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DEEPAKNTR in pole position
We are LONG on DEEPAKNTR as it is ideally positioned to exploit the IPA supply gap
DEEPAKNTR is an India-based specialty and basic Chemicals manufacturer. A domestic leader in Sodium Nitrite, Sodium Nitrate and newly added Phenol and Acetone product classes (where it already commands a meaningful 55% market share), the company recently ventured into Isopropyl Alcohol (IPA) – a key component of sanitizers – which in our view further enhances its business profile.
India at present meets 44% of its IPA demand through imports. DEEPAKNTR plans to take a piece of this as well as meet the anticipated demand uptick by doubling its IPA manufacturing capacity to 60,000 TPA by Q1FY22. A similar move was made in 2019 when the company started Phenol and Acetone production. At that time, 80% of domestic demand was met through imports. The broader Indian chemicals industry is currently sized at INR11Lcr ($150bn) and is expected to grow by 2x to INR22Lcr ($300bn) by 2025. Chemicals represent 16% of India’s manufacturing & 9% of its exports, thereby presenting substantial growth runway.
Strong product portfolio with specialty chemicals and “phenolics” offering margin upside
The product portfolio comprises Basic Chemicals (19% of revenue, 17% of EBIT), Specialty chemicals (21% of revenue, 37% of EBIT), Performance products (8% of revenue, 3% of EBIT) & Phenol and Acetone (52% of revenue, 43% of EBIT). DEEPAKNTR’s move into Phenolics i.e., Phenol, Acetone & IPA – with applications in skin care products and pharmaceuticals, has driven the bulk of its recent topline growth. In our view, this product line can be a nice catalyst for the stock as demand is significantly reliant on imports, driving an uptick in the overall topline as the segment ramps up.
Policy push and broader tailwinds bode well for sectoral growth
India, being a net importer in chemicals, allows DEEPAKNTR (among others) to benefit from i) GoI’s Production-Linked Incentive (PLI) schemes to promote manufacturing of agrochemicals ii) A narrative of modest shifting of manufacturing dominance from China, potentially placing India Inc in an advantageous position iii) Robust domestic demand from sharp growth user industries - agrochemicals, dyes, detergent, textiles, pharmaceuticals etc.
Steady growth and sound balance sheet de-risk the investment profile
Revenue/EBITDA has seen a CAGR of 46%/93% during FY17-20 helping the company deliver a lofty 21% ROCE and 22% ROE over the last four years. EBITDA margin has increased from 16% in FY19 to 25% in FY20 due to an evolving product mix (towards higher margins) and cost optimization. Leverage is accommodative with debt-to-total assets of 0.32x and debt-to-equity of 0.65x resulting in 8.02x interest coverage as at FY20, up from 4.22x as at FY19. EPS has seen a sharp uptick to INR44.80 from INR12.78 a year back.
DEEPAKNTR recently released its Q3 2021 results with 9M revenue of INR2,912cr, 9% decline Y-o-Y, although Q-o-Q revenue increased by 25% owing to the economic recovery. EBITDA margin improved to 27% driven by operational improvements in Phenolics supported by contribution from IPA. Leverage reduced further with debt-to-equity of 0.28x and interest coverage of 11.86x.
Valuation on absolute and relative terms looks fairly attractive
The stock trades at 21.20x P/E and 13.30 EV/EBITDA on FY22F vs. sector avg. P/E of 30x and sector avg. EV/EBITDA of 25x. Close comps Vinati Organics (NSE: VINATIORGA) trades at P/E of 42.50x and EV/EBITDA of 30.60x while Aarti Industries (NSE: AARTIIND) trades at 27.50x and 17.60x respectively, on FY22F. Double digit revenue and EBITDA growth outlook coupled with prospects of swift margin expansion (via shift towards higher margin products) bodes well for the stock. Promoters own 45.69% of outstanding shares and FIIs hold 13.26%.
Exposure to volatility in crude oil prices and spreads between feedstock (benzene and propylene) and finished products are notable risk factors.
We are LONG on the stock and continue to remain positive in the medium-term.