Deepak Nitrite Ltd- Q4FY20 Analysis

Deepak Nitrite Ltd- Q4FY20 Analysis

June 7, 202010:57 am
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Deepak Nitrite Ltd again had a very good quarter in terms of performance. Also, FY20 was an exceptional year for the company. While the quarterly revenue grew at a modest rate 4.7% (lost about 50cr of sales due to lockdown), the annual revenue grew by a massive 36%. Profit margin for the quarter was 16.3% and for the full year it was 14.4%.  I will try to explain the company’s performance “Deepak Nitrite Ltd- Q4FY20 Analysis”

Link to all my blogs on Deepak Nitrite Ltd

Deepak Nitrite Ltd- Q4FY20 Analysis

Deepak Nitrite Ltd- Business Profile

Deepak Nitrite Ltd operates in 3 business verticals which are Basic Chemicals(BC), Fine & Specialty Chemicals(FSC) and Performance products(PP). You can read more about them here: Link1

Whereas the only subsidiary ‘Deepak Phenolics Ltd’ manufacture Phenol & Acetone. Read here: Link2

The company derives 50% of revenue from basic or bulk chemicals and 50% from derived products. Derived or downstream products fetches higher margins. 

Chemicals business in general is marred with lot of volatility in terms of prices, depending on demand-supply scenario. Deepak Nitrite Ltd is trying to reduce the volatility by being the lowest cost producer(already cost leader in many of its products)  as well as making more of value added products.

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There was also a big management change. Umesh Asaikar who has been Executive director and CEO of the company since 2008 retired on March 31st 2020 and now Maulik Mehta who was a whole time director will be the new CEO.

Maulik Mehta is the son of the Chairman & Promoter of the company Mr Deepak Mehta.

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You can look at the profile of Maulik Mehta here: Link

I am pretty sure Mr Umesh Asaikar would have given good guidance & handholding to the new CEO.

Deepak Nitrite Ltd- Q4FY20 Analysis

Deepak Nitrite Ltd- Q4FY20 Analysis
Deepak Nitrite Ltd- Q4FY20 Analysis​

During the quarter, while India was suffering from a prolonged demand deficit, there had some impact on the demand for some of the company’s products as well.

Given the scale and reach of the company, the company took advantage of the export market in 2 key categories of its products. Of the 1055.5 cr in revenue, ₹257 cr came from exports i.e. 24% compared to 13.6% in Q4FY19. Fine & Specialty chemicals and Performance products were the key drivers of exports. The quarterly revenue increased by 4.7%, the revenue growth was very marginal due to 10 days of lockdown announced by the govt. 

The Profit after tax was quite good for the quarter mainly on account of much lower tax outgo.

Operating profit margin improved to 24.8% in Q4FY20 from 19.2% in Q4FY19.

On the back of record profitability, they have reduced the total debt by about ₹100 cr. The company’s entire borrowing is domestic. As of March 31, 2020, the debt equity ratio for DNL is 0.14x on a standalone basis and 0.69x on a consolidated basis as majority of the expansion debt sits on the books of Deepak Phenolics Ltd.

For the full year, the company was able to grow the revenue by 36% & profits by 71.5% which was led by volume growth, improved realizations as well as cost control.

Deepak Nitrite Ltd- Q4FY20 Analysis

Deepak Nitrite Ltd- Q4FY20 Segment wise performance

Deepak Nitrite Ltd- Q4FY20 Analysis
Deepak Nitrite Ltd- Q4FY20 Segment wise performance​

Deepak Nitrite Ltd: Basic Chemicals

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In the BASIC chemicals segment, the company suffered the most from lockdown and because of which the revenue declined by almost 11%. Otherwise, it would have grown from the last year figures.

Deepak Nitrite Ltd: Fine and Speciality Chemicals

In the fine and speciality chemical segment revenue grew 38% YoY and the margin was also solid at 32.1%. Witnessing Strong demand and favourable realizations in export markets, the company took advantage of that and pushed more products in exports resulting in healthy performance in the FSC segment. Overall performance has also been bolstered by benefits accruing from backward integration initiatives(they undertook last year) and capacity expansion for certain products.

Deepak Nitrite Ltd: Performance Products

For Q4FY20, Performance products continued to be the star performer of the company with a huge EBIT margin of 49.1%. For the full year FY20, this segment had an EBIT margin of 54.6%.

During Q1FY21, DASDA/OBA (Performance Products) prices dropped from $17 to $4 i.e. one fourth. The drop is caused mainly due to the significant drop in demand from Paper & Textile industry where it finds maximum usage in whitening. 

The management have in all the previous quarterly concalls mentioned that they do not think this price and margin levels were sustainable. They have been honest about it.

They internally had assumed the prices to settle to $7 but due to COVID-19 the demand for paper and textile have fallen significantly, the key consumer of DASDA.  At the current price level, the margins are expected to settle at the previous year levels(FY19) maybe around 15-18% levels compared to 54.6% for FY20.

Performance product which contributed about 18% of revenue but 42.2 % of total EBIT in FY20.

Deepak Nitrite Ltd- Q4FY20 Analysis

Deepak Phenolics Ltd

Coming to their only wholly owned subsidiary,Deepak Phenolics Ltd, had the plant commissioned on Nov 1, 2018.

In the first full year of operation itself the plant reached a capacity utilization of 100% which is unheard of. It typically takes companies 2-4 years to fully utilize their capacity. In 5 months of 2019, the plant generated a revenue of ₹908 cr and EBIT of ₹95.8 cr. For FY20, the subsidiary generated a revenue of ₹2000.86cr and EBIT of ₹187.3cr. 

Phenol prices were quite good during FY19 but dropped in FY20, and hence the lower margins.

The phenolics plant was shut down for 10 days due to lockdown, otherwise it would have exceeded the revenue for Q3FY20.

The management has always said that some part of produce of Acetone & Phenol(Pure commodity products) will be used to make downstream product(value added product) to reduce the dependence on market driven prices and increase the overall profitability. In light of the same, the company commenced commercial production of Isopropyl Alcohol (‘IPA’) at Dahej. IPA is derived from Acetone & is a common ingredient in chemicals such as antiseptics, disinfectants, sanitizer and detergents and also used as a solvent for pharma companies . The capacity was commenced during lockdown April 21st 2020, something remarkable and stands at 30,000 MT per annum. For any further CAPEX for more downstream products, they would like to wait for situation to normalize.

Govt has put a cap on the price of IPA that goes to sanitizer at ₹69/kg but the IPA that goes to pharma fetches higher prices, total averaging at ₹100/kg.

Deepak Nitrite Ltd- Q4FY20 Analysis

As of today the total capacity are running at 70% capacity utilization. The management said that they are not facing any problem with respect to raw material or labor. The biggest challenge has been logistics but they are seeing normalization there. 

During the quarter, the company lost revenue of ₹52 cr & EBITDA of 30 cr due to lockdown.

Some of the end application industry of Deepak Nitrite Ltd has seen demand shrinking caused by lockdown such as Paper, Ply & Textile and whereas the same lockdown has led to demand growth in Pharma, Detergent etc. Agro chemicals which is the company’s biggest application category continues to do better on the back of good monsoon.

The biggest contributor of profitability has been DASDA/OBA which comes under performance product segment. Now, due to the drop in prices to one-fourth level of the earlier prices, the sales figure will be one fourth to the earlier reported earning(₹767cr in FY20) and may see some decline because of demand drop in the end application segment. Hopefully, in the second half of the financial year, once schools & colleges open as well as consumption increase, these segment will see some recovery.

Given that Deepak Nitrite have a wide variety or products with wide range of application, what I have seen to date, is that if one goes down, the other compensates. But such high margin of one segment doesnot happen often(performance product for FY2o). Keeping expectations right, the company will continue to do well.  Also, Despite being in a commodity business, their execution has been remarkable.

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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.

4 Comments

  • Gautam says:

    Excellent research & presentation. What kind of returns do you expect over the next 10 yrs.

  • M N Kumar says:

    Shekar,
    I found my mental notes match well with your review points. Here is my view about Deepak Nitrite as i see into future.
    i) Maulik spoke very little in last concall. He appeared to be very and balanced. However, we need to track his execution capability. Strategy wise I am not worried as Deepak Bhai is still around example: I never expect this company to pay off debt ever and be around 0.7 to 1.2 times equity.
    ii) DSDA/OBA shortage driven profit jump seen in last few quarters is history now. Based on prices spoken in last concall ( down to $4 from $17), I think this division may get into losses this quarter if the prices are at $4. I really hope that the price have improved during the quarter.
    iii) I think DPL would give good results during this quarter. Aceton prices during Q1FY21 started around $900/ton, increased to $1600/ton and back to $1000/ton now. Phenol prices also increased from $800/ton increased to $1100/ton and back to $800/ton. Benzene and propylene, which are inputs, stayed around $500 and $950 respectively.
    iV) I think IPA revenues would be not very substantial this quarter due to ramp up while margins could be good depending upon how much % was sold to santizer industry (~100Rs/unit) vs open market ( ~ 160 rs/unit)
    V) Management was bullish on speciality chemical segment with substantial exports jump in last quarter concall. We need to monitor this segmental sales, volume and realization in this quarter.
    Vi) I look forward to their new projects of expansion/Capex …. Would it be phenol derivative ? i guess so…

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