NOCIL Ltd | Market Cap Rs 2400 Cr
CMP 143 | PE 16x FY22
Recommendation | BUY
About the company
NOCIL –Arvind Mafatlal Company –is Rs. 1000 Cr rubber chemicals manufacturer. The company’s products find application used in both tyre and non-tyre industries (latex industry, footwear and other auto-ancillary products). The bulk (~65%) of rubber chemicals are sold to the tyre industry, domestic and international.
Industry: The Indian tyre industry size is estimated at ~Rs. 60,000 Cr (as of FY18); with demand largely coming from two segments i.e. original equipment manufacturers (OEM ~35-40% of demand) and replacement market (aftermarket ~60-65%).
Chemicals manufactured by the company are essential in the production of rubber and rubber-related products. As a thumb rule rubber chemical constitutes about 3.5% to 4% of the total rubber consumption. Its growth is dependent on increase in usage of rubber.
The company manufactures intermediates as well as a wide range of final products across two manufacturing facilities in Navi Mumbai and Dahej.
Company products include: –
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Accelerators
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Antidegradants
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Antioxidants
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Pre-Vulcanization Inhibitor
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Post-Vulcanization Stabilizer
Management
NOCIL is the flagship company of the Arvind Mafatlal group. As of June 2020, the promoters held ~34% stake in the company and the remaining stake was held by public and other institutions. Mafatlal Industries, Navin Flourine and Mafatlal Denim are its sister companies.
Business of NOCIL
NOCIL has a leading market position in the rubber chemicals industry in India (with ~40% market share) and has an established clientele. The company primarily manufactures 4 categories of products namely, Accelerators, Anti-degradants/anti-oxidants, Pre-vulcanisation inhibitors and Post-vulcanisation stabilisers. Dominant portion of the revenues of the company comes from India.
NOCIL is among the few players globally with a wide product basket of 22 rubber chemicals. Furthermore, it has been able to maintain healthy relationships with major domestic and global tyre manufacturers for over 40 years, and hence has a good international presence.
Driven by strong R&D capabilities, the company has developed a process for producing a key intermediate, and has also set up and stabilised a green field production facility in Dahej.
NOCIL competes with Chinese rubber chemical manufacturers who have high scale and cost advantage. However, with recent operational efficiency improvement NOCIL has been able to improve its cost structure. The business is very competitive and NOCIL commands market share of 10% globally.
Financials
NOCIL sales has more than doubled from 2011 to 2019 and fell 20% in FY20 due to slowdown in auto industry. It clocked 14.3% CAGR in earnings growth in last 10 years.
The company has seen decline in its operating margins lately owing to de-growth in the auto sector. NOCIL exhibits cyclicality from auto sector as well as competitive environment.
In recent past, operating margins came off due to cessation of anti-dumping duty (ADD) from August 2019. The anti-dumping duty was present on 6 (out of 22) of its products contributing 50% to overall revenues (as of FY19).
Click here to view complete financials of NOCIL
NOCIL is debt-free despite of regularly increasing its capacity since 2013. The fixed asset of the company has grown ~5.6x in last 10 years. Recently it completed its ongoing capacity expansion programme (of Rs 450 crore), it will fully capitalised by financial year end. No major capex is expected over the medium term. This will lead to higher dividend payout ratio in medium term.
Future Prospects
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China Plus One: NOCIL coincidently has commissioned almost 100% additional capacity to 1,10,000 tonne (total 10% of global capacity), at a time when global clients are diversifying their vendor base away from Chinese chemical manufacturers. China accounts for about 75% of world’s rubber chemical production, it only consumes about 35% of the rubber chemicals. China plus one strategy will help NOCIL to gain market share in global supply chain of rubber chemicals. Increase in market share in rubber chemicals will be a key driver for growth. Typically for approval from any global tire customers, it takes 18 to 24 months for commercial supplies proposed to be undertaken by any new manufacturer. NOCIL is an existing supplier to Bridgestone and Michelin.
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Atmanirbhar Bharat: Furthermore, with restricted tyre imports, domestic tyre manufacturers are expected to operate at higher rate, thereby increasing domestic demand for tyres and hence NOCIL. NOCIL will also benefit as Indian tyre manufacturers will adopt (ii) Atmanirbhar policy to avoid imported rubber chemicals. NOCIL controls only 40% market share in domestic market while rest comes from US, China and Korea.
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Anti-dumping duty: Recently on NOCIL’s claim, the government has started an investigation into dumping by Chinese and Korean players in a product called PX-13. If they find merit in claim, they may implement anti-dumping duty on select products which bodes well for NOCIL’s profit margin. NOCIL management expects that the pricing pressure is behind us and future growth will come from volume growth at similar margins.
Positive triggers
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Benefit from China plus One strategy
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Debt-free Balance Sheet
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Ramping up new capacities and change in product mix to aide sales and profit growth.
Risks
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Commoditized nature of business can face pricing pressure
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Competition from Chinese & Korean players
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Cancellation of Anti-Dumping duty on one key product
Valuation
At current sales expectation of Rs. 850 Cr, it trades at 14x EV/EBITDA and 20x P/E ratio.
Assuming 2x asset turnover in new capacities, it can earn around additional sales of Rs. 400 Cr over next 2 years. With expectation of atleast 12% CAGR in sales and 18% in operating margin, implied P/E ratio is 16x FY22. We have assumed operating margins of 18% instead of 22-26% in recent past due to absence of anti-dumping duty.
We recommend BUY in the range of 140-150/share which implies 10-15% CAGR over next 3 years.
While the future potential is large, the execution, competition and regulation can lead to lower than expected performance and hence disappointment. If we find such risks that outweigh future prospects, we will recommend to exit NOCIL even at a small loss.
Note for Booster Stocks: These stocks are more volatile that large cap stocks. They are recommended to enhance your portfolio returns. Should any new information lead us to conclude that the recommended stock may not deliver as per expectations; we will recommend you to sell it. You are expected to act/exit even at a loss. You need to think portfolio returns and not individual stocks.
