DEEPAK NITRITE

Rs 1,000-cr expansion programme

Demand for the company’s products at home as well as in international markets is rising very fast with the ‘China plus one’ policy being increasingly adopted by global multinationals. During the last five years, its sales turnover had almost doubled from Rs 1,222 crore in fiscal 2017 to Rs 2,240 crore in fiscal 2020, before declining to Rs 1,809 crore in fiscal 2021 in the wake of the pandemic. With a remarkable spurt in margins, the profit at net level has recorded an almost five-fold jump from Rs 112 crore in FY2017 to Rs 544 crore in fiscal 2020, before declining to Rs 355 crore in FY2021. Margins in the case of certain items like phenol, in which Deepak enjoys a dominant global position, have pushed up the profitability of the company.

The company’s manufacturing facilities are located at Nandesari and Dahej in Gujarat, Roha and Taloja in Maharashtra, and Hyderabad in Telangana. It has been performing very well on the financial front and the prospects going ahead are highly promising.

Consider:

• Going ahead, strong domestic demand for phenolics with higher exports, particularly to countries like the US and China, could keep product prices and margins strong in this segment. According to market pundits, the margins in the case of phenolics, basic chemicals and fine and speciality chemicals are likely to remain on the upswing. What is more, the company now aims to transition from being a chemical intermediates company to an advanced products entity, leaning towards life sciences which are the need of the hour and which carry high margins. At the same time, the company would continue to focus on bringing more products under the fine and speciality chemicals segment and close the gaps in the production value chain. About 125 acres of land at Dahej would be developed to focus primarily on advanced speciality intermediates in the life sciences segment, especially in fluorination.
• Experts observe that the increased focus on advance/ high-value products would aid margin expansion and sustainability of the company. Even in the case of basic chemicals, the demand was so strong that the company could successfully passed through the increase in raw material prices to its customers. Even in the case of fine and speciality chemicals, encouraging demand which resulted in better pricing in could result in bumper earnings. Likewise even the in the case of performance products (PP), the overall volumes improved by 12 per cent in the last quarter last year in line with the opening of the economy.
• On the whole, the company has chalked out an ambitious expansion programme involving a total amount of around Rs 1,000 crore, which will include further investment in the company’s subsidiary Deepak Phenolics, Rs 350 crore in speciality intermediates and Rs 700 crore in downstream products for the higher production of solvents. The management aims to make the company the largest player in solvents and capitalize on import substitution. As a result, the increased focus on advanced/higher value products will aid margins expansion and sustainability for the company. This will result in re-rating of multiples for the stock. According to leading brokerage house Motilal Oswal, the Deepak Nitrite stock trades at a relatively cheaper valuation versus its peers.

CONSOLIDATED PERFORMANCE INDICATORS (Rs. in crore)

ELGI EQUIPMENTS

Ruling roost in air compressors

Coimbatore-headquartered Elgi Equipments is a world-renowned manufacturer of air compressors and provider of after-sales services. The company provides a range of compressors which include piston compressors, oil-free compressors, high-pressure compressors, diesel engine compressors, portable compressors, screw air compressors and air compressor accessories. The company is well- known for designing and manufacturing an extensive range of innovative and technologically advanced air compressor solutions for a variety of industry applications. Elgi has earned worldwide accolades for designing customer-centric compressed air solutions that are sustainable and help companies achieve their productivity goals while ensuring a lower total cost of ownership.

The company is growing steadily, with its sales during the last 11 years expanding from Rs 677 crore in fiscal 2010 to Rs 1,100 crore in fiscal 2021, with the profit at net level inching up from Rs 68.88 crore in fiscal 2017 to Rs 105.09 crore in fiscal 2021. The company’s financial position is very strong, with reserves at the end of March 2021 standing at Rs 844 crore – more than 26 times its equity capital of Rs 31.69 crore, that too after as many as seven bonus issues – all in the ratio of 1:1. Elgi has been paying handsome dividends, the rate for the last year being 80 per cent. Prospects going ahead are all the more promising.

Consider:

• The domestic business of the company is seeing decent traction amid economic recovery. During the last quarter of fiscal 2021, Elgi’s standalone compressor (domestic as well as direct compressors) grew at 57.5 per cent yoy to Rs 392 crore, while pure domestic air compressor sales are estimated to have grown at more than 36 per cent yoy. The company is on track with its strategy to optimise employee cost primarily in India. Its disrupted AB series of oil-free compressors is gaining good traction in India and abroad as economies gather pace worldwide. The aftermarket (20 to 25 per cent to the India topline) continues to see strong traction across geographies. For fiscal 2021, consolidated debt was reduced by Rs 20 crore to Rs 370 crore, while working capital remains stable as the position remains strong.
• The company’s strong international performance will drive incremental growth. In Q4FY21, air compressor international sales (including exports from India) are estimated to have contributed 45 per cent to the company’s air compressor sales. It continues to perform well in key international markets led by Australia, the US and Europe, while South East Asia and the Gulf are expected to rebound gradually. Margins are likely to further improve due to a ramp-up in international business, optimisation of operating costs leading to incremental revenue, future growth and positive operating average. Again, Elgi is also expected to resume its strategic investment initiatives in Europe from the current year onwards.
• Jay Varadaraj, managing director of the company, is highly optimistic about oil-free compressors having a great growth potential going ahead. According to him, today lubricated compressors account for around 80 per cent of the market because of higher energy efficiency and lower costs. No doubt, the oil-free option is three times more expensive but mandatorily used in contamination-free environments like the pharmaceutical and food processing industries. They are the greener alternative too, with the potential to save nearly 2 million litres of oil that lubricated compressors dispose as waste. The AB series oil-free product will be close to the efficiency of a lubricated compressor and priced at par. This will be a game-changing product. Hence, this is a very good and great opportunity for future growth, he adds.

Going ahead, further traction in the international market, new products like oil-free compressors (AB series) and a steady rise in domestic business augur well for the future prospects of the company. Shares are quoted around Rs ——— and are worth including in the portfolio of every discerning investor.

PERFORMANCE INDICATORS (Rs. in crore)