NOCIL reported weak operational performance during the quarter. Revenue de-grew by ~9% YoY but grew by ~5% QoQ. Volume grew by 2% YoY & 12% QoQ largely led by strong offtake in export market, although realization remained weak declining by 11% YoY & 7% QoQ. Domestic market remained muted because of heavy imports from China & it is anticipated to continue in the coming quarters as well. Management stated that NOCIL is well placed & will be able to ride the negatives currently faced by rubber chemical players & expects long-term outlook is good because of robust tyre & replacement demand. Higher competition from China is a major concern as imports of accelerator witnessed ~32% YoY growth in FY24 which impacted gross & EBITDA spreads & led to subdued volumes in domestic market. Since, the business does not have protection from ADD which is the major reason why rubber chemical players are struggling to maintain margins. Adding to the tensions, some new rubber chemical supplies globally are coming up in H2FY25E which will further heighten competitive intensity globally, it remains under our watch how demand pans out. Still, the long-term growth story remains structurally positive for NOCIL, led by tyre players expanding capacity & investing to the tune of Rs200-250bn over FY24-26E leading to increased usage of rubber chemicals. However, higher competitive intensity, weak return ratios & premium valuations make NOCIL unattractive at current juncture. Hence, we maintain our SELL rating on the stock.
Q4FY24 reported weak EBITDA spreads, Chinese imports a major cause of concern
Realization declined by 11% YoY & 7% QoQ largely because of weak demand from domestic market & higher imports.The company’s gross spread per kg declined by 7% YoY & 15% QoQ to Rs ~107 per kg in Q4FY24. Considering uncertainity owing to higher imports of rubber chemicals from China & other countries which increases competitive intensity, we remain cautious on operating spreads and volumes of the company.
Accordingly, we model in EBITDA spreads of ~Rs 39/44.5 per kg for FY25/FY26E respectively, factoring in cut of 6%/5% on FY25/26E respectively.
We have witnessed higher imports in FY24 to the tune of 32% YoY of rubber accelerators and with competitors in China dumping along with expanding their capacity coupled with subdued demand in Chinese market is leading to higher dumping in world markets including India.
Sequentially volumes higher, mid high single digit volume growth for next 3 years
In Q4FY24, volume grew by ~2% YoY & 12% QoQ. Generally speaking Q4 volumes remains high because of higher stocking by tyre companies. Management stated that domestic volumes remained subdued but export volumes witnessed recovery despite weak & global recessionary trends persisting. With domestic tyre companies increasing capacity and investing close to Rs200-250bn over FY23-26E, we feel there is no worry on incremental demand growth for the next 3 years.
We expect that the company expanded capacity of 55,000 TPA is likely to reach optimum utilization levels in the next 2 years. On the back of this, we expect NOCIL to report volume CAGR growth of mere ~7.5% from FY24-26E.
Valuations
We feel that near term concerns like highly competitive intensity led by surge in Chinese imports, global recessionary trends impacting volumes, weaker return ratios, lowering speciality sales & premium valuations make NOCIL unattractive as an investment bet.
We value the stock on P/E multiple maintaining ~20x P/E on March 26E projections and arrive at target price of 213 per share which indicates downside of ~18% from the current level. Hence, we maintain our SELL rating on the stock.
Click here to download NOCIL Ltd – Q4FY24 Result Update – SMIFS Institutional Research
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