Deepak Nitrite's (DNL) stock soared 227% in the past one year to Rs 1,800 driven by accretive performance by Deepak Phenolics Ltd (DPL), the wholly-owned subsidiary of DNL; strong growth in Fine and Specialty Chemicals segment (FSC); and recovery in the Basic Chemicals segment (BC) in the past nine months.

This led to EBITDA and PAT expanding by 22% YoY and 27% YoY to INR 12bn and INR 8bn in FY21. DPL is doubling its IPA plant's capacity to 60ktpa in FY22, and is planning to introduce downstream products from Phenol and Acetone. The company is adding new chemistries like fluorination and photochlorination into its product offerings.

However, we believe, that (1) further growth in DPL is capped as the Phenol plant is already running at 115% utilisation since 2QFY21 and (2) IPA prices would fall as demand normalcy returns. Besides, DNL is entering into challenging chemistries vis-a-vis chemistries it is currently operating in. The fluorination and photochlorination chemistries will pave the way to tap agrochemical and pharmaceutical customers for DNL. However, the company needs to demonstrate its competencies well over the period in these chemistries to seize business opportunities. We downgrade DNL to SELL from ADD, with a revised target price of INR 1,550. EBITDA/APAT were 41/42% above estimates in 4QFY21, owing to 21% higher revenue, lower-than- expected operating expenses and interest costs, and higher-than-expected other income.

Financial performance: Revenue grew 39% YoY to INR 14.6bn in 4Q, owing to volume growth and higher realisations in BC, FSC and DPL segments. EBITDA grew 74% YoY to INR 4.5bn. EBITDA margin is higher by 624bps YoY to 31% led by favorable pricing environment, higher plant efficiency, and operating leverage.

Basic Chemicals (BC): Revenue/EBIT jumped 9/27% YoY to INR 2/1bn. This came in despite significant increase in raw material prices (as DNL passed through the increase to its customers), and was driven by robust volume growth due to sharp rebound in key end user industries.

Fine & Specialty Chemicals (FSC): Revenue/EBIT jumped 30/57% YoY to INR 2/1bn, supported by volume increment of 15%. Encouraging demand resulted in better pricing in the FSC segment on a YoY basis.

Performance Products (PP): Revenue/EBIT fell 44/96% YoY to INR 867/31mn. Overall volumes in the PP segment improved by 12% QoQ, in line with the opening of the economy.

Deepak Phenolics (DPL): Revenue/EBIT jumped 77/319% YoY to INR 9/3bn. Revenue realisation for both Phenol and Acetone has increased significantly from last year as a result of healthy demand. Improved prices and increased capacity utilisation helped performance significantly.