Buy Deepak Nitrite, target price Rs 2895: JM Financial

JM Financial has buy call on Deepak Nitrite with a target price of Rs 2895. The current market price of Deepak Nitrite is Rs 2166.3. Time period given by analyst is one year when its price can reach defined target.

Deepak Nitrite, incorporated in the year 1970, is a mid cap company (having a market cap of Rs 29638.21 crore) operating in chemicals sector.

Its key Products/Revenue Segments include fine chemicals, export incentives, sale of services, scrap and other operating revenue for the year ended March 31, 2022.

Financials
For the quarter ended June 30, 2022, the company has reported a consolidated total income of Rs 2067.60 crore, up 10.22 per cent from last quarter total income of Rs 1875.89 crore and up 34.74 per cent from last year same quarter total income of Rs 1534.47 crore. Company has reported net profit after tax of Rs 234.62 crore in latest quarter.

The company’s top management includes Mr.Deepak C Mehta, Mr.Vipul Shantilal Shah, Mr.Prakash Dinkar Samudra, Mr.Meghav Mehta, Mr.Dileep Choksi, Mr.Sanjay Asher, Ms.Purvi Sheth, Mr.Sandesh Kumar Anand, Mr.Ajay C Mehta, Mr.Sanjay Upadhyay, Mr.Maulik D Mehta, Mr.Punit Sanjay Lalbhai. Company has Deloitte Haskins & Sells LLP as its auditors. As on June 30, 2022, the company has a total of 14 crore shares outstanding.

Investment Rationale
The phenol-acetone spread over benzene-propylene has started to move up of late(up ~5% QoQ in 2QFY23TD, Jul’23 spread was the lowest in the last 9 years – refer Exhibits 1 and 2).

The brokerage believes this to be due to
i) sharp correction in propylene prices due to lack lustre downstream demand for propylene derivatives,
ii) decline in benzene prices, driven by the drop in crude prices, and
iii) rise in phenol prices, led by increase in downstream demand and supply shortages of Bisphenol-A (BPA)(especially in China).

Besides this, Europe accounts for ~18-20% of global phenol production and with the current surge in European natural gas and electricity prices, European phenol production is unlikely to be competitive vs. other regions. Hence, it expects the phenol-acetone spread to continue its upwards trajectory in 2HFY23.

This is favourable for Deepak Nitrite given it derives ~55% of EBIT from the phenolics business. The brokerage maintains BUY with an unchanged Sep’23 TP of INR2,895/share (based on 28x Sep’24E EPS) (revalidated with DCF).

Promoter/FII Holdings
Promoters held 45.72 per cent stake in the company as of June 30, 2022, while FIIs owned 9.07 per cent, DIIs 10.71 per cent.