Should you invest in this midcap gem that has rallied 3 times in a year, 88 times in a decade?

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The true mark of a wealth creator is not to get distracted by market volatility and Deepak Nitrite has done just that. Despite benchmark index Sensex declining almost 2.6% in the past one month, the chemical manufacturer’s stock has rallied over 21%. If we look at a longer time frame the outperformance is even wider. Over the period of one year, the stock jumped over 3.5 times from Rs 409 on March 17, 2020, to Rs 1,576 on March 16, 2021. Over the last decade, the counter has seen a metaphoric rise from Rs 18 on March 17, 2011, to Rs 1,576 on March 16, 2021, delivering returns of 8,704%. In simple words, Rs 10,000 invested in this stock in March 2011 has now turned into a whopping Rs 8,80,447.

The prime reason for this rise is its ability to adopt a ‘Make in India’ strategy much before it was implemented by the government. Over the last 10 years, the company has incurred a cumulative capex of over Rs 2,100 crore (as per ACE Equity) making it one of the largest investments in India’s chemical sector. These investments saw its net sales of the company jumping 6 times from Rs 672.24 crore in 2011 to Rs 4,229 crore in 2020. On the other hand, its profit after tax has exploded more than 23 times from a mere Rs 26 crore to Rs 611 crore. In short, within a decade the companies’ top line has become its bottom line.

“Over the years, the company has evolved, by adding new products or entering into new business segments or through some mergers and acquisitions. The management’s foresight of venturing into new businesses and taking a share of those businesses and excelling in them maintaining their cost competitiveness and the quality focus of the product has been the key drivers,” said Suvarna Joshi of Axis Securities.

The next leg

Deepak Nitrite through a 100% subsidiary Deepak Phenolics Ltd (DPL), has created a growth engine through products based on phenol, acetone and isopropyl alcohol (IPA). It produces 200 kilotonnes per annum (ktpa) of phenol and 120ktpa of its co-product acetone and 2,600ktpa of cumene. This plant is eight times larger than all existing facilities in India.

“The company plans to enter into a variety of downstream derivatives of Phenol and Acetone, the production of IPA being the first step in that direction. Deepak Nitrite has acquired several land parcels as a part of its capacity expansion and growth plan. This comprises a big parcel of land acquired at Dahej, followed by smaller parcels of land acquired in Hyderabad and Roha. The company has acquired land of INR 140 crore in aggregate for those land parcels in FY20,” said HDFC Securities in a report.

The brokerage expects Deepak Phenolics revenue to grow from Rs 2,000 crore in FY20 to Rs 3,050 crore in FY23 with earnings before interest & tax (EBIT) jumping three-fold to Rs 550 crore from Rs 187 crore over the same period.

The company has earmarked a capex of Rs 700 crore in FY22 which entails the expansion of upstream and downstream product capabilities thereby giving it higher basic materials capacity and an opportunity to explore the value chain.

The Indian chemicals industry stood at $178 billion in 2019 and is expected to reach $304 billion by 2025 registering a CAGR of 9.3%. The demand for chemicals is expected to expand by 9% per annum by 2025. Simultaneously the continued shift from China to India for manufacturing chemicals holds the potential for further acceleration for the company.

“The valuations for Deepak Nitrite have been on the premium side, and rightly so it has commanded that premium, but with the growth opportunities that are there, the premium could sustain. It has multiple avenues to keep continuing with the growth that it has displayed in the past. So, this is one stock that an investor can benefit from,” added Joshi.

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