CD Equisearch

Deepak Nitrite (Accumulate)

CMP: ₹483.2

Target: ₹561

Notwithstanding excruciating economic stress in Q1 of current fiscal, Deepak Nitrite Ltd (DNL) along with other Indian specialty chemical manufacturers would gain from increasing access of global chemicals manufacturers to alternate markets other than China. Betraying signs of tapping global markets, DNL has lined up investments of some ₹400 crore for the current fiscal which includes setting up solvent isopropyl alcohol (IPA) capacity at its Dahej facility, a power plant, though risks to cut in capex looms large on account of perceived demand stress due to Covid-19. Eying future expansion, it recently bought 125 acres industrial land at Dahej, Gujarat for nearly ₹100 crore.

The stock currently trades at 11.1x FY20 EPS of ₹41.18 and 13.5x FY21e EPS of ₹33.82. Perilous impact of the virus has shrouded near-term business visibility, precipitating some 15 per cent cut in FY21 EPS on lower revenues; Peaking of its performance products margins would doubtlessly take the spin from its current year earnings. Yet partial lifting of trade restrictions and resuscitation of crude oil prices would support a gradual recovery.

Commencement of acetone based downstream products sometime in the second quarter of current fiscal would prop up revenues and so would recovery in cracks of phenol and acetone. Balancing odds, we advise ‘accumulating’ the stock with revised target of ₹541 (previous target: ₹396) based on 16x FY21 earnings.