Neogen Chemicals Ltd: Research Report By Edelweiss

Neogen Chemicals (Neogen) is a play on the niche segment of organic bromine derivatives. Large opportunity size (~15x of current revenue), technocratic promoters, impetus on research, strong relationships with marquee customers to whom they supply intermediates for regulated end industries are sources of competitive advantage for the company. With continued strong demand, 1.8x increase in capacity coming on-stream in Q4FY21/FY22 and two recently inked long-term contracts with innovator companies that demonstrate success in its custom synthesis business, we remain positive on Neogen’s growth prospects.

Niche products with entry barriers and strong demand; capex to aid growth

Neogen manufactures organobromides (~80% of revenue) and inorganic lithium salts (~20%). Organobromides see strong demand from pharma and agrochemical industries. Difficulty in handling bromine, R&D driven product development, and specialty nature of products act as entry barriers. We expect the Organic Chemicals segment to clock 26% CAGR over FY20-23E, as Dahej greenfield capex phases gets commissioned in Q4FY21/FY22 and the current capacity constraint is mitigated.

Moving up the curve on R&D capabilities; will foster margin expansion

Technocrat promoters (both Mr. Haridas Kanani and Dr. Harin Kanani are IIT Bombay alumni and Mr. Haridas Kanani is a pioneer in bromination in India) have focused on the advanced intermediates and custom synthesis space since FY16 which has started to yield results. This would lead to higher demand, better realizations, improving profitability from value added complex products, strong relationships with innovator customers and better earnings visibility.

Working capital cycle and leverage to see improvement

Shortening WC cycle should aid operating cash generation with focus on tweaking various levers like inventory management, process efficiencies, and favourable credit terms with both customers and suppliers. While debt is the primary source of funding for capex, we expect it to be under control (peak D/E can be at 1.2).

Robust growth ahead; initiating coverage with a BUY rating

We expect Neogen to clock 23%/26%/32% CAGR in revenue/EBITDA/PAT, over FY20-23E. Improving capacity utilization and strengthening of balance sheet are expected to improve ROAE/ROACE over FY21-23E. We initiate coverage with a BUY and a TP of INR 758 (upside of 22%), valuing the company at 27x FY23E earnings.