• Mayank Mehraa CFA, FRM

Nocil - Monopoly in the Making


Our research team has stumbled upon a phenomenon occurring across the tyre industry, where the tyre manufacturers have stopped making chemicals to free up space for expansion in manufacturing more tyres. We have maintained a positive across the tyre industry for over a year now and have over weight on Balkrishna Industries (CMP- 334) with a long term outlook. The rubber chemical industry used to be majorly catered by China Sunshine until very recently when the government has hiked anti dumping duties and the Chinese Government have implemented newer and stricter environment protection laws. However, these current developments will open the Indian and the Asia Pacific Markets for speciality chemical makers in India. Our bet on the same is this chemical company which is moving focus from other chemicals to only rubber chemicals.

NOCIL (CMP- 53) an Arvind Mafatlal Group Company has been in the speciality chemical business for close to 4 Decades now. Nocil intends to hold close to 60% Market Share in the business by the end of FY2019, however we believe its dominance in Tyre Chemicals Market is bound to grow with longer term trade contracts with all major tyre makers. The company has dramatically reduced net borrowings from Rs. 147 Cr at the end of FY 15 to a mere Rs. 26 Cr end of FY 16 while the reserves have grown sharply too from 254 Cr to 309 Cr during the same period. If the reserves continue to grow Nocil will be in a good position to expand capacities should the industry demand. However the low promoter holding and high reliance from a single manufacturing unit keeps us mildly skeptic.

India having one of the lowest automobile penetration among emerging economies and a mild growth towards the culture of spending should ensure a continuous growth in the automobile and tyre sector. 

Valuation

We chose to categorise Nocil as a longer term growth story, but at current valuations viz.-

  1. PE of 11.76x and barely any borrowings backed by growth in reserves.

  2. Margin of close to 20%, which is only bound to grow if Nocil is able to position itself in the tyre industry.

  3. Increasing Cost Synergies evident from the fall in Operating Cost (%age).

  4. A high dividend payout ratio of close to 25%

The above factors make it more of a Value Pick than Growth. While we see the revenues grow at 15% CAGR the reduction in Operating and Interest Cost should help the earning grow at above 20% CAGR. However a tax burden of 32% might continue to pinch in the short term.

For the business and industry position we strongly believe NOCIL could trade at a 20x to Forward Earnings justifying for a target price of at least Rs.200 by the end of FY19.

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Edits
  1. Balkrishna Industries stock price has been adjusted to factor in a 1:1 bonus

Following Up
  1. Nocil currently trades at a PE of 13.4 x

  2. End of FY 18- Nocil Margins were at 27% with similar DPR.

  3. We still continue to hold and add on to Nocil with a fresh target of Rs. 273/-

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