Shares of Deepak Nitrite Ltd tanked 15% on Friday in response to the company’s weak December quarter (Q3FY25) earnings. The weak quarterly performance also raised concerns about downside risks to analysts’ estimates that project linear net profit growth from FY25 to FY27.
Bloomberg consensus estimates peg the company’s FY25 net profit at ₹814 crore—a tall order, even assuming Q4 net profit would double from the December quarter’s unusually low ₹98 crore. For perspective, net profit for the nine months ended December (9MFY25) stood at ₹495 crore.
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Generally, advance intermediates and phenolics cycles are counter cyclical and hence are complementary to each other. However, both segments suffered simultaneously in Q3. The Ebit margin of the advance intermediates business nosedived to a historic low of 3.1% from 13.9% in Q3FY24, and to 8.9% from 13.3% in the phenolics segment.
Advance intermediates mainly caters to agrochemicals, dyes and pigments industries. The company blames the global destocking in the agrochemical (finished goods) business that impacts intermediate suppliers such as Deepak Nitrite with a quarter’s lag. It is hopeful that the recovery in the demand for agrochemicals will revive demand for advance intermediates.
Meanwhile, intermediates for dyes and pigments also underperformed as imports continued at unviable prices. While the government has launched an anti-dumping investigation, it remains uncertain whether duties will be imposed.
In the phenolics segment, margin compressed due to elevated input costs. On the earnings call, the management noted that the current spread on phenolics could make survival difficult for most non-integrated producers. This hints that a recovery in spreads could be on the anvil.
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Overall, Ebitda margin at 8.9% in Q3FY25 may mark the bottom. The management is optimistic that the profitability is likely to return to normalized level from Q4 onward as demand for its products stabilizes and cost optimization initiatives fructify. While the company refrained from sharing any specific margin number to define “normalized” during concall, it should be noted thatDeepak Nitrite’s annual Ebitda margin has never been less than 14% at least since FY19.
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The key question, however, is whether valuations are palatable given the risk to earnings. The stock trades at 20x price-to-earnings multiple and 13x of EV/Ebitda for FY27 estimates, as per Bloomberg consensus. These multiples appear pricey for the semi-commodity nature of Deepak Nitrite’s business. But the same multiples would look pricier when analysts cut their earnings estimates when they release their Q3 review reports.
