Deepak Nitrite's investors have to wait longer for margin to improve
Ebitda margin soared to 14.5%, a staggering rise of 567 basis points (bps) QoQ. The stock increased over 5% to almost ₹2,110. But note that Q4 had government incentives worth ₹161 crore included in revenue, which was absent in Q3. Excluding that, Ebitda margin would have been 7.7%, lower than 8.9% in the preceding quarter.
Nonetheless, the benefit of government incentives is likely to continue for the next couple of years at least and would be Rs60-70 crore on a sustained basis.
The phenolics segment, forming nearly 70% of revenue, showed a return to normalized Ebit margin at 15.6%, up by 150bps year-on-year, although QoQ recovery is sharper as the margin had dipped to 8.9% owing to firm input prices. The spreads in phenolics have reached such a low that it has become difficult for most non-integrated producers to survive.
The other segment—advanced intermediates—continues to struggle, with Ebit margin falling a whopping 1300 bps year-on-year to 7%, even though it recovered from an abysmal low of 3% in Q3. Advanced intermediates mainly caters to the agrochemicals, dyes, and pigment industries.
The management believes that dyes and pigments are showing initial signs of demand bouncing back, but the recovery in agrochemicals remains uneven after the global destocking in the agrochemical (finished goods) business.
Deepak Nitrite wants to reduce dependence on a few products in advanced intermediates by focusing on diversification through new variants and downstream products. It is also looking to reduce performance volatility through long-term supply contracts with a couple of large global customers.
The company's earnings growth is more correlated to capital expenditure (capex) led volume growth rather than margin-led growth through pricing power. Capex projects costing ₹2,000 crore would be commissioned in FY26.
Also Read: Deepak Nitrite's weak chemical margin comes as a shock catalyst
However, the management refrained from giving any guidance for the future in view of the geopolitical uncertainties and ongoing tariff war. Over the long term, the company has a pipeline of expansion projects worth ₹15,000 crore up to FY28.
During the earnings call, the management said aggressive capacity expansion in China has led to pricing pressure globally. So, unless there is rationalization of overcapacity, there is little hope.
Even if Deepak Nitrite's cost savings initiatives do fructify, Bloomberg consensus estimates are factoring 23% CAGR in EPS for the next two years to FY27. Based on FY27 estimates, the stock trades at 27x, which is expensive for a commodity stock.
Also Read: LIC's growth perils curb stock's valuation
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