On Thursday, Ambit Capital initiated coverage on Deepak Nitrite Ltd (NS:DPNT) (DN:IN) stock with a Sell rating and set a price target of INR 2,402.00. The research firm's analysis highlighted Deepak Nitrite's focus on import substitution in the Indian basic chemical sector, which facilitates a quicker capacity ramp-up compared to its peers. Specifically, the firm noted Deepak Nitrite's median gross block turnover (GB T/O) over the past ten years outpaced that of the industry average.
Deepak Nitrite has commenced a significant capital expenditure plan, estimated at around INR 140 billion, to expand into phenol downstream products. These new capacities are expected to be operational progressively over the next three to four years.
However, Ambit Capital anticipates that the company's gross block turnover will decline between fiscal years 2021-2024 and 2025-2028, with a projected median of 2.7x dropping to 1.4x. This anticipated decrease is attributed to the step-up in capital expenditures, which could constrain return on capital employed (RoCE) growth in the medium term.
The firm also pointed out that current phenol spreads, at USD 350 per ton, are trailing behind the long-term average of USD 570 per ton. Despite expecting a compound annual growth rate (CAGR) in earnings of 25% from fiscal year 2025 to 2030, Ambit Capital believes this will not match the growth achieved during fiscal years 2019 to 2022, a period characterized by operating leverage in phenol and expanding phenol spreads.
Ambit Capital's valuation of Deepak Nitrite at INR 2,402 reflects a price-to-earnings (P/E) ratio of 30 times the projected earnings for fiscal year 2027. The firm forecasts a 16% EBITDA CAGR from fiscal year 2024 to 2037. Key risks to their analysis include potential improvements in phenol spreads and a faster-than-anticipated ramp-up of the company's capital expenditure plan.
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