak Phenolics ltd

If you look at the below picture you can understand only  60,000 TPA of Phenol is manufactured in India and leaving a big room for Deepak Phenolics ltd to fill.

Deepak Phenolics Ltd
Phenol-Acetone (Demand Supply dynamics. Source:Annual report)
Deepak Phenolics Ltd
Advantages of having a local vend
Deepak Phenolics ltd- Project Funding

Given the size of the project at ₹1400cr, almost equal to the consolidated revenue of the company in 2014, Deepak Nitrite did not face any problem whatsoever in terms of securing the funding for the project.

Despite having high debt, Deepak Nitrite has not pledged any of their shares, implying creditors having comfort in the debt servicing capability of the company as well as excellent negotiation ability on account of their reputation.

Deepak Phenolics Ltd

Product Usage

Phenol:

A large percentage of phenol is used to make Phenolic resins which is used in a myriad of industries as a adhesive or binding agent.

Phenolic adhesives mainly used in Ply wood, flooring laminates, and foundry castings.

Other uses include paints, laminates, automobile layering, etc

Acetone:

Co is selling pharma-grade acetone. In India, 60% of acetone is used in pharma sector as a solvent.

Since solvent is a commodity product, the company is not able to charge any premium.

Other uses include paints & thinners.

 

Manufacturing process- Phenol Acetone
Deepak Phenolics Ltd
Phenol Acetone -Value Chain(https://www.edelweiss.in/ewwebimages/WebFiles/Research/e868513f-e941-4eaf-8938-19988414b32a.pdf)
Deepak Phenolics ltd: Raw Materials

The company uses 2 raw materials, Benzene, and Propylene. India is benzene surplus and under pricing pressure. 

Deepak Phenolics is sourcing Benzene from ONGC Petro Additions Ltd(OPAL)

Propylene, the other raw material is sourced from BPCL, IOL, GAIL. Propylene demand outstrips supply in India but according to the management they have been able to secure long term supply. The entire raw material is sourced locally, thus shielding Deepak Phenolics ltd from forex risk.

Deepak Phenolics ltd- Machinery

The company had selected top in their class vendors for the project.

Technology for manufacturing Phenol and Acetone has been sourced from Kellogg Brown & Root International Inc. and technology for manufacturing Cumene has been sourced from UOP LLC.

ThyssenKrupp Industrial Solutions (India) Pvt. Ltd. was selected as the
Engineering, Procurement, and Construction Management (EPCM) contractor.

Many research report has mentioned about the Anti-dumping duty on Phenol & Acetone. Though I could not find anything to confirm the same. Irrespective of that the phenol prices are expected to remain high on the back of demand-supply mismatch.

Deepak Phenolics ltd- Seed marketing

Like other companies, the group started seed marketing 2 years back before the commissioning of the new plant. 

The company was importing Phenol and Acetone and trading it in order to understand the market, set up distributors, understand the client and the logistical requirements.

Phenol: 70% of sales through distributors(12) and 30% through B2B(Direct client)

Acetone: 30% of sales through distributors and 70% through B2B(Direct Client)

 B2B/Direct sales, in general, have better margins.

The numbers below show the initiative towards seed marketing since 2017.

Deepak Phenolics Ltd

Deepak Phenolics- Financials

For Q3FY19, the company has not provided the consolidated revenue i.e. the revenue of other subsidiaries including Deepak Phenolics ltd. It is likely that they will provide the consolidated revenue in Q4FY19. If the consolidated revenue was published, the Q3FY19 revenue would have shown 108% jump. 

Deepak Phenolics Ltd

The phenol Plant was commissioned on Nov 1, 2018 i.e. it started operating.

 At the prevailing price and with 100% capacity utilization, Deepak Phenolics Ltd can reach a turnover of ₹2800cr with an EBITDA of 20%. Phenol plant capacity can be further increased to some extent by minimal capital expenditure.

The management has decided to use 30% of the production of phenol for captive consumption for downstream products. The targeted downstream products will be only those which are imported as they don’t want to compete with their clients. The value addition will boost the EBITDA margin by 2-3%.

The consolidated revenue of the company is expected double once the Phenol plant starts running at full capacity.

Since phenol is sold at spot prices, there is no long term contract available. So the revenue is totally dependent on the prevalent rate of Phenol in the market.

As of now, the situation seems to be positive, but given that Phenol is a commodity product, one needs to carefully track phenol prices. Other than that I don’t see any risk in terms of any competitor setting up a plant in India in the near future given the high capital outlay involved as well as long period(minimum 3 years) for any sizeable phenol plant to get ready for production.

Further reading:

 Deepak Nitrite Ltd- Moving up the value chain!

By,

Shekhar Yadav

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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