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NOCIL - Q4FY22 Result Update - Strong operating performance amidst challenges - BUY

Posted On: 2022-06-28 21:30:45 (Time Zone: IST)

Mr. Nitesh Dhoot - Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- Margin improvement led by price hikes, product mix changes, and operating leverage (inventory build-up to meet short term demand spikes/ supply issues).

- Healthy demand outlook aided by domestic tyre industry capex of over Rs 200 bn over next 3 years and resilient export demand (especially US & Europe).

- Management reiterated its guidance of full utilization of the expanded capacity by Sep'23 (currently at ~75% overall capacity utilization)

NOCIL's growth prospects look encouraging given 1) favorable demand environment in domestic and export markets driving healthy volume growth (+16% YoY in FY22) 2) sufficient capacity headroom enables capturing demand improvement 3) moderate competitive intensity with higher environment compliance costs in China leading to better level playing field 4) Zero debt balance sheet and healthy free cash flow generation of Rs 4.3 bn over FY23-24E provides comfort though crude oil at elevated levels (above USD 100/ bbl) and increase in supplies by Chinese competition pose risk to volume and spreads in FY23/24. We forecast volume growth of 12% CAGR over FY22-24E and tweak estimates to factor improvement in spreads aided by full pass through of cost inflation coupled with operating leverage benefits as it attains higher capacity utilization levels (EBITDA margin at 18.7%/19.6% in FY23/24). Maintain BUY with a revised TP of Rs310 based on 12x FY24 EV/EBITDA implying 19.5x FY24 EPS of Rs 16.0.

Strong quarter led by price hikes: Revenue growth of 44%YoY/ 19% QoQ on higher average realisations (+57% YoY/ +19% QoQ) while volume growth remained flat QoQ and declined 9% YoY. Gross margin at 50.1% (+590bps YoY/ +950bps QoQ) and EBITDA margin at 24.1% (+780 bps YoY / +1110 bps QoQ) on full pass through of input cost inflation, better product mix and operating leverage benefit (higher production levels). EBITDA +113% YoY/ +120% QoQ to Rs 1.1 bn while PAT +85% YoY/ 131% QoQ to Rs 689 mn on higher tax incidence in Q4 (28.2% vs 15.9% YoY; EPS Rs 4.1 (Rs 10.6 for FY22). Increase in core working capital by 87%YoY to Rs 5.7 bn (132 days in FY22 vs 120 days YoY) led by sales growth, inventory build-up and newer RM sources addition, impacted OCF which was - Rs 302 mn vs +Rs 939 mn YoY.

Concall takeaways: (1) Mr. Anand VS (ex-Chemetall India, BASF group) joined NOCIL w.e.f. Mar-22, as Deputy MD (2) NOCIL's domestic market share at ~42% vs. <35% pre-covid. (3) Domestic demand growth in FY23 to be ahead of forecasted GDP growth of 7-8% in FY23 (4) While supply chain challenges persist, NOCIL has taken steps to ensure RM security through sourcing diversification (increasing domestic procurement vs China dependence) (5) Exports contribution at 36% to company's revenue in FY22, while it targets ~40% contribution in the long term (growth from existing and new customers) (6) To undertake debottlenecking for select products while longer term capex to be evaluated simultaneously (7) Global rubber consumption increased 10.6% in CY21 on a lower base of -6.7% in CY20.

Shares of NOCIL Limited was last trading in BSE at Rs. 259.05 as compared to the previous close of Rs. 258.80. The total number of shares traded during the day was 51181 in over 1495 trades.

The stock hit an intraday high of Rs. 262.95 and intraday low of 256.50. The net turnover during the day was Rs. 13242645.00.

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