Deepak Nitrite Ltd

Deepak Nitrite Ltd: Expanding base

Deepak Nitrite Ltd (DNL) is a leading manufacturer of organic, inorganic and fine specialty chemicals (FSC). The Company’s product range includes chemicals which cater to a wide range of industries including colorants, agrochemicals, pharmaceuticals, rubber and specialty chemicals. DNL is also in the business of fluorescent whitening agent (FWA) and bulk chemicals & commodities. For few products like sodium nitrite, sodium nitrate and nitrotoluenes it is a market leader in India while for some like xylidines, cumidines and oximes it is amongst top global suppliers.

DNL has just set up a new plant to manufacture phenol (capacity 200,000 MTPA) and co-produce acetone (120,000 MTPA) at Dahej. The total capital outlay for the project is Rs 1200 cr (FY17 sales is Rs 1360 cr while current market cap is Rs 3000 cr – gives an indication about the size of expansion). The project is now well into its pre-commissioning activity & the company has set up a marketing team for customer outreach of the new products. We expect commencement by end of July.  At full capacity ~Rs.2000 cr topline is expected to be added. We do not foresee any major competitive risks to expansion as the market size is not lucrative enough for feedstock majors.

Phenol and acetone are organic compounds derived from benzene and propylene (crude derivatives). As seen from the table below, since more than 80% of the phenol & acetone requirement is met through imports, DNL decided to exploit the untapped potential by setting up a plant domestically. Hindustan Organics Ltd (capacity of 11,500 and 7,100 MTPA odd for phenol & acetone respectively) and SI Group (capacity of 39,500 and 24,000 MTPA odd for phenol & acetone respectively) are the only two players that manufacture phenol and acetone domestically. 

Market Size(MTPA- FY16)
Domestic Production
 (MTPA- FY16)
(MTPA- FY16)
Import proportion
Phenol275,00050,000225,00081.8%Laminates, paints, automobile lining, paints & varnishes, surfactants, pesticides
Acteone170,00030,000140,00082.4%Pharma, paints, printing inks, acrylic sheets

 The bulk chemical segment constituted about 51% of the sales in FY17 and is further segregated into three SBUs namely Sodium Nitrite/Sodium Nitrate, Nitro Toluenes and Fuel additives. The products are basically used as intermediates in dyes, pharmaceutical, food colors, agrochemicals, refinery, rubber, and specialty chemical industries etc. Since the products are commoditized in nature and pricing is linked to crude, cost leadership and volume growth is critical to gain market share. DNL is a leader in sodium nitrite/nitrate and nitro toluenes in India.

The fine specialty chemicals segment consists of niche products that require high value addition. The products are manufactured as per customer specifications and are margin lucrative. DNL manufactures various agrochemical intermediates and pharma & personal care products. The segment contributed 29% to the total sales in FY17 and EBIT margin is in the range of 23-25%.

Fluorescent whitening agents are brighteners used in industries like detergents, paper and textile. DNL is a fully integrated manufacturer of FWA (plant started in FY14 at a cost of Rs 280 cr) having vertical integration from toluene to para-nitro-toluene (PNT) and further into Di-amino Stilbin Di-sulphuric acid (DASDA) to the final product. Despite being an integrated producer of FWA and having more than 75% market share, DNL is making losses at the EBIT level because of lower capacity utilization (~40%) and long customer validation cycles. The segment contributed 20% to the total sales in FY17.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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