Stock Review: Deepak Nitrite

 

Gujarat-based chemical company Deepak Nitrite has reported double-digit growth in sales and profit in each of the last four quarters. However, its stock has not captured the strong business momentum. With a meagre gain of 2.7% in the last one year, the stock has underperformed the benchmark Sensex, which gained 6% during the period. The company's current valuation looks cheap, given its growth potential.

Deepak Nitrite manufactures organic, inorganic, fine and specialty chemicals, with organic contributing more than 50% of the total revenues. Over 40% of the company's overall revenue is contributed by its exports business.

During the March 2011 quarter, net sales surged 20% to . 190 crore, helped by 18% volume growth yearon-year. The company witnessed a growth of similar magnitude in its net profit at . 8 crore. Its operating margin fell by 110 basis points to 7.6%, on the back of higher costs. The operating margin has been hovering in the 7-9% range for the past six quarters.

Deepak Nitrite has recently made its foray into the fuel additives segment, which contributed . 63 crore, or 10%, to the total turnover in FY11. The segment is expected to be a key growth driver in the coming quarters. The company has increased focus on the Chinese market. Exports to China formed 5% of the company's overall sales for FY11 and are likely to double by the end of next year.
Given the growing demand for chemicals globally, the company has various capacity expansion plans. The recently setup fine and specialty chemicals plant at Dahej, at a capex of . 150 crore, is expected to generate revenues of . 350-400 crore by FY13. Also, increased production of inorganic intermediaries is expected to add . 120-140 crore to the company's overall revenue in the next three years at . 50-crore capex. The company expects both the plants to operate at an operating margin of 15%.

Given the growth opportunities in China and new capacities coming up, the company is likely to fare well in the coming quarters. At the current market price of . 172, the stock trades at 7 times its trailing twelve months earnings. The valuation seems to be cheap compared with larger industry peers, which are trading at an average P/E of 11.