CD Equisearch maintains a HOLD rating for Deepak Nitrite Ltd. (DNL), based on the company’s current market position, financial performance, and sectoral challenges. Despite growth in the phenol business and favorable domestic demand, the company faces headwinds from Chinese dumping and a slowdown in the agrochemical industry, which could hinder further growth. The research house recommends a price target of ₹2596, reflecting limited upside potential from the current levels over the next 6-9 months.

Key Financial Metrics

Current price: ₹2829
Price target: ₹2596
Market Cap: ₹38,590 crore
52-week high/low: ₹3169 / ₹1922
EPS FY25e/FY26e: ₹68.10 / ₹86.55
P/E ratio: 41.5x FY25e, 32.7x FY26e
ROE FY25e/FY26e: 18.2% / 19.5%
Debt/Equity: 0.1 (FY24)

Performance Overview

Advanced Intermediates Segment:
Revenue from the advanced intermediates segment grew modestly, driven by demand for performance products and fuel additives. However, margins suffered due to inventory destocking by Chinese suppliers, higher freight rates, and a sluggish recovery in the agrochemical sector. EBIT margins declined to 9.3% in Q1FY25 from 16.25% in the previous year.

Phenol Business Growth:
The phenol business experienced significant growth, with revenues rising by 37.1% in the last quarter, driven by robust domestic demand. Operating profit margins improved by 240 basis points, reflecting a 47% increase in operating profit and a 35.1% surge in post-tax earnings.

Sectoral Challenges

Chinese Competition:
Chinese suppliers have flooded the market with cheaper products, creating intense pricing pressure for DNL’s advanced intermediates. This trend has impacted export volumes to the EU and US and disrupted the company’s margin profile.

Agrochemical Slowdown:
The global agrochemical market has seen a subdued recovery, negatively impacting DNL’s pricing power. Demand from key segments such as dyes, pigments, and homecare is picking up, but the sector remains under strain.

Valuation and Target

CD Equisearch assigns a HOLD rating with a revised target price of ₹2596, reflecting a 30x FY26e earnings multiple. The stock currently trades at a high valuation of 41.5x FY25e EPS, implying limited near-term upside. Investors are advised to reassess their positions once the market conditions, particularly regarding Chinese competition and agrochemical demand, stabilize.

Investment Outlook

For Short-Term Investors:
Given the stock’s current valuation and sectoral risks, short-term investors should avoid fresh entries and consider partial profit booking if the price nears the 52-week high of ₹3169.

For Long-Term Investors:
Investors with a longer horizon may hold positions, as the commissioning of new projects (such as MIBK, nitric acid, and phenol derivatives) could drive growth from FY26 onwards. However, DNL’s growth trajectory remains tied to a recovery in global demand and stabilization of external pressures like freight rates and Chinese dumping.

Risks and Catalysts

Risks:

Global supply chain disruptions due to volatile freight rates.
Continued price pressure from Chinese competitors, particularly in advanced intermediates.
Uncertain recovery in agrochemicals, which impacts DNL’s pricing power.
Catalysts:**

Phenol business expansion and improved operational efficiencies.
New capacity additions in MIBK, MIBC, and specialty chemicals could enhance growth by FY26.
Government initiatives in India to boost domestic production and reduce dependence on imports could support long-term prospects.
CD Equisearch advises maintaining caution due to near-term volatility but highlights long-term potential through capacity expansions and improved profitability in the phenol business.