• Mayank Mehraa CFA, FRM

A Near Multinational Monopoly @10x Earnings & its Excess Reserves

The Company:

NOCIL India- is a midcap company promoted by the Arvind Mafatlal Group. The company has over 4 decades of experience in speciality chemicals. While being India's largest rubber chemical manufacturer it has become a one-stop-shop for the major needs of tyre manufacturers. The company dominates the local markets with over 40% market share in the Indian Tyre Industry.

The closest competition the company faces is from the China-based company "China Sunsine Chemicals".

The US-China trade war has opened up the requirement for American tyre makers to approach a non-Chinese alternative for their chemical demand. Nocil has recently undergone capacity expansion post which it can now cater to international tyre manufacturers.


The Fundamentals:

The company sits on over Rs. 1000 Cr of reserves while the market capitalisation of the stock is Rs. 1,786 Cr (at Rs. 107.85/- per stock). Along with being debt-free, the company maintains a healthy dividend pay out. At current prices, the company has a 2.32% dividend yield. The company has a strong ROCE of over 24% and trades at cheap multiples to Book Value at 1.48x and Earnings(FY-19) at 9.66x.


Concerning the excess cash on the books, I've suggested the company give out a portion as dividends or might even buy some stock back considering how the company does not seem to need any recent expansions. These Cash Bonus to the shareholders would help raise sentiments, however, I have received no response from the company.


The Industry:

Owing to the high dependence on the Indian Tyre Industry and given the slump in auto demand and manufacturing Nocil has seen a decline in topline over the year.

Channel checks of various research houses suggest manufacturing in the Auto Industry should pick up by the end of this Calendar Year owing to low inventory levels at auto dealerships.

I see the major liquidity issues that originally caused the demand to collapse, no longer exist.

The Indian Auto sector was enjoying the massive demand for vehicles to cater to online cab aggregating apps. A chunk of these loans was on very little collateral and in major cities. Post the I&LFS Collapse such low collateral loans had to be stopped since most NBFCs were/are in a panic. The industry situation worsened due to the government's aggressive green initiatives.

However, I see this cab aggregator demand come back from the tier 2/3 cities which have not yet been exposed to the luxury and comfort of the same along. Such demand should inturn trigger the demand in CV and Logistics. Either way, more cars being manufactured would require tyres and Nocil would be a direct beneficiary.


Target:

I see the stock trade at over Rs. 200/sh in a year's time which might look like a 100% return target but is a mere 20x Earnings (FY 19).

The company has names of marquee investors like Dolly Khanna and Ashish Kacholia in its shareholding.


Disclaimer:

While I am in my individual capacity financially exposed to the company, this post should not be construed as investment advice.

48 views

Recent Posts

See All

HDFC and it's Warrant for profit

A strategy that could magnify your returns while significantly reducing your worst case downside risk.

Rajratan Global Wires | A Vision of Outperformance

The Company A family-owned and managed business that began in 1989 as a steel trading concern. The company moved into commercial manufacturing of pre-stressed concrete wires and stands. Rajratan enter

Essel Propack | Global Leadership with probable growth

In the backdrop of an operationally excellent quarter from Colgate- Palmolive India, our research team stumbled upon an exciting company at the cusp of a breakout. Previously we had ignored the prospe

Untitled.png