Nocil Ltd: To bounce back!
(BSE Code: 500730) (CMP Rs.135.90) (FV: Rs.10) By Dildar Singh Makani
Promoted in 1961 by the renowned Arvind Mafatlal group in Mumbai, NOCIL Ltd (National Organic Chemicals Ltd) is a petrochemicals giant that offers a wide range of speciality organic chemicals viz. rubber chemicals used by the tyre industry. It is the largest manufacturer of rubber chemicals in India with state-of-the-art technology. Its brands, namely, PILFLEX Antidegradants, PILNOX Antioxidants, PILCURE Accelerators, Post-Vulcanization Stabilizer and PILGARD PreVulcanization Inhibitor are well recognised in both the domestic as well as overseas markets. With regional sales offices in Mumbai, Delhi, Chennai and Kolkata, it exports to 40+ countries worldwide. NOCIL is a one-stop shop offering a wide range of products to suit all market requirements of the industry. It is a preferred supplier to major tyre manufacturers such as Apollo Tyres, Ceat, MRF, J.K. Tyres and to various rubber product manufacturers worldwide. The automobile sector is presently at an inflection point. Many new variants in passenger and logistics sector vehicles are being planned. The demand for tyres is therefore on the rise. With major tyre companies consolidating their operations in and around Asia, NOCIL will benefit immensely.
Current Capacity: NOCIL has two plants – one at Navi Mumbai in Maharashtra and another at Dahej in Gujarat with combined production capacity of ~55,000 TPA. These plants currently operate at 80% capacity utilisation. With growing demand, there is every possibility of higher utilisation, which in turn will boost its top-line as well as bottom-line.
Ongoing Capex: NOCIL has already initiated its capex plans to enhance production of rubber chemicals and intermediaries at its Dahej plant. Its Rs.170 crore capex is scheduled to commence commercial operation during H2FY19. The entire capex is being funded by internal accruals and without any recourse to debt. In fact, even after expansion, the company is unlikely to take any debt for working capital requirements. Further expansion programmes are also on the drawing board. Considering the long-term prospects, the company may also venture into greenfield expansion. FY17 Performance Highlights: For FY17, NOCIL posted higher sales of Rs.818.28 crore as against Rs.788.61 crore in FY16. PBT rose to Rs.170.47 crore from Rs.118.13 crore in FY16 while PAT rose to Rs.120.09 crore from Rs.77.74 crore. Consequently, its EPS jumped 54% from Rs.4.83 to Rs.7.42.
The company is virtually debt-free. Its debt:equity ratio stands at just 0.03. Its debt has significantly reduced from Rs.146.83 crore in FY13 to just Rs.15 crore in FY17. Its RoNW has improved continuously from 6% in FY14 to 20% in FY17. The company also declared a higher dividend of 18% for FY17 v/s 12% in FY16.
Q1FY18 Performance Highlights: NOCIL posted excellent results for Q1FY18. Its revenue grew 10% to Rs.239.23 crore from Rs.215.78 crore in Q1FY17. EBIDTA margin improved to 25.5% from 19.3% in Q1FY17, which is a healthy sign. PAT margin also improved to 16.1% from 12.3% in Q1FY17. As a result, it reported an operating profit and net profit growth of 51% and 46% respectively. EPS jumped to Rs.2.11 from Rs.1.47 in Q1FY17.
Future Outlook: The global demand for rubber consumption (natural and synthetic) is on the rise since the last few years. Therefore, the demand for speciality organic chemicals is also rising. If the trend in the tyre industry is any indication, NOCIL’s working in the remaining quarters of FY18 will continue to be good. Anti-Dumping
Policy: One of the reasons for NOCIL’s continuing improved performance is the extension of antidumping duty on rubber chemicals which the government had first imposed in 2011. Another advantage is that NOCIL’s environment compliances are in place, which is a key problem faced by Chinese companies. Also, with the antidumping duty and expansion of its Dahej plant, it may earn the advantage of operating leverage. NOCIL is likely to be fancied by investors at least as long as the antidumping duty remains in place and it is able to take advantage of the expanded capacity. Investor-friendly: The management had previously issued bonuses as follows: 1975- 1:2; 1980- 1:3; 1986- 1:2; 1993- 1:3; and 19951:1. The company’s future outlook is robust and although the next bonus issue
is not around the corner, dividend enhancement is a distinct possibility. The management has increased dividend payouts at regular intervals in the past whenever the company’s financial position had permitted.
Shareholding: The total equity capital of the company is Rs.164.14 crore, of which 36.85% stake is held by the promoters and the balance 63.15% stake is held by the investing public. FIs, MFs, Insurance Companies and Foreign Investors collectively hold 1.44% stake. FPIs hold 5.46% stake while FIIs hold 1.3% stake. Ace investors Dolly Khanna and Ashish Kacholia hold 33,87,496 shares (2.6%) and 51,40,008 shares (3.13%) respectively. Bodies Corporate hold ~8.01% stake.
The company does not have any outstanding convertible warrants. The promoters have pledged 25.19% of their stake to fund the expansions.
Capex: So far, NOCIL has not placed its future expansion plans on table. But at the same time, it can be safely assumed that huge expansions are underway. Continuing demand may prompt the company to go in for aggressive organic and inorganic growth. This will ultimately create a need for additional funds and a part of this requirement may come by way of additional equity. Therefore, a rights issue from an investor-friendly company cannot be ruled out.
Conclusion: The global demand for rubber processing chemicals is forecast to rise by 50% to 1.5 MMT in the next 3-5 years. NOCIL has the distinction of serving some of the best brands and its current working is excellent. Ongoing and future expansions are also likely to contribute to future earnings. Further, CARE has recently upgraded the company’s long-term credit rating from AA- to AA. Its short-term borrowing rating was also upgraded from AA to AA+ (highest in the category). Rising volumes, too, suggest a breakout in share price. The delivery percentage, which is currently at around 30% of all trades, is also rising slowly.
Going by the improving fundamentals, expansions and industry outlook, NOCIL may post an EPS of around Rs.9 for FY18. Its CMP is hovering around Rs.135.90, which translates into a forward P/E of just 16.93x v/s Industry P/E of over 25x. The stock is likely to touch Rs.240 within a year. It would be prudent to buy this stock for a conservative period of 3 years for stupendous returns.