NOCIL is a net cash company with strong corporate governance track record: SMIFS

NOCIL Ltd.: A rubber chemical giant

With over 4 decades of experience, NOCIL is the market leader in rubber chemical space, capturing ~40% domestic and ~4-5% global market share in terms of production. The company has established long term relationship with its customers in over 40 countries. We believe NOCIL is on a strong footing of growth majorly led by (a) Recently completed capacity expansion of Rs4.7bn by adding another 55,000 TPA capacity to lead double digit volume growth going ahead (b) Global rubber chemical sourcing strategy is expected to undergo a change to include China+1 (c) Increasing shift towards radial tyres to propel rubber chemical consumption (d) Increased focus towards specialized products to enrich the product mix.

Despite lockdown and virus grappling the economy, the company reported healthy double-digit volume growth in FY21. We believe the company will continue its double-digit volume growth trajectory for the next 2 years, thereby leading to increased visibility and market share globally. The company has developed strong R&D and technical research capabilities and long-lasting relationship with clients that create huge entry barrier for new players.

Despite the recent run up in stock price of the company, the future growth visibility of this cash rich company is significant and therefore we value the stock on 16x on FY23 EBITDA and assign target price of Rs 290 per share.

 Healthy double-digit volume growth on the cards: Over the last 5 years from FY16-21, NOCIL volume CAGR growth has been ~7-7.5%. This was owing to consistent rubber and tyre consumption growth, increasing focus on exports, strong client relationship and diversified product profile. Despite industry volumes declining by 7% YoY for CY20, NOCIL volumes grew by 14% YoY in FY21 backed by increasing exports, higher wallet share from existing clients and robust domestic demand. NOCIL has consistently gained market share on the back of strong volume growth and plans to further increase its exports footprint backed by recent capacity expansion and diverse product basket. Recently, the company has doubled its base capacity by adding 55,000 TPA at a capex of Rs4.7bn. We believe the expanded capacity is likely to reach optimum utilization levels by H1FY24. On the back of this, we expect NOCIL to report volume CAGR growth of 13-13.5% from FY21-24E.

 Exports to be the key driver of growth going ahead: With the onset of pandemic which led to supply chain disruption globally and business hit suffered by several conglomerates dependent primarily on Chinese companies as sourcing partner are now looking for alternatives outside China. We believe this would eventually lead to global companies prefer Indian manufacturers like NOCIL which have the scale and expertise to fulfil the needs of any global tyre manufacturer. In the rubber chemicals space, China accounts for lions share roughly 70% of global production of which more than 40% is exported. With the China+1 strategy in place and NOCIL doubling its capacity would eventually lead to market share gains for NOCIL, at the expense of Chinese manufacturers. The company’s exports as a % of sales stood at ~33% in FY21 as compared to 25% in FY16. We believe as NOCIL increase its wallet share and visibility in export market the company will eventually touch 40% of export sales in the coming years.

 Healthy product mix to drive operating margins : Over the past few years, NOCIL has invested on increasing its product quality and technical capabilities to manufacture high grade specialized products particularly used in the export markets. The company’s specialized product portfolio stands at 25% of sales in FY21 up from 15% in FY14.

Increased focus on speciality products particularly for the export market was one of the key reasons for improvement in gross as well as operating margins over the last couple of years. The company is focusing significantly on increasing its wallet share and visibility in the export market which should further improve the mix towards specialized grade products and thereby margin profile of the company. The company is focusing on value added or niche product having wider visibility and thereby, commands higher margins. Higher value-added product coupled with cost optimization would lead to improvement in margins in the coming years. Consequently, we expect EBITDA margins to be at 17.8% & 20.4% in FY22E & FY23E respectively.

 Valuation: A net cash company with strong corporate governance track record recently completed its expansion plan of doubling the capacity. The new capacity will reach peak utilization levels in 2-3 years and would generate an asset turnover of roughly 1.85-2x. Considering strong product portfolio and volume growth, we expect NOCIL to report a CAGR of 22%/46%/46% at Revenue/EBITDA/PAT level over FY21-23E. The stock is trading at P/E of 22x on FY23 EPS and EV/EBITDA of 13.6x on FY23 EBITDA. We assign 16x as the target EV/EBITDA multiple and arrive at target price of INR 290 per share which offers 16% upside from current valuations.