Is Deepak Nitrite's Shine Fading? Motilal Oswal Says 'Sell'!

In a significant move that has sent ripples through the chemical sector, prominent brokerage firm Motilal Oswal has slapped a 'Sell' recommendation on Deepak Nitrite. The analyst firm has set a target price of Rs 1,630 per share, indicating a potential downside from current levels.

The cautionary stance comes on the heels of Deepak Nitrite's performance in the fourth quarter of fiscal year 2024 (Q4 FY24), which fell short of analyst expectations.

While the company's Profit After Tax (PAT) showed a modest increase year-on-year, it was significantly below the consensus estimates, largely due to ongoing pressures in its key segments.

A deep dive into the Q4 numbers reveals the Phenolics division as a primary drag. This segment, crucial for the company's overall profitability, grappled with severely depressed realizations.

The glut in the market, coupled with inventory write-downs, resulted in the Phenolics segment swinging into a loss, significantly impacting the consolidated performance. The challenges faced by the Phenolics division underscore the broader pricing volatility within the specialty chemicals landscape.

While the Basic Chemicals division managed a relatively decent showing, bolstered by higher volumes, it too wasn't immune to the overarching pricing pressures.

The Advanced Intermediates segment, however, provided a pocket of stability amidst the turmoil, demonstrating resilience in its operational performance.

Looking ahead, Motilal Oswal's outlook remains cautious. Analysts foresee a prolonged soft demand environment, particularly for the Phenolics segment, with weak realizations expected to persist in the near term.

A major concern highlighted is the elevated inventory levels, which are likely to take considerable time to clear, potentially delaying any significant recovery in profitability.

Adding to the complexity, Deepak Nitrite has announced substantial capital expenditure plans amounting to Rs 1,500 crore for FY25.

While such investments typically signal future growth, analysts caution that the returns on this significant outlay might be delayed, especially given the prevailing challenging market conditions. The brokerage firm believes that the stock, currently trading at a rich valuation of 28x/23x FY25/26E EPS, does not adequately reflect the headwinds and the projected delay in recovery.

Based on these concerns, Motilal Oswal has reiterated its 'Sell' rating, deriving its target price from 20x FY26E EPS.

Investors are advised to exercise caution and monitor the company's performance closely as it navigates these challenging waters.