NOCIL Research Report By PL

Rating: BUY | CMP: Rs144 | TP: Rs252

Attractive growth story

Key Takeaways

 High global and domestic Tyre capex to help sustain medium term growth, despite a near term demand dip. Capex timelines remain unchanged for Nocil.

 Introduction of a new accelerator- TBBS, continued traction of zinc based specialized application products and US exports expected to drive sales.

 We expect 18% earnings CAGR over FY18-21E. Nocil remains our preferred pick with attractive valuation of ~11x PER FY20E and ROEs of ~18%

Our recent plant visit to Nocil at Dahej reinforced our conviction on a strong growth outlook, notwithstanding near term demand dip due to weak auto sales. Company’s strong focus on R&D has developed innovative process technologies patented in US, EU and India which has reduced plant operating costs.

Demand outlook for rubber chemicals remains strong given ~85% utilization, disruptions in China, and Global and domestic Tyre capex of USD10bn and Rs 250bn over the next few years. Nocil is well placed to capitalize on this demand as completion of Phase 2 expansion will double its capacity (1,10,000 tons by October 2019, ~10% of global capacity) as global Tyre players are eyeing more non-Chinese supplies.

Nocil is confident of maintaining 25% EBIDTA margins in the medium term despite removal of duty protection. Retain Buy with PT of Rs252 based on 15x FY21E PER

Key highlights of our plant visit and management interaction are as follows:

 R&D remains the cornerstone: Nocil’s management remains focused over R&D with the development of new process technologies patented in US, EU and India. The process change has not only helped cut production costs but also supported profitability (~700bps EBIDTA margin expansion due to process change out of 1,700bps over FY14-18). R&D has also helped Nocil to recover and reuse effluent wastes.

As a testimony to prioritize waste treatment, the company volunteered state pollution board (GPCB) to test their software at the Nocil plant. The company remains a preferred player to develop new products and collaborate with global Tyre players.

 Captive power reduces cost: Nocil produces ~2MW of power from steam and 0.5MW from solar power (~60% of total power requirement) at Dahej, which helps reduce overall cost. For expansion, Nocil plans to add captive power generation to reduce reliance on State utilities.

 Technology remains a closely guarded secret: Unlike petrochemical plants where process technologies can be licensed, in rubber chemicals industry, technology remains closely guarded. At Nocil, only a few people at the top management and core R&D team remains privy to process the technology. As a result, Nocil is one of the few global players to produce intermediate and finished goods covering entire basket of products

 Introduction of a new grade to complete Nocil’s product basket: Nocil has recently introduced TBBS, an accelerator, at Dahej plant which will replace current import requirement of ~8,000tons. Introduction of TBBS has completed Nocil’s product offerings making it a one stop shop for all rubber chemicals requirement for Tyre players.

 Easy access to key raw materials: Nocil procures key raw materials like aniline, acetone etc. from domestic and international players. While Acetone is procured from Deepak Phenolics next door, aniline is procured from GNFC and imports.

 Sufficient buffer for expansion at existing plant: Nocil has created sufficient buffer at their new plant to minimize capex for their next phase of expansion. In addition, Nocil has relied on in-house technologies for ongoing expansion and has outsourced only civil and structural engineering.

 CY19 demand dip an aberration: Company expects CY19 weak demand outlook to be an aberration and believes that outlook will revive by H2FY20. Nocil’s management expects Q4FY19 performance to reflect full extent of production cuts by OEMs.

However, as per the company, production schedule of OEMs have recovered from recent lows and will see full traction by H2FY20 when pre buying for new emission norms-BS6- kicks in. Nocil is confident of healthy demand recovery in the medium term led by high capex of global and domestic Tyre majors, and accordingly, does not plan to defer its current capex timelines.

 Products for specialized application for exports: Nocil is one of few big players to produce zinc-based products for specialized application across Tyres and non-Tyre products and accounts for 60% of FY18 exports. They have usage in latex industry which are exported to South East Asian countries like Malaysia and Thailand etc.

 Environment compliance has increased Chinese cost structure: Nocil mentioned that high environment protection costs for Chinese players have pushed up their operating costs. China Sunshine CY17 environment protection costs increased 50%YoY and accounted for 3.6% of sales.

Accordingly, the competitive intensity from Chinese players has come off significantly and company is confident of maintaining 25% EBIDTA margins (9MFY19- 29%) in the medium term despite removal of Anti-Dumping Duty in July 2019.

 US-China trade dispute-an attractive growth option: Ongoing trade dispute between US-China has opened another attractive growth opportunity for Nocil.

Already 500 tons of rubber chemicals have been exported and the company expects more volumes to be exported to US as they account for over 10% of global market. Medium term export share is to rise to 40% from current ~30%.