by More than four times jump within one year from the lows of March 2020.
Still, the company is available at a good valuation with immense room for growth due to the closure of various factories in China.
Global companies trying to reduce the dependency on China and the Indian government promoting the local manufacturing
This company is one of the biggest beneficiaries of macro-environment factors and is well-positioned to cater to the ever-growing demand of late.
This company has made a lot of headlines and became the talk of the town in the 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 revenue and profitability but what factors resulted in such an extraordinary growth of Deepak Nitrite,
let’s try to decode it in this article, as usual, we’ll 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 analyze the valuation of the company to decide. If it is worth investing in Deepak nitrite at current levels or not.
In the next few weeks, I would cover fundamental analysis of companies like laura’s lab, Alkylamine, Dixon technology, endurance technology, etc.
All these companies have immense growth potential, I am sure you would appreciate the analysis. All right let’s start with our analysis.
Also Read: Fundamental Analysis of Newgen Software & Praj Industries Stock Fundamental Analysis
Introduction
Deepak Nitrite was established in the 1970s. Deepak Nitrite is a leading and fastest-growing chemical intermediate company with a diversified presence across three-segment are as follows:
- Basic Chemical
- Fine & Specialty Chemical
- Performance Products
It enjoys strong competitive positioning in most of the product categories and has a strong client base and caters to over 900 plus clients in over 40 plus countries with over 100 international quality products manufactured in six manufacturing facilities in India
Deepak Nitrate is ranked among fortune next 500 companies and recognized among the top 25 wealth creators by fortune magazine India.
Its diversified product portfolio catered to segments like dyes, pigment agrochemical, pharmaceutical, plastics, textile, paper, home, and personal care segments.
Deepak Nitrite is one of the only 40 Indian companies awarded the use of responsible care logo which is given to industry leaders who believe in sustainable growth.
Today Deepak Nitrate is a supplier of some of the world’s biggest company including bear Unilever, Indian oil, Reliance, Loreal, etc.
Fundamental Analysis of Deepak Nitrite
Fundamental Analysis of Deepak Nitrite are as follows:
Business Model of Deepak Nitrite
Now let us try to understand the business of Deepak Nitrite in detail.
Basic Chemical
- The first category is a basic chemical.
- It includes products like sodium nitrite, sodium nitrate, and fuel additives which are applied in the paint industry, petrochemical industry, and rubber industry.
- Deepak nitrite is a leading producer of sodium nitrite and sodium nitrate in the world.
Fine & Specialty Chemical
- The next category is financed specialty chemical products include xylidine, cumidine, oxime, and specialty agrochemical which is the application in agrochemicals color, pigment, paper, personal care, and pharma industry.
- Deepak nitrate is among the top three global players of xylidine, cumidine and oxime.
Performance Product
- The third category is a performance product.
- This category includes optical brightening agent or oba and plasmonic which is applied in textile, coating, paper, detergent, etc.
- It has 100 subsidiaries with the name Deepak phenolics which manufactures phenol, acetone, Isopropyl alcohol that is IPA.
- Deepak Nitrate is the largest producer of phenol and acetone since 2018 in India.
Phenols
- Phenols are used for making glue household products and as intermediates for industrial synthesis.
Acetone
- Acetone is a solvent used in manufacturing of pharma products, plastics cosmetics, and personal care products.
Isopropyl Alcohol
- IPA is also a key component in the manufacturing of cleaning disinfectants, agrochemical resin, pharmaceutical products, and sanitizer.
Revenue Breakup by Business
- If you look at the revenue break up by the business.
- 39 percent revenue of Depak Nitrite is from performance products.
- 15 percent is from basic chemicals.
- 46 percent is from finance specialty chemicals.
Management of Deepak Nitrite
- If you look at the management of Deepak Nitrite.
- Deepak Nitrite’s chairman and MD is Mr. Deepak Mehta.
- Mr. Deepak Mehta has over 40 years of experience in the chemical industry.
- One of the prominent personalities in the chemical sector in India.
- He is also the chairman of national chemical committee at FICCI.
- He is the second-generation member of the Mehta family to lead the company.
- They also have the third generation young blood to take the legacy forward with Mr. Maulik Mehta who is the CEO of the company and holds a BBA degree from the University of Liverpool, UK.
- He also has done master’s in industrial-organizational psychology from Columbia University, USA.
- Further he has done his MBA from Harvard University, Boston.
- He is 37 years old and has got 10 years of experience.
- Overall on the company and its business, I would rate it 10 on 10.
Competitive Strength of Deepak Nitrite
Competitive Strength of Deepak Nitrite are as follows:
Market Leadership
- The first competitive strength of Deepak nitrite is market leadership across product segments.
- Deepak Nitrite is the market leader in most of the businesses it operates.
- For example, In the basic chemical business, Deepak Nitrite is the largest player in India for supplying sodium nitrite with a market share of 80 percent, fuel additives with a market share of 75 percent, and nitro toluene with 50 market share.
- It has a market share of 75 percent in the performance product business of optical brightening agents in the finance specialty chemical segment.
- Deepak Nitrite is continuously investing money in research and development and integrated operations which have established Deepak Nitrite relationships with key customers for supplying xylidine, oxime, cumidine, nitroxylene which is application in pharma, personal care, and agro-based chemicals.
Backward Integration
- The next Strength is backward integration.
- It is very important to understand the concept of forwarding and backward integration in a business.
- 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 two sides on one side you would need to procure the raw material like various chemicals to manufacture your product.
- On 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 in various segments naturally every entity including raw material suppliers, and distributors would have its profit margin.
- If you want to grow what can you do? you can add more products to your portfolio and that’s called Horizontal Integration.
- What else can you do? you can have your own distribution network and that’s called Forward Integration.
- Likewise, you can have your own raw material manufacturing plant and that’s called Backward Integration.
- Both forward and backward integration is called Vertical Integration.
- This way your cost would reduce and you will enjoy better margins when you have a lower cost,
- You become a leader as competitors will not be able to compete at that cost,
- This is the most important aspect of the chemical sector.
How Deepak Nitrite is using Backward Integration?
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 which is used for producing the final products.
For example, the company did Backward Integration by acquiring a chemical in 2006 which was a manufacturer of desktop an important raw material for manufacturing brightening agents.
The company is planning a lot of such backward and forward integration to expand its business and manufacture product at a lower cost.
Sustainable Growth
- The third key strength is 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 responsible care logo which is given to industry leaders who believe in sustainable growth.
- The biggest reason for high growth in the chemical sector in India.
- In recent years, due to the shutdown of many chemical factories in China, due to environmental concerns.
- 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.
Key Risk of Deepak Nitrite
- 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 a 35 percent market share.
- What if tomorrow it reduced 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 the chemical sector releases many hazardous products.
Competitors
- It has various competitors in the chemical sector in different categories
- some of the competitors include Aarti Industries, Lindy organics, Sumi Chemicals, Tata Chemical, etc.
- Overall on competitive strength, I would rate Deepak Nitrite nine on ten.
- The global chemical industry currently stands at four trillion US dollars in annual sales over the past two decades.
- This industry has witnessed a structural shift of manufacturing from dominance from the west including the US and Europe to east which includes china.
- China alone represents a dominant 35 percent share in the global chemical industry while 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 a structural shift in the global supply chain or the theme called China plus one.
- Especially after Covid, companies all over the world are exploring the alternatives of China.
- so that they can reduce the dependency on China and minimize the business risk.
- India is said to be a key beneficiary of the shift.
- India is already the sixth-largest producer of chemicals and has all the required skillset and technology to cater to this ever-growing global demand for chemicals.
- In fact, even the Indian government is focusing a lot on making India initiative and this would again help the Indian companies to flourish in the long term including the chemical sector.
- There would be an increase in demand not only from the global market but also from the domestic market due to increasing chemical consumption across the industry.
Future Growth Prospects
- If you look at the future growth prospect of Deepak Nitrite.
- It is all set to encash this growing demand as being one of the biggest players in the chemical industry and has already invested in manufacturing new plants to cater to the growing demand.
- Deepak Nitrite continues to expand the business by both backward and forward integration where company would expand its scope of various value-added products with forwarding integration.
- For example, Deepak phenolics invested more than 1400 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 tons of phenol per annum and 1.2 lakh tons of its co-product acetone and supported by a capacity of 26 lakh ton of chemical compound cumidine.
- The plant with advanced digital IoT system, process technology, and zero-emission is eight times bigger than all existing facilities in India it was commissioned in November 2018.
- Deepak Nitrite chairman and 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 metric ton annually planned at the hedge to make isopropyl alcohol from acetone.
- Earlier there was a huge dependency on china for these products so new production would significantly reduce the country’s dependency on the import of this product.
- IPA is an important input in the production of essential pharmaceuticals and the manufacturing of sanitizers.
- Overall if there is one company that would lead the growth of the chemical sector in India then it is Deepak Nitrite.
- It is a brilliant example of Atmanirbhar Bharat and i have no doubt about its bright future growth Prospect.
- Hence on future growth, I would rate it 10 on 10.
Company Financials of Deepak Nitrite
Company Financials of Deepak Nitrite are as follows:
Revenue
- If you look at the revenue growth Deepak Nitrite revenues have grown from 1327 crores in fy15 to currently at 3953 by December 20.
- This slight fall is due to Coviid the CGI growth rate in the last six years is 20 percent which is brilliant.
- Its profits have grown from 53 crores in march 15 to currently at 658 crores by December 20.
- Just look at the sharp growth in profit the CAGR growth rate.
- In the last six years is 55 percent which is just insane hence on the growth ratio I would rate it 10 on 10.
Operating Margin
- If you look at the profitability ratio
- Deepak Nitrite operating margin has been great
- In fact, in the last few years, its operating margin has increased significantly,
- Due to forward and backward integration and currently operating at a margin of 27 percent.
ROE and ROCE
- If you look at the profitability Deepak Nitrite’s latest ROE is 21.27% and ROCE is 27.32% which is just exceptional.
- Hence on profitability ratio, I would rate it 10 on 10.
Debt to Equity ratio
- If you look at the debt to equity ratio.
- Deepak Nitrite has significantly reduced its debt level and is currently at 0.38 which is well under control
- hence on the debt to equity ratio I would rate it 10 on 10.
Valuations
- If you look at the valuations Deepak Nitrite’s share has jumped from the lows of 310 in march 20 to currently at 2300 that’s more than eight times the jump in more than one year.
- However, in spite of such a sharp jump Deepak Nitrite is still trading at a PE ratio of 27 which is very reasonable.
- In fact, looking at the growth prospect it is undervalued and has immense potential to grow.
Also Read: Fundamental Analysis of CDSL & Fundamental Analysis of CarTrade Tech Ltd
Conclusion
Overall if we conclude Deepak Nitrite has an excellent business and its management strong competitive advantage and solid financial and a very bright growth prospect which makes it a fundamentally super strong company.
It is currently available at a fair valuation. What is your take on Deepak nitrite have you invested in it do let me know in the comment box.
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