August 30, 2016 ₹101 Time Horizon 12 Months Target: ₹161 · 2016-09-01 · August 30, 2016 Jun-16 Mar-16 Dec-15 Sep-15 Promoter 52.0% 51.8% 57.3% ... led to in-house development

Anand Rathi Research

Time Horizon – 12 Months

August 30, 2016

Jun-16 Mar-16 Dec-15 Sep-15

Promoter 52.0% 51.8% 57.3% 57.3%

Institutions 14.0% 13.2% 5.7% 5.7%

Others 34.0% 35.1% 37.0% 37.0%

Total 100% 100% 100% 100%

Source: Company, Anand Rathi Research, Bloomberg

V

A

L

U

E

P

I

C

k

(In ₹ Mn.) FY-16 FY-17E FY-18E FY-19E

Net Sales 13,729 14,512 15,644 33,688

EBITDA 1,663 1,995 2,268 5,137

EBITDA Margin 12.1% 13.8% 14.5% 15.3%

EPS (₹) 5.4 6.8 7.5 23.4

EV/Sales 1.0 0.9 0.9 0.4

EV/EBITDA 7.9 6.2 5.5 2.4

P/E (x) 18.7 14.8 13.4 4.3

Price Performance CY13 CY14 CY15 YTD

Absolute 13% 172% -10% 37%

Relative 6% 141% -6% 27%

Analyst: Narendra [email protected]

Relative stock performance (Aug’15=100)

CMP: ₹101

Target: ₹161

Shareholding Pattern (as on Mar’16)

Key Data

Bloomberg Code DN IN

NSE Code DEEPAKNTR

BSE Code 506401

Sector Chemicals

Industry Basic & Diversified Chemicals

Face Value (₹) 2.0

BV per share (₹) 41

Dividend Yield (%) 1.2%

52 Week L/H(₹) 54.5 / 109

Market Cap. (₹ Mn.) 11,722

Deepak Nitrite Limited (DNL)

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Nifty DDEEPAKNTR

2 Anand Rathi Research

Established in 1970s by Mr. C.K. Mehta (Founder & Chairman), Deepak Nitrite Limited (“DNL”) is an Indian chemicalmanufacturing company. Enjoys a leading market position in most of its products in the domestic as well as globalmarkets.

DNL is on of the leading global player for several niche chemical products like Xylidines, Cumidines, Oximes &Colour Intermediates and caters to several industries - Colorants, Petrochemicals, Agrochemicals, Rubber,Pharmaceuticals, Paper, Textile, Detergents, Fine & Specialty Chemicals, etc.

DNL has strong distribution network across the globe with footprints in over 30 countries. Its strong R&D focus hasled to in-house development of new product applications and understanding customer preferences resulting inhaving some Fortune 500 companies amongst its clientele.

DNL currently operates its businesses with three main SBUs namely Bulk Chemicals segment, Fluorescent &whitening agents segment and Fine & speciality segment each contributing 56%, 20% and 24% to the revenuesrespectively.

DNL has recently increased its focus on adding high value products and moving higher in the value chain to improveits profitability in long term. As a result the company has renamed its Bulk chemicals segment to Basic chemicalssegment and Fluoroscent & whitening segment to performance products segment.

DNL is undertaking a greenfield expansion plan at Dahej, Gujarat for manufacturing phenol (2,00,000 ton/year) andacetone (1,20,000 T/year). The project is already under execution and is expected to start by Dec-17. Due to India’sdependent heavily on the imports due to lack of domestic production capacity and imposition of around 7.5%cumulative anti-dumping duties, the macro scenarios for the domestic market looks promising for DNL.

We initiate our coverage on Deepak Nitrite Limited with a BUY rating and a target price of ₹161 per share.

A well known chemical company with proven track record in chemicals sector.



…with a pedigree of almost 45 years

Source: Company, Anand Rathi Research

Year DNL History & Milestones

1970 Incorporation of DNL as a private Ltd company.

1971 Listing on public markets, BSE.

1972 Manufacturing of Sodium Nitrite and Sodium Nitrate at Vadodara, Gujarat.

1982 Promoted Deepak Fertilizers and Petrochemicals Ltd.

1984 Acquisition of Sayadri Dyestuffs & Chemicals from Mafatlal group.

1992 Commissioned Multipurpose Nitro- Aromatics plant.

1995 Commissioned Hydrogenation facility near Mumbai.

2000 Acquisition of Aryan Pesticides Limited.

2005 Relocation of Sayadri Facilities to Vadodara and Roha.

2006 Rights issue of equity shares.

Acquisition of colour intermediate business (DASDA) from Vasant ChemicalsLtd.

2010 Entry into Fuel Additives business.

2011 Listed on NSE

2013 Brownfield expansion for manufacturing inorganic salts at Nandesari.

2014 Dahej facility for OBA fully commissioned.

1:1 bonus and 5:1 split declared.

2015 Fundraising through QIP: INR 833 mn



Spread across key chemical hubs of the country…

Manufacturing Facilities


Nitration

Alkylation

Nox Absorption

Hydrogenation

Sulphonation

Condensation

Diazotisation

Oxidation

Expertise in multiple chemical processes



…offering products throughout key chemical value chain.

Business Segments


Fine & Specialty Chemicals Basic ChemicalsPerformance

Products



With revenue well distributed over products and geographies.


Colour, 58%Agro, 22%

Fuel Additives, 17%

Pharma, 1% Others, 2%

Domestic62%

Exports38% Europe

48%

U.S.23%

China8%

Others21%

Product wise revenues (FY-16, ₹ Mn.)Segment wise revenues (FY-16, ₹ Mn.)

Exports geography wise revenues (FY-16, ₹ Mn.)Domestic vs Exports revenues (FY-16, ₹ Mn.)


Basic Chemicals50%

Fine & Speciality Chemicals

29%

Performance Products

21%


Basic and Specialty segments performance remain stable to positive…

Fine & Specialty Chemicals


6%

8%

10%

12%

14%

-

600

1,200

1,800

2,400

Q2-FY15 Q3-FY15 Q4-FY15 Q1-FY16 Q2-FY16 Q3-FY16 Q4-FY6 Q1-FY17

Revenues ₹ Mn. EBIT % (RHS)

Basic Chemicals Segment

11%

17%

23%

29%

35%

-

350

700

1,050

1,400


Basic Chemicals segment contributing almost 50% to revenues is DNL’s high volume segment consisting of manufacturing

of both organic & inorganic chemicals that are made to standard specifications

This SBU can be further classified under Nitro Toluene, Ortho Toluene and Inorganic Chemicals such as Sodium Nitrites &

Sodium Nitrates. DNL plans to leverage on its cost leadership to enhance volumes & drive profits in this segment. The

company also plans to increase contributions from its high value products within the segment.

The Fine & Specialty Chemicals segment contributing around 30% to revenues includes niche products that require greater

value addition and is segregated into Specialty Chemicals, Xylidines, Oximes, Cumidines, Nitro Oxylene amongst others.

These products are customized as per customer specifications and find application in the manufacture of agrochemicals,

pharmaceuticals, pigments, paper, hair colour, etc.



…while performance products segment remains muted.

Performance Products Segment


-10%

-5%

0%

5%

10%

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675

900


Performance products segment (Fluorescent Whitening Agents) contributes around 20% to revenues is an application

chemical and is commonly known as Optical Brightening Agent (OBA). DNL is a fully integrated manufacturer of FWA.

OBA has wide applications in varied industries - Paper, Detergents, Textiles, Coating Applications in Printing & Photographic

Paper the products in this segment can be customized into liquid or powdered form, as per the customer’s requirements.



New capacity expansion to lead revenue growth…

Phenol & Acetone Project


DNL is currently in process to set up its new production unit for producing Phenol and Acetone at Dahej. The

project is being set up with technological tie up with KBR (USA), a licensor of phenol production process.

The company has already achieved financial closure and preliminary engineering work has also been completed

at the site. As of June 30, 2016, an amount of ₹1,000 million has already been invested for the Cumene plant

which will serve as a feedstock.

The project execution is progressing within scheduled timelines and is expected to get operationalized by

December 2017.



Phenol Chain Derivatives



With India continuously a net importer of Phenol and Acetone

Global Phenol trade pattern

Source: PTT Plc, Anand Rathi Research

Global Acetone trade pattern

USA would resume to export Phenol but

reducing caused by refinery issue.

WEU will turn from exporter to importer

due to feedstock constraint.

Asia (NEA & SEA) turns to be the key

supplier since 2014.

India is the most impressive importer by

continuous growth of domestic demand.

BPA & MMA is key driver for Asia demand,

however, SEA demand grows in slow pace.

India is the most impressive importer by

continuous growth of domestic demand,

especially Pharmaceutical field.



…presenting DNL an opportunity to make inroads into domestic markets.




…and a favorable product spread internationally augurs well for margins and faster payback.

Phenol/Acetone Spread and Brent Crude


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(Phenol+Acetone)-(Benzene+Propylene) Spread Brent Crude (RHS)

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-16

Spread as % of Feedstock Cost

The ‘(Phenol+Acetone) - (Benzene+Propylene)’ Spread is calculated on the basis of actual feedstock requirement and the final product ratios i.e.

0.87 for Benzene, 0.47 for Propylene, 1 for Phenol and 0.612 for Acetone and 1.31 for Cumene. The prices reflected here are from global markets

and does not include India import parity (customs, import duties, anti-dumping etc.).

As per our analysis, the Phenol/Acetone spread is a function of multiple drivers like crack spreads in olefins which impacts availability of

Benzene/Propylene to Cumene spreads and finally the Phenol/Acetone prices rather than a simple crude oil price function though it is an

important contributor. In India’s case we see that India is a Benzene surplus country but have a relatively lower Propylene production (lower

propylene available for phenol production) thus it has fewer Phenol/Acetone capacities installed and is heavily import dependent.

However, we have also noted that only spread alone is not sufficient enough to assess phenol/acetone profitability thus we have included net

spread as a % of feedstock cost chart where we can see that lately the margins for phenol/acetone have improved despite net spreads remaining

more or less at lower levels.



We expect DNL to almost add ₹1,600 to ₹1,700 million through new project going ahead.

Revenue estimates (₹ Mn.)

DNL with its new Phenol project at Dahej coming online by December 2017, the top line for the company is expected to be almost

get doubled by FY-19E. Due to India’s dependent heavily on the imports due to lack of domestic production capacity and imposition

of around 7.5% cumulative anti-dumping duties, the macro scenarios for the domestic market looks promising for DNL.

We have in our projections for the new project have assumed utilisation levels at 80% in FY-19E and with this we expect DNL to

report around ₹1,600-1,700 million in sales from phenol and acetone combined.

On margins front we expect DNL to improve its margins gradually over next two years and further increase in margins in FY-19E on

back of phenol project.


-

9,000

18,000

27,000

36,000

FY-15 FY-16 FY-17E FY-18E FY-19E

Traditional Sales (₹ Mn.) Phenol Project Sales (₹ Mn.)

0%

5%

10%

15%

20%

-

1,500

3,000

4,500

6,000

FY-11 FY-12 FY-13 FY-14 FY-15 FY-16 FY-17E FY-18E FY-19E

EBITDA (₹ Mn.) EBITDA Margins (RHS)

EBITDA & EBITDA margin estimates



With global chemical industry shifting gradually to the

emerging Asian regions from the developed western.

The Indian chemical industry offers huge scope of growth

for the sector in the long-term on back of higher per

capita consumption, increase in agri inputs, growth in

pharma industry.

The Indian specialty chemicals, is now one of the fastest

growing industries globally (next only to China), delivering

13% annual average growth over the last five years

reaching US$ 25 billion in 2014.

We expect DNL to get benefit from both macro and micro

factors in future.

At CMP the stock is trading at 14.8x times FY17E earnings

and 13.4x times FY18E earnings.

We initiate our coverage on Deepak Nitrite Limited with a

BUY rating and a target price of ₹161 per share.

Relative stock performance (Aug’15=100)

Valuation and Recommendation:

Source: Bloomberg, Anand Rathi Research


(In ₹ mn) FY-16 FY-17E FY-18E FY-19E

EPS (₹) 5.4 6.8 7.5 23.4

P/E (x) 18.7 14.8 13.4 4.3

P/B (x) 2.5 2.1 1.8 1.3

ROE 13.3% 14.4% 13.7% 29.8%

ROCE 18.5% 18.1% 17.0% 35.3%

EV/EBIDTA (x) 7.9 6.2 5.5 2.4


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Margins FY-16 FY-17E FY-18E FY-19E

Sales Growth % 3.4% 5.7% 7.8% 115.3%

Operating Margin % 12.1% 13.8% 14.5% 15.3%

Net Margin % 4.6% 5.5% 5.6% 8.1%

Consolidated Financials:



Liabilities

Equity Share Capital 233 233 233 233

Reserves & Surplus 4,496 5,290 6,166 8,886

Total Shareholder's Funds 4,729 5,522 6,399 9,119

Minority Interest - - - -

Long-Term Liabilities 1,589 2,789 3,589 3,589

Other Long-term Liabilities 77 77 77 77

Deferred Tax Liability 566 566 566 566

Short-term Liabilities 5,980 5,845 6,301 13,569

Total 12,941 14,800 16,933 26,920

Assets

Net Fixed Assets 6,297 8,393 9,775 12,258

Long-Term L&A 797 797 797 797

Non Current Investments 28 28 28 28

Other Non-Current Assets 9 9 9 9

Current Asset 5,812 5,574 6,324 13,829

Total 12,941 14,800 16,933 26,920


Net Sales 13,729 14,512 15,644 33,688

Operating Expense 12,066 12,516 13,375 28,550

EBITDA 1,663 1,995 2,268 5,137

Other Income 20 145 156 337

Depreciation 395 522 612 758

EBIT 1,288 1,618 1,813 4,716

Interest 397 484 560 831

Misc. items - - - -

PBT 891 1,134 1,252 3,885

Tax 262 340 376 1,166

Minority Interest (2) - - -

PAT 627 794 877 2,720



The company’s business is exposed to crude oil price.

Any substantial delay in its new project at Dahej may impact our projections negatively.

Key Risks:



Rating and Target Price history:

Date Rating Target Price (₹) Share Price (₹)

30-Aug-16 BUY 161 101

DNL rating detailsDNL rating history & price chart

Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

NOTE: Prices are as on 30th Aug 2016 close.


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Disclaimer:

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Continued…



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Contd…

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2

ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company, at theend of the month immediately preceding the date of publication of the research report or date of the public appearance?. NO

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Documents

August 30, 2016 ₹101 Time Horizon 12 Months Target: ₹161 · 2016-09-01 · August 30, 2016 Jun-16 Mar-16 Dec-15 Sep-15 Promoter 52.0% 51.8% 57.3% ... led to in-house development