Deepak Nitrite Ltd- Q1FY20 Analysis

Deepak Nitrite Ltd had the best quarter(Q1FY20) ever in terms of operating profit margin. The much-hyped wholly-owned subsidiary ” Deepak Phenolics Ltd” which got commissioned on 1st Nov’18 also has been running at 100% capacity utilization contributing ₹500+ cr for the last two quarters to topline. I will explain the company’s performance of Q1FY20 in this blog “Deepak Nitrite Ltd- Q1FY20 Analysis”

Deepak Nitrite Ltd- Q1FY20 Analysis

Fig1. Deepak Nitrite Ltd- Q1FY20 Financial Analysis

Deepak Nitrite Ltd had an exceptional Q1FY20. The company had a historically high level of the profit margin of 12.5% & EBITDA margin of 24.2% for this quarter.

The heavy lifting i.e. bringing the margin to such a level was borne by a single product which is OBA(Optically Brightening Agent) which has got very strong demand in the paper industry. The demand push has enhanced the EBIT margin for this segment standing at 58.1%

While the margins of other segments improved YoY, the maximum margin improvement of 20% was in OBA which is a part of Performance products. Deepak Nitrite Ltd is the only fully integrated manufacturer of OBA in India. Deepak Nitrite Ltd- Q1FY20 Analysis

Fig 2. Segment Wise Margin Analysis

With experience what I have learned is that the problem with such good results is ‘it is almost impossible to sustain for long‘. For the coming quarter, the result will be judged on the basis of comparison with the last quarter. And most likely the company will not perform as per expectation, that might lead to drop in share price. Deepak Nitrite Ltd- Q1FY20 Analysis

Deepak Nitrite Ltd- FY19 Annual performance Analysis

Fig 3.Deepak Nitrite Ltd- FY19 Annual performance Analysis

Explanation to the numbers in Fig 3

I will be using the following format to explain the numbers in Fig 3.

” Line item no. : Explanation”

1.: FY18 was a great year for the company with everything going in the favor of the co. FY19 the growth is aided with favorable conditions + the commissioning of Phenol-Acetone plant

3. : Gross margin have been consistent over the last 4 years

7.: The management has taken an ambitious target of improving the EBITDA margin by 1% every year since the last couple of years and they have been able to achieve that.

15. : Have consistently improved Profit margin. For FY17, the margins appear higher due to an exceptional gain of ₹70.34cr.

16,17,18,19: Cash conversion cycle for the Consolidated co. has increased significantly from 11.8 in FY18 to 52.6 in FY19(Lower the better), but for the standalone co. it has improved marginally. That is quite obvious if you look at the Cash flow from operation(CFO) in line item no: 18 & 19. The CFO for the standalone entity was 281 cr compared to just 63.7cr for consolidated, implying a lot of trade not happening in terms favorable to Deepak Nitrite Ltd(Mainly on the supplier side). In terms of sales, the Days sales outstanding as well as trade receivable as a percentage of total revenue has declined, meaning great demand for the company’s products.

24,25,26: Despite all the heavy capital expenditure and debt taken, the company as a whole has been able to improve its efficiency ratio. This is more to do with the healthy increase in profitability of the company. Deepak Nitrite Ltd- Q1FY20 Analysis

Segment wise revenue data trend

In terms of revenue trend, the company has moved from commodity chemicals i.e. Basic chemicals to higher margin accretive Fine and Speciality Chemicals by increasing revenue contribution from this segment from 24% in FY15 to 29-30% in FY19.

Deepak Nitrite Ltd- FY19 Key takeaways

BASIC CHEMICALS-The co. improved its operational processes to achieve cost leadership in this segment which typically consists of products of high volume and lead to higher realization.

FINE & Speciality CHEMICALS– The segment witnessed volume growth with capacity expansion and backward integration initiatives. Their realization improved in select products, which led to a growth in topline. Co. also has done Brownfield expansion to enhance capacities of major products.

PERFORMANCE PRODUCTS: The segment finds application in textiles, paper, detergents with its key value in the characteristic of the main product. This segment had been in losses for years and it is only the last year where the co. saw a turnaround in its fortune.

Phenolics: For FY20, Deepak Phenolics Ltd plans to boost production of derivatives and downstream products. India still is an importer of Phenol & Acetone, so in terms of demand, I don’t see any problem but given the global slowdown all commodity products are witnessing a decline in prices. Need to observe this closely.

With nearly US$ 15 billion of Chinese exports in chemicals and plastics subject to US tariffs, India is set to gain market share in the global chemical industry, estimated to be around US$ 4.7 Trillion. But, India still is a net importer of chemicals and with so much opportunity coming its way, the country has not been able to capitalize on these due to lack of political will in the country. Hopefully, something positive will happen soon.

In terms of performance, since Deepak Nitrite Ltd has achieved so much efficiency and growth, I would like to wait to see if it is possible to improve things further.