Deepak Nitrite – High growth Indian ‘Special’ality Chemical Business?
Deepak Nitrite – Can a newly commissioned Phenol-Acetone manufacturing plant transcend Deepak Nitrite into high growth mode?
Product Offering & Growth Strategy:
Deepak Nitrite manufacturers a range of basic / special chemicals and intermediates and operating in 3 main segments – Basic chemicals, Fine & Speciality chemicals, and Performance Products. It has 300 products and has a leading market position in most of them and caters to various industries – Agrochemicals, Rubber, Pharmaceuticals, Paper, Textile, Detergent, Colourants, and Petrochemicals. It has five plants in operation – Nandesari & Dahej in Gujarat, Roha and Taloja in Maharashtra, and at Hyderabad. It has diversified customer base across continents, and preferred supplier to major leading companies such as BASF, Monsanto, and Bayer.
Following picture showcases chemicals Deepak Nitrite manufacturers in each of its business segments. Deepak Nitrite has a reputation for picking chemicals with overly long sustainable ‘demand-supply’ gaps and/or with greater potential to become low cost producer and Top 3 global supplier to leading chemical companies.
Since a few years, Deepak Nitrite has been busy setting up a plant to manufacture Phenol (200,000 MTPA) and Acetone (120,000 MTPA) in Dahej, Gujarat, India. In Aug 2018, it started a trial run of the plant and has recently commissioned a ‘production’ run. Deepak Nitrite is sourcing Phenol manufacturing technology from Kellog Brown & Root International, and Cumene manufacturing technology from UOP Honeywell. Deepak Nitrite used Thyssenkrupp for EPC work. The plant is supposed to be one of the cost effective plants in world. Deepak Nitrite also added Cumene capacity (serves as feedstock for manufacturing phenol and acetone) to improve its profit margins.
Some applications and use cases of its products:
Deepak Nitrite’s basic chemicals / fine & speciality chemicals / performance products find their uses in several industries.
Phenol and Acetone:
- Electronics: BPA (used to make plastics which in turn is used in electronics) is the largest market for phenol and acetone. Electronics is a growing industry in India
- Crop protection: Phenol and Acetone are key raw materials in manufacturing herbicides and pesticides. Declining farm lands, and growing food grain demand in India will serve as ‘demand drivers’ for crop protection and yield improvement
- Automobiles: Phenol is used as key raw material in manufacturing nylon intermediates used in automobile carpeting. Acetone intermediate methyl methacarbonyte is used for auto glazing, and as an exterior car coating for improving scratch and weather resistance in automobiles. Burgeoning middle class, and low ownership of automobiles will serve as ‘demand drivers’ for Automobile industry in India
- Adhesives: Phenol and Acetone intermediates are used as water-based adhesives in paint. Government regulations in India are restricting use of volatile organic compounds (VOC’s). Solvent based coatings are being replaced by water based coatings
A few elements of product and revenue growth strategy:
Basic chemicals:
- Characterized by high volume, and moderate margin products
- Focus on further strengthening of product portfolio
- Brownfield capex to enhance capacities of major products
Fine & Speciality chemicals (this is a value-add segment for Deepak Nitrite):
- Characterized by moderately low volume, high-margin chemicals and customized per requirements
- Full capacity utilization
- Additional capex for growing demand
- Targeted penetration in certain sectors such as pharma and personal care
Performance Products:
- Better efficiency and utilization of the plant
- Will be aided from improved demand and pricing trends in the local and export markets
Phenol and Acetone:
- About 85% plant utilization by 2020
- Agreements with leading chemical companies such as Reliance Industries in India
- Strategize and Serve phenol and acetone ‘derivatives / intermediates’ markets after stabilizing phenol and acetone markets
Phenol and Acetone Industry Dynamics and Impact on Deepak Nitrite:
Following graphs depict Indian acetone-phenol demand, supply-demand gaps, and Deepak Nitrite’s 2-3 year market opportunity.
Competition:
Acetone – Phenol market:
- Deepak Nitrite may not have price or quality advantage over competitors, however, lower logistics cost, and better inventory management should help customers leverage Deepak Nitrite’s products (vs imports)
- Imports spread across countries (5 countries account for 80% of acetone imports; 4 countries account for 90% of acetone imports); Exports to India are significant only for China (90% of its production volume) and Thailand (50% of its production volume), and with increasing supply from Deepak Nitrite, Phenol-Acetone prices may be subjected to a price war. But increasing YOY global demand for Phenol-Acetone, price competition would be temporary
Deepak Nitrite’s competitive advantage:
- Low cost manufacturer and leading supplier to global chemical companies for some of its basic and fine and speciality chemicals; Deepak Nitrite has a long standing relationship with its customers across 30 countries
- Phenol and Acetone
- Location advantage for raw material; Manufacturing plant at Dahej, Gujarat (close to Benzene raw material source from Reliance industries in Gujarat); Benzene, one of the raw materials, is available in excess in India now.
- Deepak Nitrite’s cost estimates (feedstock etc.,) suggest that the risk profile of the project is very low
- Location advantage for operational variables such as ports for transport, electricity, and water
- Favorable industry dynamics (import substitution) in India; Manufactured phenol and acetone is expected to replace 60% of phenol and acetone imports
- Global and India demand drivers for phenol and acetone
- Technology and EPC collaboration with leading players in world
- Dahej plant is expected to be very cost effective, safe, and IOT integrated
- An R&D unit to improve process chemistry, productivity and yield for basic chemicals, and to ‘customize’ solutions in fine and speciality chemicals, and performance product segments
- Management (see Management section)
Management pedigree:
- Management (since inception to its current descendant of the founding member) is known to be fiscally prudent, and known to be ‘market prudent’ picking only areas where there are relatively stable ‘demand-supply’ gaps for longer periods and offer opportunities to become a top supplier
Key Financial highlights:
Revenue (in Crores Rs):
In 2020, Deepak Nitrite is projected to have:
- 3,500 Cr revenue
- 550 Cr EBIDTA
- 15% EBIDTA margin
- 250 Cr profit after tax
- 15 EPS
| Mar 2015 | Mar 2016 | Mar 2017 | Mar 2018 | |
| Sales | 1,327 | 1,373 | 1,371 | 1,651 |
| Sales Growth % | 3.45% | -0.16% | 20.48% | |
| Expenses | 1,188 | 1,205 | 1,233 | 1,448 |
| Material Cost % | 62.99% | 60.12% | 60.09% | 61.43% |
| Manufacturing Cost % | 13.66% | 12.70% | 12.97% | 11.80% |
| Employee Cost % | 7.54% | 8.67% | 8.92% | 8.24% |
| Other Cost % | 5.31% | 6.35% | 7.96% | 6.51% |
| Operating Profit | 139 | 168 | 138 | 204 |
| OPM % | 10% | 12% | 10% | 12% |
| Other Income | 2 | 0 | 81 | 7 |
| Interest | 38 | 40 | 37 | 47 |
| Depreciation | 36 | 40 | 48 | 53 |
| Profit before tax | 67 | 89 | 135 | 111 |
| Tax % | 21% | 29% | 28% | 29% |
| Net Profit | 53 | 63 | 96 | 79 |
| EPS in Rs | 4.86 | 5.15 | 7.37 | 5.79 |
| Dividend Payout % | 20% | 22% | 16% | 22% |
Balance Sheet:
| Mar 2015 | Mar 2016 | Mar 2017 | Mar 2018 | |
| Share Capital | 21 | 23 | 26 | 27 |
| Equity Capital | 20.91 | 23.26 | 26.14 | 27.28 |
| Reserves | 325 | 449 | 689 | 895 |
| Borrowings | 545 | 529 | 724 | 987 |
| Other Liabilities | 240 | 301 | 382 | 720 |
| Trade Payables | 109.55 | 137.69 | 279.65 | 587.73 |
| Total Liabilities | 1,130 | 1,302 | 1,821 | 2,629 |
| Fixed Assets | 549 | 594 | 586 | 588 |
| Gross Block | 817.38 | 899.03 | 650.82 | 640.62 |
| Accumulated Depreciation | 268.66 | 301.31 | 64.88 | 53.06 |
| CWIP | 44 | 36 | 349 | 955 |
| Investments | 3 | 87 | 118 | 32 |
| Other Assets | 534 | 585 | 767 | 1,055 |
| Inventories | 107.3 | 123.11 | 168.85 | 327.16 |
| Trade receivables | 310.99 | 313.19 | 360.33 | 411.77 |
| Cash Equivalents | 3.06 | 6.49 | 14.49 | 48.2 |
| Loans n Advances | 58.54 | 62.1 | 125.75 | 214.72 |
| Total Assets | 1,130 | 1,302 | 1,821 | 2,629 |
Cash Flows:
| Mar 2015 | Mar 2016 | Mar 2017 | Mar 2018 | |
| Cash from Operating Activity | 108 | 167 | 49 | 183 |
| Profit from operations | 140.17 | 168.96 | 142.42 | 211.78 |
| Working Capital Changes | -18.15 | 17.13 | -77.19 | -0.92 |
| Taxes paid | -14.01 | -18.81 | -16.22 | -27.86 |
| Cash from Investing Activity | -89 | -169 | -353 | -525 |
| Fixed Assets Purchased | -106.09 | -86.73 | -296.23 | -622.28 |
| Fixed Assets Sold | 16.25 | 0.22 | 55.03 | 1.12 |
| Investments purchased | 2.5 | -270.51 | -713.54 | -296.65 |
| Investments sold | -2.5 | 186.72 | 683.9 | 387.22 |
| Cash from Financing Activity | -22 | 4 | 305 | 345 |
| Proceeds from Shares | 0 | 80.71 | 146.43 | 146.28 |
| Proceeds from Borrowings | 42.02 | 31.97 | 301.01 | 475.76 |
| Repayment of Borrowings | -54.94 | -74.9 | -85.05 | -169.81 |
| Interest Paid | -37.49 | -37.23 | -34.15 | -44.97 |
| Dividends Paid | -10.39 | -10.4 | -13.89 | -15.6 |
| Net Cash Flow | -3 | 2 | 1 | 4 |
Valuation Metrics:
| 2018 | 2020E | |
| ROCE | 9 | 25 |
| EPS | 5 | 17 |
| P/E | 38 | 15 |
| P/BV | 5 | 3 |
| EV/EBITDA | 19 | 8 |
| EV/Revenues | 2.5 | 1.2 |
Risks of investment:
- High volatility of raw material processes; Chemical companies have this inherent risk
- Regulatory issues in India and abroad; Chemical companies are often subjected to regulatory standards (safety, environmental pollution etc.,). Case in point is stricter standards by Chinese governments on chemical companies to minimize environmental pollution led to a longer-term ‘supply gap’ in global marketplace for chemicals, and India tried to take advantage of that. So, any changes by governments (e.g., China going easy on environmental standards) is bound to affect Deepak Nitrite in some fashion
- Delays in stabilizing and ramping up capacity of Phenol and Acetone plant