Nocil Ltd: To bounce back!

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(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.

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