NOCIL Ltd Research Report By Motilal Oswal

Niche play in the specialty chemicals industry

NOCIL, part of Arvind Mafatlal Group, is India’s largest rubber chemicals company. Its portfolio includes accelerators, antidegradants, anti-oxidants, pre/post vulcanization products. Rubber chemicals, which possess properties such as antioxidation, antidegradation and lifespan extension, are used in the manufacture of tyres, tubes, latex goods, and footwear, among others.

Market leader in rubber chemicals in India:

With a long-standing operating history of over four decades, Nocil commands ~45% in the domestic market and ~5% globally. It has established its presence in over 40 countries and boasts strong business relationships with some major global tyre manufacturers.

A wide product range, global presence, technical know-how and a reputation of being a dependable supplier have ensured market share expansion not only at home but also globally.

Domestic players gaining an edge:

China’s quest to emerge as a global leader in the fight against pollution has accelerated closure of non-compliant companies there. Moreover, the imposition of anti-dumping duty in India from 2014 helped domestic producers withstand competition from Chinese and Korean firms. Nocil is one of the key beneficiaries of these developments.

Tyre industry to run the show:

Growth in rubber chemicals is highly dependent on demand from the tyre industry – the largest consumer of rubber chemicals (~65%). According to the company, the global tyre industry has committed ~USD7.5b toward expansion plans, while the Indian tyre companies have lined up capex to the tune of INR-150-180b over the next few years. This is likely to drive tyre industry growth of 12-14% over the next 4-5 years, benefiting rubber chemicals behemoths like Nocil.

Building capacity for the future:

To capitalize on the growth opportunities, Nocil has earmarked capex of INR4.25b. The company is expected to operate at 2x its current levels post setting up of expanded capacity at peak utilization levels.

The new capacity will come on stream in phases until September 2019. Management expects asset turnover of 2x from this expansion, leading to annual incremental revenue of ~INR9b at current price trends.

Improved technology and change in product mix boosted margins:

Nocil employed fully automated process at its Dahej plant (commenced operations in Mar’13), which apart from achieving higher productivity also aided in significant cost rationalization. Combination of product mix in the exports business which involved higher percentage of products in specialised applications helped the company to generate margins at similar levels vis a vis domestic sales. All these resulted in Nocil’s operating margin expanding from 10.5% in FY14 to 27.4% in FY18.

Valuation and view:

The stock is trading at 14.2x FY19E and 12.1x FY20E EPS. We believe Nocil is well positioned to capitalize on the structural changes in the industry and strengthen its competitive positioning against international peers.

Robust demand for rubber chemicals backed by new capacity put by tyre companies only strengthens the growth narrative. We expect earnings CAGR of 17% over FY18–20. We, thus, initiate coverage on Nocil with a Buy rating and a target price of INR225, based on 16x FY20E EPS.