V A L U E. P I C k. Deepak Nitrite Limited (DNL) CMP: 101 Target: 161. Anand Rathi Research. Time Horizon 12 Months.

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1 August 30, 2016 Time Horizon 12 Months CMP: 101 Target: 161 V A L U E P I C k Key Data Bloomberg Code NSE Code Shareholding Pattern (as on Mar 16) 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%, Bloomberg Analyst: Narendra Solanki narendrasolanki@rathi.com DN IN DEEPAKNTR BSE Code Sector Industry Chemicals 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 (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 ( ) EV/Sales EV/EBITDA P/E (x) Price Performance CY13 CY14 CY15 YTD Absolute 13% 172% -10% 37% Relative 6% 141% -6% 27% Relative stock performance (Aug 15=100) 80 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nifty DDEEPAKNTR Anand Rathi Research

2 A well known chemical company with proven track record in chemicals sector. Established in 1970s by Mr. C.K. Mehta (Founder & Chairman), Deepak Nitrite Limited ( DNL ) is an Indian chemical manufacturing company. Enjoys a leading market position in most of its products in the domestic as well as global markets. 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 has led to in-house development of new product applications and understanding customer preferences resulting in having 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 revenues respectively. DNL has recently increased its focus on adding high value products and moving higher in the value chain to improve its profitability in long term. As a result the company has renamed its Bulk chemicals segment to Basic chemicals segment 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) and acetone (1,20,000 T/year). The project is already under execution and is expected to start by Dec-17. 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 initiate our coverage on Deepak Nitrite Limited with a BUY rating and a target price of 161 per share. 2 Anand Rathi Research

3 with a pedigree of almost 45 years Year DNL History & Milestones 1970 Incorporation of DNL as a private Ltd company Listing on public markets, BSE Manufacturing of Sodium Nitrite and Sodium Nitrate at Vadodara, Gujarat Promoted Deepak Fertilizers and Petrochemicals Ltd Acquisition of Sayadri Dyestuffs & Chemicals from Mafatlal group Commissioned Multipurpose Nitro- Aromatics plant Commissioned Hydrogenation facility near Mumbai Acquisition of Aryan Pesticides Limited Relocation of Sayadri Facilities to Vadodara and Roha Rights issue of equity shares. Acquisition of colour intermediate business (DASDA) from Vasant Chemicals Ltd Entry into Fuel Additives business Listed on NSE 2013 Brownfield expansion for manufacturing inorganic salts at Nandesari Dahej facility for OBA fully commissioned. 1:1 bonus and 5:1 split declared Fundraising through QIP: INR 833 mn 3 Anand Rathi Research

4 Spread across key chemical hubs of the country Manufacturing Facilities Nitration Oxidation Alkylation Diazotisation Expertise in multiple chemical processes Nox Absorption Condensation Hydrogenation Sulphonation 4 Anand Rathi Research

5 offering products throughout key chemical value chain. Fine & Specialty Chemicals Business Segments Basic Chemicals Performance Products 5 Anand Rathi Research

6 With revenue well distributed over products and geographies. Segment wise revenues (FY-16, Mn.) Product wise revenues (FY-16, Mn.) Pharma, 1% Others, 2% Performance Products 21% Fuel Additives, 17% Fine & Speciality Chemicals 29% Basic Chemicals 50% Agro, 22% Colour, 58% Domestic vs Exports revenues (FY-16, Mn.) Exports geography wise revenues (FY-16, Mn.) Exports 38% China Europe 8% 48% Domestic 62% Others 21% U.S. 23% 6 Anand Rathi Research

7 Basic and Specialty segments performance remain stable to positive Basic Chemicals Segment Fine & Specialty Chemicals 2,400 14% 1,400 35% 1,800 12% 1,050 29% 1, % 8% % 17% 11% - Q2-FY15 Q3-FY15 Q4-FY15 Q1-FY16 Q2-FY16 Q3-FY16 Q4-FY6 Q1-FY17 6% Revenues Mn. EBIT % (RHS) Revenues Mn. EBIT % (RHS) 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. 7 Anand Rathi Research

8 while performance products segment remains muted. Performance Products Segment % 5% 0% -5% -10% Revenues Mn. EBIT % (RHS) 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. 8 Anand Rathi Research

9 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 Anand Rathi Research

10 Phenol Chain Derivatives 10 Anand Rathi Research

11 With India continuously a net importer of Phenol and Acetone Global Phenol 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 India is the most impressive importer by continuous growth of domestic demand. Global Acetone trade pattern 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. Source: PTT Plc, Anand Rathi Research 11 Anand Rathi Research

12 presenting DNL an opportunity to make inroads into domestic markets. 12 Anand Rathi Research

13 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 and a favorable product spread internationally augurs well for margins and faster payback Phenol/Acetone Spread and Brent Crude % Spread as % of Feedstock Cost % % % 0 0 0% (Phenol+Acetone)-(Benzene+Propylene) Spread Brent Crude (RHS) The (Phenol+Acetone) - (Benzene+Propylene) Spread is calculated on the basis of actual feedstock requirement and the final product ratios i.e for Benzene, 0.47 for Propylene, 1 for Phenol and 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. 13 Anand Rathi Research

14 We expect DNL to almost add 1,600 to 1,700 million through new project going ahead. Revenue estimates ( Mn.) EBITDA & EBITDA margin estimates 36,000 6,000 20% 27,000 4,500 15% 18,000 3,000 10% 9,000 1,500 5% - FY-15 FY-16 FY-17E FY-18E FY-19E Traditional Sales ( Mn.) Phenol Project Sales ( Mn.) - FY-11 FY-12 FY-13 FY-14 FY-15 FY-16 FY-17E FY-18E FY-19E EBITDA ( Mn.) EBITDA Margins (RHS) 0% 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. 14 Anand Rathi Research

15 Valuation and Recommendation: 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 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) Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nifty DDEEPAKNTR Source: Bloomberg, Anand Rathi Research (In mn) FY-16 FY-17E FY-18E FY-19E EPS ( ) P/E (x) P/B (x) ROE 13.3% 14.4% 13.7% 29.8% ROCE 18.5% 18.1% 17.0% 35.3% EV/EBIDTA (x) Anand Rathi Research

16 Consolidated Financials: (In Mn.) FY-16 FY-17E FY-18E FY-19E 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 Depreciation EBIT 1,288 1,618 1,813 4,716 Interest Misc. items PBT 891 1,134 1,252 3,885 Tax ,166 Minority Interest (2) PAT ,720 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% (In Mn.) FY-16 FY-17E FY-18E FY-19E Liabilities Equity Share Capital 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 Deferred Tax Liability 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 Non Current Investments Other Non-Current Assets Current Asset 5,812 5,574 6,324 13,829 Total 12,941 14,800 16,933 26, Anand Rathi Research

17 Key Risks: The company s business is exposed to crude oil price. Any substantial delay in its new project at Dahej may impact our projections negatively. 17 Anand Rathi Research

18 Rating and Target Price history: DNL rating history & price chart DNL rating details Date Rating Target Price ( ) Share Price ( ) 30-Aug-16 BUY Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nifty DDEEPAKNTR Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research NOTE: Prices are as on 30 th Aug 2016 close. 18 Anand Rathi Research

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