More than 4 times jump within 1 year from the lows of March 2020. Still, the company is available at good valuation with immense room for growth!
Due to closure of various factories in China, global companies trying to reduce the dependency from China and Indian government promoting the local manufacturing, this company is one of the biggest beneficiary of marco environment factors and well positioned to cater to the ever growing demand. Oflate, this company has made a lot of headlines and became the talk of the town in investor’s community. I am talking about none other than Deepak Nitrite.
Over the past few quarters, Deepak Nitrite has shown tremendous growth in its revenues and profitability. But what factors resulted in such an extraordinary growth of Deepak Nitrite? Lets try to decode it in this article.
As usual, we will start the fundamental analysis of Deepak nitrite by analyzing the company and its business, its competitive strength, future growth prospect and the financial analysis to decide if Deepak Nitrite is fundamentally strong or not. Then we will analyse the valuations of the company to decide if it is worth investing in Deepak Nitrite at current levels or not.
Company and its business
- Established in the 1970s, Deepak Nitrite is a leading and fastest growing chemical intermediates company with a diversified presence across three segments: Basic Chemicals (BC) , Fine and Specialty Chemicals (FSC) and Performance Products (PP).
- It enjoys strong competitive positioning in most of the product categories and has a strong client base and caters to over 900+ clients in over 40+ countries with over 100 international quality products manufactured in 5 manufacturing facilities in India.
- Deepak Nitrite is ranked among Fortune Next 500 companies and recognized among the top 25 wealth creators by Fortune Magazine, India.
- Its diversified product portfolio caters to segments like dyes and pigments, agrochemical, pharmaceutical, plastics, textiles, paper and home and personal care segments in India and overseas.
- Deepak Nitrite is one of the only 40 Indian companies awarded the use of the Responsible Care logo which is given to industry leaders who believe in sustainable growth.
- Today, Deepak Nitrite is a supplier to some of world’s biggest companies including Bayer, Unilever, Indian Oil, Reliance, L’oriel, etc.
Products & its usage:
Basic Chemical: Sodium Nitrite, Sodium Nitrate, Nitro Toluidines, Fuel Additives which has application in paint industry, petrochemical industry and rubber industry. Deepak Nitrite is a leading producer of Sodium Nitrite and Sodium Nitrate in the world.
Fine & speciality chemicals: Xylidines, Cumidines, Oximes & specialty agrochemicals which has application in agrochemicals, colors & pigments, paper, personal care and pharma industry. Deepak Nitrite is among top 3 global player of Xylidines, Cumidines and Oximes.
Performance Products: Optical brightening agent (OBA) and Flavonic acid which has application in textile, coating, paper, detergent, etc.
It has a 100% subsidiary with name Deepak Phenolics which manufacture Phenol, acetone and Isopropyl Alcohol: Deepak Nitrite is a largest producer of Phenol and acetone since 2018 in India. Phenols are used for making glue, household products and as intermediates for industrial synthesis. Acetone is a solvent used in manufacturing of pharma products, plastics, cosmetics and personal care products. IPA is also a key component in the manufacture of cleaning, disinfectants, inks, agro-chem formulations, resins, acrylic emulsions, pharmaceutical products and sanitizers.
Management: Deepak Nitrite Chairman and MD is Mr. Deepak C. Mehta. Mr Deepak Mehta has over 40 years of experience in Chemical industry and one of the prominent personality in Chemical sector in India. He is also the Chairman of National Chemical Commitee at FICCI. He is the 2nd generation member of Mehta family to lead the company. They also have 3rd generation young blood to take the legacy forward with Mr Maulik Mehta who is the CEO of the company and holds BBA degree from University of Liverpool, UK. He has also done Master in Industrial and Organizational Psychology from Columbia University, USA. Further, he has done his MBA from Harvard University, Boston. He is 37 years old and has 10 years of experience.
Overall, on company & its business, I would rate it 10/10.
Competitive strength
1. Market leadership across product segments: Deepak Nitrite is the market leader in most of its businesses it operates. For example, in basic chemical business, Deepak Nitrite is the largest player in India for supplying sodium nitrite with market share of 80%, fuel additives with market share of 75% and nitro-toluene with 50% market share. Its has a market share of 75% in the “performance product” business of optical brightening agent. In the Fine and specialty chemical segment, Deepak Nitrite is continuously investing money in research & development (R&D), and integrated operations which has established Deepak Nitrite’s relationship with key customers for supplying Xylidines, Oximes, Cumidines, Nitro Oxylene, which find application in pharma, personal care and agro-based chemicals.
2. Backward Integration: It is very important to understand the concept of forward and backward integration. Let me help you understand with a simple example. Let’s say you manufacture FMCG products like soap, shampoo, biscuits, etc. Now, you would need help from 2 sides. On one side, you would need to procure the raw materials like various chemicals to manufacture your products and one another side, you would need a good distribution network to distribute your products. Generally, one company can’t do everything. Hence, there are various entities involved. Naturally, every entity including raw material supplier and distributor would have their profit margins. Now, if you want to grow, what can you do? You can add more products in your portfolio. That’s called horizontal integration. What else can you do? You can have your own distribution network. That’s forward integration. Likewise, you can have your own raw material manufacturing plant. That’s backward integration. Both forward and backward integration are called vertical integration. This way, your cost would reduce and you will enjoy better margins. When you have lower cost, you become a leader as competitors will not be able to complete at that cost. This is the most important aspect in Chemical sector. Now let us understand how Deepak Nitrite is using backward integration.
One of the key strengths of Deepak Nitrite is its backward integration where it also manufactures the raw material used for producing the final product. For example, the company did backward integration by acquiring Vasant Chemicals in 2006 which was a manufacturer of DASDA, an important raw material for manufacturing brightening agents. Company is planning a lot of such backward and forward integrations to expand its business and manufacture products at lower cost.
3. Sustainable growth: Deepak Nitrite has always focused on sustainable growth which is again a key differentiator. It is one of the only 40 Indian companies awarded the use of the Responsible Care logo which is given to industry leaders who believe in sustainable growth. Guys, the biggest reason for high growth in the chemical sector in India in recent years is due to the shutdown of many chemical factories in China due to environmental concern. And in the future, chemical companies in India would only be able to operate if they are sustainable without harming the environment. Deepak Nitrite is one of the few companies with sustainable growth.
Risk: If you ask me about the risk aspect of Deepak Nitrite, one major risk is that China is still a big player in Chemical sector with 35% market share. What if tomorrow it reduces its cost to gain the market share. It would impact the chemical sector in India. Another key aspect would be the best practices for sustainable growth as Chemical sector releases many hazardous by-products.
Competitors: If we look at the competitors, it has various competitors in Chemical sector in different categories. Some of the competitors include Aarti industries, Vinati Organics, Fine organics, Tata Chemical, Godrej Industries, etc.
Overall, on competitive strength, I would rate Deepak Nitrite 9/10.
Future growth prospects
The global chemical industry currently stands at US$ 4 trillion in annual sales. Over the past two decades, this industry has witnessed a structural shift of manufacturing dominance from the West (USA and Europe) to the East (China followed by rest of South East Asia). China alone represents a dominant 35% share of the global chemical industry, whilst India has a very small share in chemical manufacturing. India is however, expected to be one of the fastest growing chemical markets in the world in the coming years.
The biggest reason is structural shift in the global supply chain or the theme called “China plus one”. Specially after COVID, companies all over the world are exploring the alternative of China so that they can reduce their dependency from China and minimize the business risk. India is set to be a key beneficiary of this shift. India is already the 6th largest producer of chemicals and has all the required skillset and technology to cater to ever growing global demand for chemicals.
In fact, even the Indian government is focusing a lot on the “Make in India” initiative and this would again help the Indian companies to flourish in the long term including the chemical sector. There would increase in demand not only from the global market but also from the domestic market due to increasing chemical consumption across industries.
Deepak Nitrite Future Growth prospects:
Deepak Nitrite is all set to encash the growing demand as being one of the biggest player in the Chemical industry and has already invested in manufacturing new plants to cater to the growing demand. Deepak Nitrite continue to expand the business by both backward and forward integration where company would expand its scope of various value added products with forward integration.
For example, Deepak Phenolics invested more than Rs 1,400 crore over 25 months, one of the largest investments in India's chemical sector in recent years, to create a manufacturing capacity of 2 lakh tonnes of phenol per annum and 1.2 lakh tonnes of its co-product acetone, and supported by a capacity for 26 lakh tonnes of chemical compound cumene. The plant, with advanced digital IoT systems, process technologies and zero emission, is eight times bigger than all existing facilities in India. It was commissioned in November 2018. Deepak Nitrite chairman & MD said that “it will help in saving half a billion dollars in imports for the country”.
In April 2020, Deepak Nitrite subsidiary Deepak Phenolics commissioned a 30,000 MT (annually) plant at Dahej to make Isopropyl Alcohol (IPA) from Acetone. Earlier, there was a huge dependency on China for these products. So new production would significantly reduce the country's dependence on imports of this product. IPA is an important input in the production of essential pharmaceuticals and manufacturing of sanitizers.
Overall, if there is one company that would lead the growth of Chemical sector in India is “Deepak Nitrite”. It is a brilliant example of Aatmanirbhar bharat and I have no doubt about its bright future growth prospects. Hence, on future growth, I would rate it 10/10.
Financial:
Growth Ratio: If we look at the revenue growth, Deepak Nitrite revenues have grown from Rs 1,327 Cr in FY15 to currently at Rs 3,953 by Dec 2020. The slight fall is due to COVID. The CAGR growth rate in last 6 years is 20.1% which is brilliant.
Its profits have grown from Rs 53 Cr in Mar 15 to currently at Rs 658 Cr by Dec 2020. Just look at the sharp growth in profits. The CAGR growth rate in last 6 years is 55% which is just insane.
Hence, on growth ratio, I would rate it 10/10.
Profitability ratio: Deepak Nitrite operating margin has been great. In fact, in the alst few years, its margin have increased significantly due to forward and backward integration and currently operating at a margin of 27%.
ROE and ROCE: If we look at the profitability, Deepak Nitrite latest ROE is 35.8 and ROCE is 37.1% which is exceptional.
Hence, on profitability ratio, I would rate it 10/10.
Debt to equity: If we look at the debt to equity ratio, Deepak Nitrite has significantly reduced its debt level and currently at 0.38 which is well under control. Hence, on debt to equity ratio, I would rate it 10/10.
Valuations
If we look at the valuations, Deepak Nitrite share has jumped from the lows of Rs 310 in March 2020 to currently at Rs 1588. Thats more than 4 times jump in just 1 year. However, inspite of such a sharp jump, Deepak Nitrite is still trading at a PE ratio of 32.8 which is very reasonable. In fact, looking at the growth prospect, it is undervalued and has immense potential to grow.
Conclusion:
Overall, if we conclude, Deepak Nitrite has an excellent business and its management, strong competitive advantage, solid financials and a very bright growth prospect which makes it a fundamentally superstrong company and it is currently available at fair valuation.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".
Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.
Launch your Graphy