Ashish Kacholia’s latest portfolio
First, we have to perform the ritual of perusing Ashish Kacholia‘s latest portfolio as of 31st March 2019.
As one can see, specialty chemical stocks dominate the portfolio.
There are four stocks which owe their allegiance to the specialty chemicals sector. These are NOCIL, GHCL, HIKAL and Vishnu Chemicals.
The portfolio is otherwise perfectly balanced with representatives of software, engineering, pharma, FMCG, retail, realty etc contributing to the prosperity of Ashish Kacholia.
The net worth of the portfolio as of date is about Rs. 624 crore, which is quite impressive.
|Stock Name||CMP (Rs)||Nos of shares||Value (Rs Cr)|
Shaily Eng Plastics Ltd.
Vaibhav Global Ltd.
Poly Medicure Ltd.
IFB Industries Ltd.
DFM Foods Ltd.
Mold-Tek Packaging Ltd.
V2 Retail Ltd.
MIRC Electronics Ltd.
GTPL Hathway Ltd.
Vishnu Chemicals Ltd.
CHD Developers Ltd.
Marshall Machines Ltd.
Beta Drugs Ltd.
Deepak Nitrite, Latest stock pick of Ashish Kacholia
Deepak Nitrite, a small-cap stock with a market capitalisation of Rs. 4400 crore, is Ashish Kacholia’s latest stock pick.
He bought 750,000 shares on 15th March 2019 and held them as of 31st March 2019.
The investment is worth Rs. 25 crore at the CMP of Rs. 322.
Ashish Kacholia’s timing was perfect. The stock is up 23% since his purchase.
The YoY gain is 33% while the gain over 24 months is 116%.
— Yatin Mota (@YatinMota) June 6, 2019
|DEEPAK NITRITE LTD – KEY FUNDAMENTALS|
|MARKET CAP||(Rs CR)||4,387|
|EPS – TTM||(Rs)||[*S]||10.30|
|LATEST DIVIDEND DATE||19 JUN 2019|
|BOOK VALUE / SHARE||(Rs)||[*S]||77.56|
|DEEPAK NITRITE LTD – FINANCIAL RESULTS|
|PARTICULARS (Rs CR)||MAR 2019||MAR 2018||% CHG|
(Source: Business Standard)
Beneficiary of US-China trade war
Sonal Bhutra, a CA, has conducted a detailed study of the affairs of Deepak Nitrite.
She has highlighted the core points in an easy-to-understand manner.
Interesting highlights from Deepak Nitrite's AR
– The domestic chemical industry has attracted FDI investment of $1.3Bn in FY18, about 3% of the total FDI
-Significant opportunities lie ahead arising out of US-China trade war as well as shutting down of capacities in China
— Sonal Bhutra (@sonalbhutra) June 6, 2019
-per capita consumption of chemicals in India is 1/10th of the world average
-In the Specialty Chemicals segment, production picked up by 3.7% in 2018 and is expected to witness another 2.2% rise in 2019
-India continues to be a net importer of chemicals
— Sonal Bhutra (@sonalbhutra) June 6, 2019
– Capacity utilisation touched 100% during Q4FY19
– Domestic market share of around 55% in Phenol and Acetone
– Phenol plant is expected to save approx. $350 – 400 mn of Foreign Exchange every year pic.twitter.com/1WFFec6uFK
— Sonal Bhutra (@sonalbhutra) June 6, 2019
Heavy Import duty/ Anti-dumping duty on Phenol/ Acetone augers well
Deepak Nitrite is one of the dominant producers of Phenol and Acetone, which are specialty chemicals.
It has set up a facility to produce 2 lk tonnes of phenol. The turnover from the phenol plant is around Rs 1,000 crore and it will generate a revenue of Rs 2,000-2,250 crore in FY20.
Recently, India has imposed heavy import duty on Acetone from Countries like Singapore, EU, USA & South Africa in the range $56.91-$277.85/MT.
The anti-dumping duty imposed is effective for a period of five years (unless revoked, superseded or amended earlier) from the date of publication of the notification in the Official Gazette and is payable in Indian currency.
Deepak Nitrite in Focus – India Imposes heavy import duty on Acetone from Countries like Singapore, EU, USA & South Africa in the range $56.91-$277.85/MT. Deepak Nitrite has Total Capacity of 1.2 lk MTPA which got recently commissioned. https://t.co/eYDqipFRHn pic.twitter.com/wVtlpSGOdd
— Yatin Mota (@YatinMota) March 26, 2019
#4QWithCNBCTV18 | Deepak C Mehta, #DeepakNitrite says have put up a facility to produce 2 lk tonnes of phenol; Turnover fm phenol plant is around Rs 1,000 cr & phenol plant will be able to do rev of Rs 2,000-2,250 cr in FY20#OnCNBCTV18 @Nigel__DSouza @Reematendulkar @sonalbhutra pic.twitter.com/YlK3rKqiHC
— CNBC-TV18 News (@CNBCTV18News) May 8, 2019
Deepak Nitrite – Q4FY19 and FY19 – Super Growth in revenues and profits over the year. Seems all set to double revenues and profits over FY20@unseenvaluehttps://t.co/kQFYZgd3nf#deepaknitrite pic.twitter.com/jLSSQr5Pg4
— P₹oxy Investor (@proxy_investor) May 3, 2019
However, it is a fact that Phenol prices have the tendency to fluctuate wildly depending on demand-supply factors.
In December 2018, Phenol prices had crashed while those of Cumene, a raw material, had surged.
This played havoc with Deepak Nitrite’s fortunes.
There is also a risk of oversupply because out of the estimated market demand for 3 lakh tonnes, the two large players have a combined production capacity off 6 lakh tonnes.
Deepak nitrite will be starting the commercial sale shortly.. the total market of phenol in India is 3 lac tonne out of which 2 lac tonne will be produced by Deepak.. HOCL also has 4ok capcity.. as of now phenol is majorly imported.. will the supply impact the price further?? https://t.co/79pEGiI4QC
— Navin Shetty (@Navin_Shetty1) December 6, 2018
Chemical Prices (WoW ending 19 Oct)
– Lower prices for Polyethylene – +ve for FMCG (lower packaging costs)
– Acetone prices heading downward – -ve for Deepak Nitrite
– Lower styrene prices – +ve for rubber companies & Supreme Petrochem@CNBCTV18Live @ETNOWlive pic.twitter.com/Rnte6nSqak
— Toshniwal Equity (@ToshniwalEquity) October 20, 2018
Phenol prices up 32% since July positive for Deepak nitrite
— Jimit shah (@DIALWEALTH_IN) October 19, 2018
Income-tax department conducted search
Income-tax sleuths conducted a search and seizure operation on Deepak Nitrite in November 2018.
The Company confirmed this in a letter to the BSE.
However, the outcome of the search and whether any undisclosed income was detected is not known.
Pollution control problems
Deepak Nitrite has been regularly in the cross-hairs of the pollution control board for alleged violation of norms.
Deepak Nitrite Ltd asked by Pollution Control Board to shut one unit at Hyderabad https://t.co/MHJzHQpY8g
— EquityBulls.com (@equitybulls) October 7, 2016
Now, Vadodara-based human rights activists have accused the Company of illegally discharging hazardous effluents in mainstream water bodies and air.
Deepak nitrite – Everything looks good with growth, quality ratios. However this is what worrying me and might break up your complete analysis if crystallised.https://t.co/JQNAYDyegC
— Equialpha (@equialpha) June 7, 2019
However, whether there is any truth in the allegations is not known.
It is the common modus operandi of so-called activists to make baseless allegations and use that as a lever to extort money from companies.
Deepal Nitrite is a key beneficiary of the environmental clamp down in China: Ventura
Ventura has issued a detailed initiating coverage report in which it has recommended a buy with a projected target price of Rs. 401.
The logic is as follows:
“On the back of its strong R&D capabilities, Deepak Nitrite Ltd (DNL) has a proven track record of identifying high growth new product categories and successfully scaling them up. The recent initiative to enter into the phenol acetone segment has been a game changer for the company. In only 5 months of operations, it has achieved good profitability and 100% utilization. It is also looking to undertake further capacity addition in downstream derivatives of the phenol acetone chain. Apart from its strong business fundamentals, the environmental clamp down in China which has resulted in a favorable pricing uptick and gradual migration to sourcing from India. DNL is expected to be one of the key beneficiaries.
On the back of above, we expect DNL to a clock revenue growth of 22% CAGR to INR 4,919 crore by FY22 with EBITDA and PAT growing faster at a CAGR of 26% to INR 823 crore and a CAGR of 34% to INR 421 crore respectively. Operating margins are expected to expand 140 bps to 16.7% whereas net profit margins are expected to expand by 210 bps to 8.6% by FY22. ROE and ROCE too are expected to improve to 21.6% (+420 bps) and 23% (+620 bps), respectively. With future capex to be incurred largely through internal accruals, the Free Cash Flow to the Firm (FCFF) should turn positive. On the back of sustained capex, debt in absolute terms will largely remain flat. However, Debt to Equity, Interest coverage and Debt to EBITDA are expected to improve.
We initiate coverage on Deepak Nitrite Ltd as a BUY with a price objective of INR 401, representing a potential upside of 36% from the CMP of INR 295 over a period of 30 months. We have used the PE multiple approach to value Deepak Nitrite and assigned a multiple of 13x on FY22 EPS of INR 30.8 to arrive at the target price.”
Deepak’s most potent fine & specialty chemicals business incredibly benefitted from higher volume growth: CD Equisearch
CD Equisearch has also echoed the same bullish logic in support of Deepak Nitrite.
“The stock currently trades at 21.7x FY19e EPS of Rs 11.94 and 15.6x FY20eEPS of Rs 16.58. Reduced imports from China coupled with higher dependence on agro chemicals sector, largely explains the recent robustness in performance chemicals business, triggering increased output of both DASDA and OBA. Estimate of some 38.8% growth in earnings next fiscal largely hinges on seamless domestic penetration of phenol & acetone market. Chinese government’s expansive crackdown on polluting industries would support domestic off take of agrochemicals, dyes and pigments; though seasonality of agro chemicals business is no small threat. On balance, we maintain our buy rating on the stock with revised target of Rs 332 (previous target: Rs 295) based on 20x FY20e earnings, over a period of 9 months.”
While Ashish Kacholia deserves to be complimented for his stock pick, it is a fact that there are a few uncertainties surrounding Deepak Nitrite. First, there is the vagary of the prices of phenol and acetone in the international market. A slump in prices will spell doom. Second, there is a risk of oversupply in the domestic market. Third, it is not known what dark secrets have been unearthed by the income-tax department. Fourth, the anti-dumping duty is subject to revision by the Government. If the duty is reduced or removed, it will play havoc with the fortunes of the Company because imports will come gushing in.
In these circumstances, we will have to tread cautiously and monitor Deepak Nitrite carefully before taking a decision!