Summary
Neogen Chemicals (Neogen) delivered a subdued financial performance in the quarter. Profitability was impacted on account of higher employee costs, rise in insurance premiums, increase in finance costs owing to rebuilding of the Dahej MPP (post the fire incident) and lower utilization and startup costs at Neogen Ionics. The demand for Electrolytes and Salts has been delayed by 6 to 12 months owing to the delays in EV ramp up. However we continue to remain positive on the battery chemicals theme as growth from EVs and Battery Energy Storage Systems (BESS) will necessitate the creation of a domestic supply ecosystem wherein Neogen will have a first mover advantage and be the frontrunner for being a credible supplier. EV and BESS will be the future drivers however growth will be back ended towards FY28.We fine tune our estimates and maintain our BUY rating on the stock with revised TP of Rs2,001 at 36xFY28E expected earnings.
Key Highlights and Investment Rationale
Strong growth outlook for FY28: The management is seeing good pick up in electrolytes beginning from Q4FY26 as the cell manufacturers such as Ola and Exide start manufacturing battery cells. We expect a steady ramp up in Electrolyte volumes with a strong scale up in FY28 as the domestic EV supply chain begins ramping up led by EV and BESS demand.
Salts business expected to see strong pick up in H2FY27: To secure the US Govt. Tax credit (45X), U.S. LiB cell producers must adhere to Foreign Entity of Concern (FEOC) guidelines. This necessitates a shift to non-FEOC suppliers by 2027.The management is expecting strong volumes owing to this regulation from US customers. Neogen has also completed Production Part Approval Process for Electrolytes and provisional approval for Lithium Electrolyte Salts which is a testament to its product capabilities.
