NOCIL - Pass-through price hikes protect topline - HDFC Securities

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities and Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

Our BUY recommendation on NOCIL with a target price of INR 330 is premised on (1) ramp-up in capacity utilisation, (2) robust volume growth on the back of pick-up in demand in the tyre industry, and (3) expansion of margin with focus on specialised rubber chemicals. We expect NOCIL's PAT to grow at 27% CAGR over FY22-24E, led by 25% CAGR in EBITDA. In the absence of major Capex over the next two years, the RoCE shall expand from 9.6% in FY22E to 14.2% in FY24E and generate an FCF of INR ~5bn over FY22-24E. Q1 EBITDA/APAT were 43/58% above our estimates, owing to an 8% rise in revenue, lower-than-anticipated raw material costs, lower-than-expected other expenses, and lower-than-expected tax outgo.

Financial performance: Revenue grew 7/223% QoQ/YoY to INR 3.4bn, the highest-ever booked in any quarter till date, supported by increase in price realisation. The sequential de-growth of 13% in volumes was offset by an improved realisation by 20% in Q1. Domestic volumes were impacted by the strike of the second wave of the COVID-19 pandemic as most of the company's customers had to shut down their plants. However, the company witnessed a growth in export volumes. Gross margin came at ~49.4% (+524/+81bps QoQ/YoY) in Q1, mainly on account of high inventory gains. EBITDA grew 45/871% QoQ/YoY to INR 7bn with EBITDA margin coming in at 21.1% (+547/+1407bps QoQ/YoY).

Con call takeaways: (1) Plants operated at 70% capacity utilisation in Q1. Operations were affected with demand from customers falling as majority of them faced issues due to COVID-led disruptions. (2) NOCIL has been instrumental in passing through the increased raw material and freight costs to its customers which has protected its topline. (3) NOCIL plans to reach 100% capacity utilisation at all its plants by Sep'23. This will help it achieve a 7-8% market share globally. (4) China plus one strategy continues to play out well for NOCIL, as over 75% of the global demand of rubber chemicals is met by China and companies worldwide are de-risking their businesses.

Change in estimates: We raise our FY22/FY23E EPS estimates by 8.9/8.6% to INR 8.2/10.3 per share to factor in the overall performance of Q1, and a reduced tax rate.

DCF-based valuation: Our price target is INR 330 (WACC 10%, terminal growth 4.5%). The stock is trading at 26.9x FY23E EPS.

Shares of NOCIL Ltd was last trading in BSE at Rs. 280.25 as compared to the previous close of Rs. 277.2. The total number of shares traded during the day was 222474 in over 4169 trades.

The stock hit an intraday high of Rs. 285.75 and intraday low of 276.15. The net turnover during the day was Rs. 62558683.

Source : Equity Bulls

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