0.29% Dividend Yield: This Midcap Chemical Stock Soars 4% On 'Double Upgrade' By Morgan Stanley; BUY?

Shares of Deepak Nitrite Ltd, a specialty chemicals company, experienced a surge, reaching their highest level since January 2022. The catalyst behind this rally was a double upgrade by brokerage firm Morgan Stanley, which revised the stock's rating from "underweight" to "overweight." Alongside this upgrade, Morgan Stanley also boosted the price target for Deepak Nitrite to Rs 2,985 per share, signalling a potential upside of 22% from Friday's closing levels.

The rationale behind Morgan Stanley's bullish stance lies in Deepak Nitrite's investment cycle, characterized by substantial capital expenditure and operational enhancements. The brokerage anticipates that this investment wave, combined with the stabilization of the company's base business and a robust balance sheet, could propel Deepak Nitrite to double its base earnings by 2028.

Morgan Stanley's optimism is further fueled by Deepak Nitrite's shift towards becoming an integrated, downstream phenolics producer. The brokerage believes that the company is well-positioned to replicate its past success, particularly in India's phenol market, leveraging a margin upcycle and witnessing a significant rise in consensus estimates.

Deepak Nitrite's ongoing pipeline of nearly $1 billion in investments has already commenced, with the inauguration of its greenfield phenol capacity. Notably, the company's valuation multiples have consistently outpaced those of its global chemical peers since 2021, a trend that Morgan Stanley views as a pivotal surprise.

Looking ahead, Morgan Stanley foresees continued outperformance from Deepak Nitrite, citing its industry-leading operating metrics and top-quartile returns. As new investments materialize and contribute to the company's earnings, there remains ample room for further growth and appreciation in shareholder value.

Despite the bullish outlook, Morgan Stanley highlights several risks, including project slippages, slow execution, and sluggish earnings, which could potentially impact its estimates.

Currently, among the 20 analysts covering Deepak Nitrite, 65% advocate a "buy" rating, while four suggest "sell" and three recommend a "hold" position on the stock.

As of 1 pm on the National Stock Exchange (NSE), Deepak Nitrite shares were trading with gains of nearly 4% at Rs 2,536 per share. Over the past year, the stock has recorded gains of almost 30%.

For the fiscal year ending March 2023, Deepak Nitrite has declared an equity dividend of 375%, translating to Rs 7.5 per share. With the current share price standing at Rs 2548.95, this equates to a dividend yield of 0.29%. The company boasts a track record of dividend payouts, consistently declaring dividends for the past five years.

The most recent rights issue undertaken by Deepak Nitrite dates back to 2005, wherein shares were issued in the ratio of 2:4 at a premium of Rs 140.00 per share. Following this rights issue, the shares began trading ex-rights from February 21, 2006. Additionally, in 2014, the company underwent a face value split, reducing it from Rs 10 to Rs 2 per share, with shares trading on an ex-split basis from June 20, 2014. Similarly, Deepak Nitrite announced a bonus issue in 2014, in the ratio of 1:1, with shares trading ex-bonus from June 20, 2014.

Deepak Nitrite is engaged in the production of a diverse range of chemicals, including agrochemicals, colourants, rubber, pharmaceuticals, specialty, and fine chemicals. Led by Chairman Deepak Mehta and CEO Maulik Mehta, the company holds a prominent position in the chemical manufacturing industry, particularly in the production of Advanced Intermediates.