Equity Analysis

Deepak Nitrite held a conference call on 09 February 2023 to discuss the results for the quarter ended December'22 and way forward. Mr. Maulik Mehta, Executive Director and Chief Executive Officer, Mr. Sanjay Upadhyay - Director, Finance & Group CFO and Mr. Somsekhar Nanda -CFO of the company addressed the call.

Highlights of the Concall

• The operating environment continues to be highly dynamic. The recalibration of global supply chains over the last year due to various factors like the sanctions on Russia, China closing and then reopening continue to play out further, as the Chinese economy is reopening after very, very strict COVID protocols. The company expects that it will continue to remain dynamic at least for the next couple of months as the situation gets normalized. These developments have certainly affected the supply and demand of key intermediates.

• Strong topline performance (up 16% YoY and 2% QoQ) was driven by maintaining leadership in market share and geographies. Current landscape of realignment of global supply chains and seeking of assured supply by customers has limited the ability to drive higher realizations.

• EBITDA performance was muted on a YoY basis due to high base of last year combined with continued increase in some input as well as utility costs, including power and fuel. Partial passing on of higher input prices, moderation from extreme highs and productivity enhancements have enabled an improved performance on a QoQ basis. The positive traction is expected to sustain in the upcoming quarters.

• The company has operated all plants, except for Nandesari unit at high utilization rates. The phenol plant has clocked an average utilization of 117% for the quarter, and achieved highest-ever quarterly domestic sale and highest production per day of phenol.

• Nandesari plant, which was previously impacted by the fire incident has fully resumed production and has contributed to the overall performance. Utilisation levels are being ramped up progressively. Nandeari plant operated for about less than eight months in 9MFY23 due to fire accident in June 2022.

• Revenue in the advanced intermediates segment increased by 19% YoY due to sustained healthy demand from key customers, while the rise in EBITDA was 2%, impacted by factors such continued higher input prices not fully passed on to customers, increased power and fuel costs, and higher overhead expenses linked to Nandesari plant restart.

• The advanced intermediates business has added sizeable international business including new customers in export business.

• The company expects to maintain its performance momentum in advanced intermediates due to the shift of global supply chains and positive demand trends. Further performance will be driven by new multiyear contracts, strong demand and the ability to pass on cost increases to customers, as prices of products and raw materials stay at elevated levels.

• Revenues from the phenolics segment grew 13% YoY as the phenol plant maintained an average capacity utilization in excess of 117%, effectively overcoming significant external challenges in the global environment during the period under review. Highest-ever quarterly domestic sales volume and daily production of phenol was recorded in Q3.

• Phenol demand in India remains stable while weakness in global demand was observed. Many Asians in all plants are operating at 60 65% capacity.

• The moderation in EBITDA in phenolics was due to a reduced realization following the unusually high realization in the base period. After sharp volatility in the preceding quarters the demand-supply situation is stabilizing, and the company anticipates steady price trends going ahead.

• The company registered highest-ever production of DASDA during Q3. It also attained highest-ever sales volume and turnover of OBA in Q3 FY23.

• The company is progressing well with its expansion plans with multiple projects in progress. Installation of capacity for spent sulfuric acid concentration (SAC) plant is set to be commissioned this quarter. Its project for MIBK and MIBC which are derivatives of acetone are progressing well and expect commissioning in Q4 of FY24. The company will consume 80% of the acetone that it manufactures.

• The company is constructing a facility for complex chlorination and photo chlorination that will go on stream in H2 of FY24. Its project to internally manufacture key raw materials is progressing well and towards commissioning as planned.

• In addition, the company has approved capital investment of approximately Rs 1000 crore which will help the company's growth plans. Out of this it has approved a project for manufacturing polycarbonate compounding at a world scale which will add impetus to our move towards the polycarbonate business. And this will help it in understanding the key marketplace the niche players the large players and it will be manufacturing compounding products which will be used by growing demand in India in applications like 5G boxes, EV batteries, medical devices and much more.

• The company continues to progress as per plan with regards to its plant in Oman, that will manufacture sodium nitrite phase one.

• DPL repaid a term loan of Rs 50 crore in the month of October 2022, taking the company's net debt to equity ratio to 0.07x as compared to 0.20x last year.

• On a consolidated basis, the company continues to remain debt-free, with a net worth of Rs 3,860 crore (Consolidated) & Rs 2,528 crore (standalone), thereby strengthening its balance sheet for future expansion.

• As of end Q3 FY23, DNL has invested Rs 315 crore in wholly owned subsidiary Deepak Chem Tech Limited. In the month of Jan 2023, DNL invested a further Rs 80 crore in Deepak Chem Tech Limited, taking the total investment to Rs 395 crore.

• The company has planned total capex of about Rs 1500 crore for FY23 and FY24.

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