nocil (nocil in) - business standard...3november 29, 2018 rating: buy| cmp: rs169 | tp: rs270 set...
TRANSCRIPT
Set for a smooth ride
Avishek Datta [email protected] | 91-22-66322254
Rating: BUY | CMP: Rs169 | TP: Rs270
NOCIL (NOCIL IN)
NOCIL
November 29, 2018 2
Contents Page No.
Rubber chemicals- Poised for growth ................................................................ 4
Rubber chemicals to ride on increased Tyre usage ........................................ 4
Tyre industry in a sweet spot .......................................................................... 4
Nocil’s performance against global peers .......................................................... 7
Nocil – At an inflexion point .............................................................................. 10
Valuation .......................................................................................................... 14
Key risk to our call ............................................................................................ 15
Story in charts .................................................................................................. 16
November 29, 2018 3
Rating: BUY| CMP: Rs169 | TP: Rs270
Set for a smooth ride
We initiate coverage on Nocil with a ‘BUY’ and a PT of Rs277, based on P/E
of 15x FY21E or 8.0x EV/EBIDTA FY21E. Nocil is India’s largest manufacturer
of rubber chemicals, with over four decades of experience. The company’s
technical capabilities and reliability has helped develop deep relationship
with leading global and domestic tyre players. Nocil’s earnings have
increased 7x over FY14-18 led by 1) steady demand growth of 12.5% CAGR 2)
higher share of specialty grade chemicals 3) benefit from Anti-Dumping Duty.
Nocil remains well placed to capitalize on supply disruptions in China which
accounts for 70% of global rubber chemicals supplies. Going forward, Nocil
plans to double its capacities by H2FY20E to capitalize on domestic tyre
industry capex (Rs250bn over the next five years) and global opportunities
from disruption in China. Also, US has imposed 10% duty on rubber
chemicals imports from China and will add another 15% duty from January
2019. This will open new opportunities for Nocil even though some Chinese
supplies might be diverted to India.
Timely capex to support growth: Nocil remains well placed to capitalize on
domestic and international opportunities. Domestic tyre manufacturers have
lined up capex of Rs250bn over the next five years (Source: ICRA), given
improved demand traction. Anti-dumping duty (ADD) imposed on imports of
TBR tyres from China for five years will spur domestic tyre demand. In the
international markets, disruption in Chinese supplies will make the company
better placed to capitalize on export markets (US$22bn capex by global tyre
players by CY21; Source Notch). Accordingly, Nocil’s timely capex of Rs4.3bn
will double its capacity in stages through H2FY20 and revenues can potentially
double in FY21E, given the asset turn of 2x.
Tougher environment norms to lift cost structure: China has progressively
tightened environment norms over the last few years. This has disrupted
supplies for highly polluting chemical industries as they account for over 70%
global rubber chemicals. Tightened environment norms have also increased
the cost structure; China Sunsine’s CY17 environmental protection expense
was up 50%YoY to RMB99mn or 3.6% of revenues. We believe the higher cost
structure of rubber chemical players is structural and will ease competitive
pressure on players like Nocil, going ahead.
Closing the gap to global leaders: Nocil’s EBITDA margins have increased
17% over FY14-18 led by 1) cost rationalization 2) backward integration post
start of new facility at Dahej in FY13 3) higher share of speciality grade
chemicals and 4)imposition of anti-dumping duty (ADD) protection (~4% of
sales). However, our analysis of Nocil’s operating performance vis-à-vis China
Sunsine (CS), one of the world’s largest rubber chemicals players, suggest that
Nocil’s operating matrix has steadily improved due to cost optimization and
better raw material sourcing and is better placed to compete with global majors.
Initiate with a ‘BUY’ and PT of Rs277. Nocil remains well placed to capitalise
on strong downstream demand from tyre markets. Timely capacity, addition,
along with healthy margins, will drive earnings at 22% CAGR over FY18-21E.
Initiate with ‘BUY’ and PT of Rs277 based on 15xPER FY21E. Net cash of
Rs7.7bn for FY21E and healthy ROEs of 20% provide downside support.
NOCIL (NOCIL IN)
November 29, 2018
Company Initiation
Key Financials(Standalone)
FY18 FY19E FY20E FY21E
Sales (Rs. m) 9,676 11,176 14,669 18,483
EBITDA (Rs. m) 2,629 3,018 3,667 4,621
Margin (%) 27.2 27.0 25.0 25.0
PAT (Rs. m) 1,689 1,808 2,371 2,968
EPS (Rs.) 10.3 11.0 14.4 18.0
Gr. (%) 44.1 7.1 31.1 25.2
DPS (Rs.) 2.5 2.7 3.5 4.4
Yield (%) 1.5 1.6 2.1 2.6
RoE (%) 17.4 16.4 18.8 20.2
RoCE (%) 26.1 24.0 25.6 29.7
EV/Sales (x) 2.6 2.4 1.9 1.4
EV/EBITDA (x) 9.6 9.0 7.5 5.5
PE (x) 16.5 15.4 11.7 9.4
P/BV (x) 2.7 2.4 2.1 1.8
Key Data NOCI.BO | NOCIL IN
52-W High / Low Rs. 236 / Rs. 139
Sensex / Nifty 36,170 / 10,859
Market Cap Rs. 28 bn / $ 401 m
Shares Outstanding 165m
3M Avg. Daily Value Rs. 203.47m
Shareholding Pattern (%)
Promoter’s 34.08
Foreign 4.71
Domestic Institution 6.00
Public & Others 55.21
Promoter Pledge (Rs bn) 1.21
Stock Performance (%)
1M 6M 12M
Absolute 11.0 (11.7) (4.0)
Relative 4.5 (14.7) (10.8)
Avishek Datta
[email protected] | 91-22-66322254
NOCIL
November 29, 2018 4
Rubber chemicals- Poised for growth
Rubber chemicals to ride on increased Tyre usage
The rubber processing chemicals industry is a play on growth in downstream
demand, especially for Tyres. The global rubber markets consumption in CY17 was
expected at 28mn MT and has registered a CAGR 3% over CY12-17 (Source:
Rubber Statistical Bulletin). Growth of the rubber industry is directly linked to
automobile sector as the Tyre industry accounts for 65% of total rubber usage.
Other uses of rubber are latex, footwear, conveyor belt, flooring, cycle tubes,
medical gloves etc.
Tyre industry in a sweet spot
Tyres account for two-thirds of rubber chemicals demand. Overall Indian tyre
demand has registered CAGR of 5.2% over FY13-18 led by demand in OEMs and
replacement segment. For FY18, according to SIAM (Society of Indian Automobile
Manufacturers), demand for passenger vehicles increased 7.9%, while commercial
vehicles and three-wheelers were up 19.9% and 24.2%, respectively. For FY18,
two-wheelers volume was up 14.8%.
Growth is, however, set to accelerate to CAGR of 8.3% over FY18-23E, 1) given
the strong government focus on infrastructure 2) rising and vehicle demand due to
increased consumerism and 3) imposition of anti-dumping duty (ADD) on radial tyre
imports from China for five years. Government has proposed ADD on import of
radial tyres for trucks and buses from China to provide a level-playing field to
domestic manufacturers. The duties range between US$245.35-452.33/ton for a
period of five years.
Indian tyre demand to grow at 8.3% CAGR over FY18-23
Source: Notch, Crisil, PL
1006 1084 1166 1144 1171 1234
1871
529 486534 594 631
744
1075
0
500
1000
1500
2000
2500
3000
3500
FY13 FY14 FY15 FY16 FY17 FY18 FY23F
'000 to
ns
Replacement OEM
NOCIL
November 29, 2018 5
Global tyre demand to accelerate
Tyre demand is expected to accelerate globally across segments - passenger and
trucks and buses due to favourable demand traction. Overall global demand is also
likely to accelerate to 3.3% over CY16-21E against 2.2% over CY06-16. Also,
global capital expenditure is pegged at US$21.8bn during CY16-21E, given
improved demand environment.
Global tyre demand to accelerate
Source: Notch, Crisil, PL
Global tyre industry capex at US22bn
Asia 9,869
North America 6,319
Europe 3,550
Africa/ME 1,934
South America 150
World 21,822
Source: Notch, Crisil, PL
Rising environmental cost in China augurs well for rubber chemicals
China has progressively tightened environment norms over the last few years. This
has resulted in major disruption in supplies for highly polluting chemical industries
as they account for over 70% global rubber chemicals. Increased compliance audits
have, led to closure of smaller/unorganized units. This has led to disruption in
supplies, which in turn, has wide ramifications for downstream users globally. Rising
compliance costs among Chinese players has also increased the cost structure.
Our analysis of CS (one of the largest rubber chemicals company based out of
China) financials suggests that environmental protection expenses for CY17 was
up 50%YoY to RMB99mn. This translated to 3.6% of CY17 revenues, up from
RMB66mn in CY16 or 3.2% of CY16 revenues. This has meant that companies like
Nocil, which are compliant with respect to environmental norms have benefitted
immensely-Nocil’s operating profits more than doubled over FY15 to Rs2.6bn in
FY18.
Anti-dumping duty on rubber chemicals - an added support
Government has levied anti-dumping duty (ADD) on six products out of twenty
manufactured by Nocil, which will be effective until July 2019. According to Nocil’s
management, duty protection accounts for 4% of sales and ~35% revenues are
exposed to duty protection. With significant over capacity in China, the
management is hopeful of ADD duty extension as there is a scope of significant
injury to domestic industry from cheaper imports. However, effects of duty
protection are overstated as competitors cut prices to compete with domestic
players. Accordingly, we have factored in 2% EBITDA margin compression in
FY20E to 25% against 27% factored in FY19E. Our sensitivity analysis suggests
that if the EBIDTA margins were to erode by 4% (vs 2% in base case), Nocil’s
FY20E earnings impact will be 8% (pls see the later pages on sensitivity analysis
for details).
2.5
3.3
1.5
3.2
2.2
3.3
0
0.5
1
1.5
2
2.5
3
3.5
CY06-16 CY16-21
Passenger Trucks & Buses Total
NOCIL
November 29, 2018 6
US imposition of import duty on Chinese imports will open new market
US has recently imposed 10% import duty on Chinese rubber chemicals and will
add another 15% effective 1st January 2019. US and European markets account for
~22% share and any restrictions on Chinese imports will open up opportunities for
other including Nocil. While some of the Chinese supplies might be diverted to India
(5% of global market), entry into US will be a high growth opportunity for Nocil.
Winds of change blowing across rubber chemicals
Rubber chemicals are important additives, which are needed to make simple rubber
polymer commercially useful for final applications. By weight, they account for 6%,
while they account for 3% of value of rubber. Global rubber chemicals demand is
estimated at ~1.2MTPA. There are wide range of rubber-processing chemicals like
anti-degradants, accelerators and other processing aids.
Anti-degradants: Anti-degradants are chemicals used to develop rubber’s
resistance to heat, oxidation, sunlight and mechanical stress. It ensures that rubber
doesn’t split or destroys from friction with road.
Accelerators: Accelerators are chemical compounds that speed the process of
vulcanization. Vulcanization is one of the major activities on raw rubber to eliminate
its sticky nature. Vulcanization process generally takes 45 hours; however, with use
of accelerators, the process can be completed in 1 hour.
Processing aids: Processing aids act as agents to improve manufacturing process
of rubber-based products.
Rubber chemicals usage
Source: PL, Industry
Rubber94.1%
Accelerators1.7%
Vulcanizing agents
2.0%
Anti-oxidants2.2%
NOCIL
November 29, 2018 7
Nocil’s performance against global peers
Given that there are very few listed pure rubber chemicals players globally, we
compared Nocil’s financials with China Sunsine (one of the world’s largest rubber
chemicals manufacturers; Mkt cap USD470m). Our detailed comparative analysis
over last decade shows many interesting data points which augurs well for Nocil.
Sales volume growth: Over the last decade, CS’ volume has registered CAGR
growth of 18% to 140,476MT against 7% CAGR for Nocil. This higher growth rate
was supported by rapid expansion in Chinese vehicle population over last decade.
However, the company’s volume traction has overtaken CS over the last five years,
partly out of low base effect and increased capacities to 13% CAGR against 9% for
CS.
China Sunsine volume growth over Nocil has come off over last five years
Source: Company, PL
Raw material cost share has come down: Raw material intensity has come down
for the industry globally. For CS, raw material share has come down to 60% of sales
over CY14-18 against over 70% during CY08-13. For Nocil, RMC share has come
down to less than 50% over FY15-18 against ~60% over FY09-14.
Raw material intensity has come down for the sector given benign raw material prices
Source: Company, Company, PL
30,787
45,420 54,275
60,907
81,371
98,345 108,973
114,572
135,791 140,476
21,542 23,413 24,171 24,413 23,436 24,960 30,932 32,169 36,190 40,714
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14 CY14/FY15 CY15/FY16 CY16/FY17 CY17/FY18
Nocil China Sunsine
70%76% 76% 77% 78%
64% 61%56%
60% 60%59% 58% 58%61%
65%59%
54%50% 48% 46%
0%
20%
40%
60%
80%
100%
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14 CY14/FY15 CY15/FY16 CY16/FY17 CY17/FY18
Nocil China sunsine
NOCIL
November 29, 2018 8
Operating costs have diverged: Operating cost structure has increased sharply
for CS to average 22% of sales over CY13-18 against ~10% over CY08-12. Against
that, Nocil’s cost has averaged at ~30% over last decade and has come down to
27% for FY18. Rising environmental compliance cost will also push the cost
structure of the Chinese peers, thereby, reducing the competitive intensity for Nocil.
Operating costs for China Sunsine has doubled, while for Nocil it has come off
Source: Company, PL,
Nocil’s operating profit margins increased significantly: Nocil’s OPM has
increased 170bps over FY14-18 led by better product mix, operational efficiency
and higher volumes and has overtaken its Chinese peers in FY18. However, CS
margins have historically been higher and have averaged ~20% over last four
years.
Nocil’s operating margins have improved significantly over last four years
Source: Company, PL, PL
30% 31% 31% 32% 31% 31% 30% 30% 30%
27%
14%
6%8% 8%
13%
25%
19%
25%
21%19%
0%
5%
10%
15%
20%
25%
30%
35%
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14 CY14/FY15 CY15/FY16 CY16/FY17 CY17/FY18
Nocil China sunsine
11% 11% 11%
7%
4%
10%
16%
19%21%
27%
16%17%
16% 15%
9%
12%
20% 19% 19%21%
0%
5%
10%
15%
20%
25%
30%
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14 CY14/FY15 CY15/FY16 CY16/FY17 CY17/FY18
Nocil China sunsine
NOCIL
November 29, 2018 9
ROE-improving trend: CS historically reported better ROE profile against Nocil.
However, improving profitability trend has bridged the gap between players.
Nocil ROE has been on an uptrend supported by improving financials
Source: Company, PL
30
18
14
4
10
24
18 17
22
12 11 11
12
6
14 13 12
17
-
5
10
15
20
25
30
35
CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14 CY14/FY15 CY15/FY16 CY16/FY17 CY17/FY18
Nocil China Sunsine
NOCIL
November 29, 2018 10
Nocil – At an inflexion point
Nocil is part of Arvind Mafatlal Group companies which is India’s largest rubber
chemicals company offering one of the largest range of rubber chemicals. The
company manufactures accelerators, antioxidants, pre-vulcanize inhibitor and post
vulcanise inhibitor. While the accelerators and anitoxidants account for ~45% of
product slate, while pre and post vulcanizing inhibitors account for ~10%. Nocil has
two plants in Navi Mumbai and Dahej with a rated capacity of 55,000 MT. Led by
improved market fundamentals, Nocil is on track to double its capacity by H1FY20.
The company caters to all the major customers like Continental, Yokohama, Apollo
Tyres, Ceat, MRF etc.
Nocil is one of the few companies to stay put in the rubber chemicals business
despite intense competition from the Chinese players. The company’s business
fortune got a significant lift post FY14 led by 1) start of modern complex at Dahej 2)
imposition of ADD on certain rubber chemicals and 3) tightening environmental
norms in China.
Timely capacity expansion to meet rising demand
Nocil is currently operating at near-rated capacity and plans to spend Rs4.25bn to
double its capacity at both the facilities in Navi Mumbai (42,000 tons) and Dahej
(11,000 tons). Capacity expansion will be funded largely through internal accruals
and all three phases will come on stream by H1FY20E. The first phase of expansion
has already come on stream in Q1FY19. With asset turn of 2x, management
expects revenues to double post completion of these expansion projects.
Nocil capacity to double in stages by H1FY20E
Source: Company, PL
However, we have factored in gradual ramp up in volumes to factor in delay in
stabilization of new capacities.
55,000 59,400
75,900 80,300
1,10,000
-
20,000
40,000
60,000
80,000
1,00,000
1,20,000
Existingcapacity
Q1FY19 Q3FY19 Q4FY19 Q2FY20
MT
NOCIL
November 29, 2018 11
We have factored in gradual ramp-up of new capacities
Source: Company, PL
Sales growth to ride on higher volumes and increased realization
Over FY14-18, Nocil’s revenue growth CAGR of 12.9% has tracked the volume
growth of 12.5%. This is because; realizations growth has been muted due to drop
in crude oil prices. Going forward, we have factored in CAGR 5% realization growth
over FY19-21E as crude prices have recovered from lows. This is in-line with crude
inflationary realization growth over FY10-14. Also, supported by capacity additions
coming on stream, we expect 24% CAGR revenue growth over FY18-21E.
Have factored in net realization growth of 5% over FY18-21E
Source: Company, PL
Domestic market will continue to remain the bedrock
Nocil’s domestic share of sales has steadily increased to 74% in FY18 against 60%
in FY10. This is on the back of intensely competitive export market in light of
aggressive exports by Chinese players. However, recent clampdown on Chinese
production capacities due to environmental factors will mean Nocil is better placed
to cater to the export market. US has recently imposed 10% duty on imports from
China and will impose another 15% from January 2019. This will open up
opportunities for domestic players like Nocil to better target export market.
Accordingly, we expect export share will increase to 31% in FY21E. However,
domestic market will continue to remain the bedrock as domestic sales have
increased at 18% CAGR over FY14-18.
55,000 55,000
73,315
110,000 110,000
44,415 49,967
54,964
68,705
82,446
-
20,000
40,000
60,000
80,000
100,000
120,000
FY17 FY18 FY19 FY20 FY21
Rated capacity (MT) Production (MT)
196 197209
225238 231
220205
238250
262275
0
50
100
150
200
250
300
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19E
FY
20E
FY
21E
Rs
/to
n
Realisation (Rs/ton)
NOCIL
November 29, 2018 12
Sales to increase at CAGR of 24% over FY18-21E
Source: Company, PL
Raw material cost intensity has come down
Nocil’s raw material price intensity has come down steadily over the years due to
benign raw material prices and benefits of higher value added products.
Accordingly, gross margins have expanded to 54.5% in FY18 against FY14 levels
of 41.5%. We have factored in gross margins to remain stable at 54% for FY20/21E.
Raw material prices have been benign for rubber chemicals players
Source: China Sunsine, PL
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
(Rs
mn
)
Domestic Exports Others
NOCIL
November 29, 2018 13
Operating margins likely to remain elevated
Nocil’s operating profit margins have been on an uptrend led by product mix
change, cost rationalization and operating leverage from improved volumes.
Buoyed by margin improvement, operating profit margins have improved to 27.2%
in FY18 against 21.3% in FY17 and 10.2% in FY14. With spreads likely to sustain
in the medium term, we have factored in OPM of ~27% for FY19E; H1FY19 29.5%.
However, we have reduced our margins to 25% for FY20E to factor in removal of
duty protection benefits by July 2019.
Profits on an upswing
Supported by healthy demand trend and margin expansion, Nocil’s earnings have
increased 3x to Rs1.7bn in FY18. With demand trend likely to remain robust,
coupled with healthy operating leverage from new capacities, we expect Nocil’s
earnings to increase 21% over FY18-21E.
Nocil’s return ratios are likely to stay healthy supported by improved operating
performance and lower finance charges. We calculate ROEs of ~17-20% over
FY18-21E.
Strong balance sheet - an added strength
Nocil has a healthy balance sheet with net cash of Rs2.5bn as on FY18. Also,
despite capex plans of Rs4.3bn over FY18-20E, steady cash flow from operations
will mean a lean balance sheet.
Nocil key assumptions
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Rubber chemicals sales (tons) 30,932 32,169 36,190 40,714 44,785 55,982 67,178
Realisation (Rs/ton) 231 220 205 238 250 262 275
Sales (Rs m) 7,190 7,152 7,422 9,676 11,176 14,669 18,483
Gross profit (Rs m) 3,304 3,557 3,826 5,270 6,370 7,921 9,981
Gross profit (%) 46% 50% 52% 54% 57% 54% 54%
EBIDTA 1,119 1,382 1,580 2,629 3,018 3,667 4,621
EBIDTA (%) 16% 19% 21% 27% 27% 25% 25%
PAT 568 778 1,165 1,689 1,808 2,371 2,968
Source: Company, PL, Company, PL
Nocil earnings sensitivity to realization and volume changes
Base case Sensitivity FY20E earnings sensitivity (Rs m)
Base case PAT Revised PAT % change
2% drop in EBIDTA margin due to anti-Dumping Duty abolition Anti-Dumping Duty abolition of 4% 2,371 2,172 -8%
5% increase in realization Zero increase in realization 2,371 2,260 -5%
FY20E volume growth of 25% FY20E volume growth of 15% 2,371 2,184 -8%
Source: Company, PL
NOCIL
November 29, 2018 14
Valuation
Nocil’s is expected to report 21% CAGR in earnings growth over FY18-21E led by
1) higher volumes post commissioning of new capacity 2) higher realisation and 3)
benign raw material pricing. We have valued Nocil at 15x P/E FY21E which
translates to EV/E of 8.0x FY21E.
Peer comparison valuation
Chemicals Price M Cap
(USDm)
P/E (x) EV/EBIDTA (x) RoE (%)
FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E
AARTI INDUSTRIES LIMITED 1,455 1,684 26.3 20.8 16.2 15.3 12.6 10.1 24 24 23.1
ATUL LTD 3,486 1,475 22.9 19.9 18.6 14.5 12.7 11 16.6 16.5 16.6
SRF LTD 2,132 1,378 20.0 16.0 13.7 11.6 9.8 8.9 16.1 17.5 17.5
VINATI ORGANICS LTD 1,448 1,071 31.3 24.9 18.5 20.5 16.1 12.2 23.6 23.2 25.4
NAVIN FLUORINE 711 500 20.5 17.4 15.0 13.8 11.6 9.9 16.2 16.9 17.6
CHINA SUNSINE 470 5.1 5.6 na 3 3.3 3.6 28.2 19.6 16.4
NOCIL 169 390 15.4 11.7 9.4 9.0 7.5 5.5 16.4 18.8 20.2
AEKYUNG PETROCHEMICAL CO LTD 8,590 242 6.1 7.3 6.1 3.3 3.5 2.9 14.1 10.8 11.9
I.G. PETROCHEMICALS LTD 417 184 7.7 6.7 5.4 4.0 3.6 3.0 26.7 24.0 23.4
Source: Bloomberg, PL
Nocil's FY20E earnings sensitivity to margin changes
Base case
Nocil earnings sensitivity to margins 15% 20% 25% 30% 35%
FY20E EPS 8.3 11.4 14.4 17.5 20.5
Source: Company, PL
Nocil earnings sensitivity to realization and volume changes
Base case Sensitivity FY20E earnings sensitivity (Rs m)
Base case PAT Revised PAT % change
2% drop in EBIDTA margin due to anti Dumping Duty abolition Anti Dumping Duty abolition of 4% 2,371 2,172 -8%
5% increase in realization Zero increase in realization 2,371 2,260 -5%
FY20E volume growth of 25% FY20E volume growth of 15% 2,371 2,184 -8%
Source: Company, PL
NOCIL
November 29, 2018 15
Key risk to our call
Threat of US-China trade war: In the event of flare up in US-China trade war, there
is a possibility of Chinese volumes being diverted to India as US is world’s second
largest rubber chemical player after China.
Delay in ramp up of new capacity: Nocil plans to double its capacity by H2FY20E,
however, any delay in start and ramp up of new capacity will impact earnings.
Sensitivity to lower production
Base case Sensitivity Base case PAT(Rs m) Revised PAT(Rs m) % change
FY20E production volume of ~69,000MT 20% lower volumes 2,371 1,903 -20%
Source: Company, PL
Removal of anti-dumping duty: The anti-dumping duty imposed on rubber
chemicals imports will end in July 2019. Duty protection adds to ~4% of operating
profits. Management remains hopeful of extension of duty protection as Chinese
companies with ~70% of global capacity and ~33% of usage has potential to injure
domestic players. In the event of complete removal of duty protection, FY20E
earnigs will be impacted by ~8% against our base case.
NOCIL
November 29, 2018 16
Story in charts
Improving trends in operating margins
1,3
82
1,5
80
2,6
29
3,0
18
3,6
67
4,6
21
19%21%
27% 27%25% 25%
0%
5%
10%
15%
20%
25%
30%
-
1,000
2,000
3,000
4,000
5,000
FY16 FY17 FY18 FY19E FY20E FY21E
(Rs
mn
)
EBIDTA EBIDTA margin
Source: Company, PL
Profit momentum is likely to remain robust
778
1,165
1,689 1,808
2,371
2,968
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY16 FY17 FY18 FY19E FY20E FY21E
(Rs
mn
)
Source: Company Data, PL
Return ratios are likely to remain robust
13.2 14.0
17.416.4
18.820.2
11.09.6
14.715.7
17.418.7
0.0
5.0
10.0
15.0
20.0
25.0
FY16 FY17 FY18 FY19E FY20E FY21E
ROE ROCE
Source: Company, PL
Operating margins have steadily
increased with H1FY19 margin of
29.5%
We expect FY18-21E PAT CAGR of
22%
Return ratios to steadily increase for
the company with rising profitability
NOCIL
November 29, 2018 17
Financials Income Statement (Rs m)
Y/e Mar FY18 FY19E FY20E FY21E
Net Revenues 9,676 11,176 14,669 18,483
YoY gr. (%) 30.4 15.5 31.3 26.0
Cost of Goods Sold 4,406 4,806 6,748 8,502
Gross Profit 5,270 6,370 7,921 9,981
Margin (%) 54.5 57.0 54.0 54.0
Employee Cost 674 894 1,174 1,479
Other Expenses 1,968 2,459 3,080 3,881
EBITDA 2,629 3,018 3,667 4,621
YoY gr. (%) 66.4 14.8 21.5 26.0
Margin (%) 27.2 27.0 25.0 25.0
Depreciation and Amortization 229 228 301 424
EBIT 2,400 2,790 3,366 4,197
Margin (%) 24.8 25.0 22.9 22.7
Net Interest 12 160 160 160
Other Income 143 110 387 460
Profit Before Tax 2,531 2,740 3,593 4,497
Margin (%) 26.2 24.5 24.5 24.3
Total Tax 845 932 1,222 1,529
Effective tax rate (%) 33.4 34.0 34.0 34.0
Profit after tax 1,686 1,808 2,371 2,968
Minority interest - - - -
Share Profit from Associate - - - -
Adjusted PAT 1,689 1,808 2,371 2,968
YoY gr. (%) 44.9 7.1 31.1 25.2
Margin (%) 17.5 16.2 16.2 16.1
Extra Ord. Income / (Exp) - - - -
Reported PAT 1,689 1,808 2,371 2,968
YoY gr. (%) 44.9 7.1 31.1 25.2
Margin (%) 17.5 16.2 16.2 16.1
Other Comprehensive Income - - - -
Total Comprehensive Income 1,689 1,808 2,371 2,968
Equity Shares O/s (m) 164 164 164 164
EPS (Rs) 10.3 11.0 14.4 18.0
Source: Company Data, PL Research
Balance Sheet Abstract (Rs m)
Y/e Mar FY18 FY19E FY20E FY21E
Non-Current Assets
Gross Block 6,569 6,569 10,819 10,919
Tangibles 6,569 6,569 10,819 10,919
Intangibles - - - -
Acc: Dep / Amortization 1,576 1,803 2,105 2,528
Tangibles 1,576 1,803 2,105 2,528
Intangibles - - - -
Net fixed assets 4,994 4,766 8,715 8,391
Tangibles 4,994 4,766 8,715 8,391
Intangibles - - - -
Capital Work In Progress 392 2,892 392 150
Goodwill 28 30 33 37
Non-Current Investments 812 812 812 812
Net Deferred tax assets (1,003) (1,277) (1,636) (2,086)
Other Non-Current Assets 288 313 341 371
Current Assets
Investments 2,245 2,245 2,245 2,245
Inventories 1,550 1,790 2,350 2,960
Trade receivables 2,434 2,811 3,689 4,648
Cash & Bank Balance 276 499 113 182
Other Current Assets 298 328 360 396
Total Assets 13,317 16,488 19,052 20,196
Equity
Equity Share Capital 1,645 1,645 1,645 1,645
Other Equity 8,730 10,098 11,892 14,137
Total Networth 10,374 11,742 13,536 15,782
Non-Current Liabilities
Long Term borrowings - 2,000 2,000 -
Provisions 153 153 153 153
Other non current liabilities 1 1 1 1
Current Liabilities
ST Debt / Current of LT Debt - - - -
Trade payables 1,139 1,315 1,726 2,175
Other current liabilities 653 - - -
Total Equity & Liabilities 13,322 16,488 19,052 20,196
Source: Company Data, PL Research
NOCIL
November 29, 2018 18
Cash Flow (Rs m)
Y/e Mar FY18 FY19E FY20E FY21E Year
PBT 2,531 2,740 3,593 4,497
Add. Depreciation 229 228 301 424
Add. Interest 35 - - -
Less Financial Other Income 143 110 387 460
Add. Other (110) 640 (387) (460)
Op. profit before WC changes 2,685 3,608 3,507 4,461
Net Changes-WC (899) (141) (1,027) (1,121)
Direct tax (802) (932) (1,222) (1,529)
Net cash from Op. activities 984 2,535 1,259 1,810
Capital expenditures (276) (2,495) (1,750) 142
Interest / Dividend Income 30 110 387 460
Others (1,133) 841 404 516
Net Cash from Invt. activities (1,379) (1,544) (959) 1,118
Issue of share cap. / premium - - - -
Debt changes (100) 2,000 - (2,000)
Dividend paid (350) (526) (690) (864)
Interest paid (13) - - -
Others 41 - - -
Net cash from Fin. activities (422) 1,474 (690) (2,864)
Net change in cash (816) 2,465 (390) 64
Free Cash Flow 708 40 (491) 1,952
Source: Company Data, PL Research
Quarterly Financials (Rs m)
Y/e Mar Q3FY18 Q4FY18 Q1FY19 Q2FY19
Net Revenue 2,493 2,759 2,681 2,720
YoY gr. (%) 40.6 44.6 13.4 19.5
Raw Material Expenses 1,148 1,220 1,190 1,194
Gross Profit 1,344 1,539 1,491 1,526
Margin (%) 53.9 55.8 55.6 56.1
EBITDA 696 846 802 789
YoY gr. (%) 28.8 21.5 (5.1) (1.7)
Margin (%) 27.9 30.7 29.9 29.0
Depreciation / Depletion 40 112 54 56
EBIT 656 734 748 733
Margin (%) 26.3 26.6 27.9 27.0
Net Interest 3 2 3 1
Other Income 32 32 21 32
Profit before Tax 685 764 766 764
Margin (%) 27.5 27.7 28.6 28.1
Total Tax 235 255 258 236
Effective tax rate (%) 34.4 33.3 33.7 30.8
Profit after Tax 450 510 508 528
Minority interest - - - -
Share Profit from Associates - - - -
Adjusted PAT 450 510 508 528
YoY gr. (%) 76.6 100.1 (9.7) 38.8
Margin (%) 18.0 18.5 19.0 19.4
Extra Ord. Income / (Exp) - - - -
Reported PAT 450 510 508 528
YoY gr. (%) 76.6 100.1 (9.7) 38.8
Margin (%) 18.0 18.5 19.0 19.4
Other Comprehensive Income - - - -
Total Comprehensive Income 450 510 508 528
Avg. Shares O/s (m) - - - -
EPS (Rs) - - - -
Source: Company Data, PL Research
Key Financial Metrics
Y/e Mar FY18 FY19E FY20E FY21E
Per Share(Rs)
EPS 10.3 11.0 14.4 18.0
CEPS 11.7 12.4 16.2 20.6
BVPS 63.1 71.4 82.3 96.0
FCF 4.3 0.2 (3.0) 11.9
DPS 2.5 2.7 3.5 4.4
Return Ratio(%)
RoCE 26.1 24.0 25.6 29.7
ROIC 19.7 18.3 19.2 22.9
RoE 17.4 16.4 18.8 20.2
Balance Sheet
Net Debt : Equity (x) (0.2) (0.1) 0.0 (0.2)
Net Working Capital (Days) 107 107 107 107
Valuation(x)
PER 16.5 15.4 11.7 9.4
P/B 2.7 2.4 2.1 1.8
P/CEPS 11.4 12.1 15.8 20.1
EV/EBITDA 9.6 9.0 7.5 5.5
EV/Sales 2.6 2.4 1.9 1.4
Dividend Yield (%) 1.5 1.6 2.1 2.6
Source: Company Data, PL Research
NOCIL
November 29, 2018 19
Analyst Coverage Universe
Sr. No. Company Name Rating TP (Rs) Share Price (Rs)
1 Bharat Petroleum Corporation Accumulate 326 277
2 GAIL (India) BUY 435 372
3 Hindustan Petroleum Corporation Hold 219 230
4 I.G. Petrochemicals BUY 810 438
5 Indian Oil Corporation Accumulate 142 148
6 Indraprastha Gas BUY 360 284
7 Mahanagar Gas BUY 1,179 842
8 NOCIL NR - 94
9 Oil & Natural Gas Corporation BUY 223 172
10 Oil India Accumulate 236 199
11 Petronet LNG BUY 300 218
12 Reliance Industries Accumulate 1,152 1,122
PL’s Recommendation Nomenclature (Absolute Performance)
Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
NOCIL
November 29, 2018 20
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