May 10, 2017 | PM Securities
Nocil Limited is a Arvind Mafatlal Group company engaged in manufacturing of over 20 rubber chemicals products broadly falling in the categories Accelerators, Antioxidants & Antidegradants which form about 3-4% of the end rubber products. NOCIL caters predominantly to the tyre industry (60-65% of top-line). These chemicals are used predominantly for vulcanisation process. Nocil has an in-house capacity of ~55000 Tonnes per annum currently which is virtually fully utilised and has planned an capacity expansion this year to support further output. NOCIL's revenues are from domestic market to the extent of 70% and 30% are from exports to 40 countries.
Global rubber consumption stood at 27mn tonnes last year typically the industry has been growing at 2-4% y-o-y the rubber chemicals market size is ~ 0.95 to 0.97mn tonnes per annum. India’s rubber consumption stood at 1.6 mn tonnes previous year (5.8% growth y-o-y) whereas NOCIL’s domestic sales grew by 10%.
1) Nocil reported a annual growth of ~3.8% on top-line (~7420mn FY16 Vs. ~715mn FY17) and ~36.84% at PAT level (~1060mn FY16 vs ~780mn FY17) after adjusting PAT against tax-adjusted gains on exceptional items amounting to ~Rs. 200 Mn on account of sale of part of its non-current investments in Navin Fluorine International Limited.
2) This increment in PAT was majorly contributed by increase in Gross margins by 1.83% from 49.79% to 51.62% on account of cost benefits & a drastic decrease in interest expense from ~90mn to ~20mn on account of debt repayment. Avg debt (LT+ST) for the period FY15-16 stood at 709mn vs ~10.5mn for the financial year FY16-17.
Management comments & Interpretation
1) As per managements comments annual volume growth of ~12% was witness, but the top-line only grew by 3.78% suggesting lower realisations. This interpretation can be supported by managements remarks on highly competitive environment prevailing in the rubber chemicals industry.
2) As majority of the PAT growth witnessed can be attributed to RawMat cost benefits, the increasing prices of Benzene may put a pressure on the gross margins going ahead as NOCIL’s key raw materials are Benzene derivatives. As per managements remarks pass-on of these RawMat price increment are subject to intensity of competition. As discussed earlier the competition is intensive.
3) Interest expense drop which is another contributor to PAT growth is expected to remain at these levels on account of debt being repaid and shall continue to contribute to the bottom-line.
4) Current capacity utilisation levels of NOCIL’s existing 55000 TPA capacity are north of 90%, Currently an CAPEX of Rs. 1700mn majorly out of internal accruals is planned to expand the capacity of both Accelerators & Anti-oxidants with an expected Asset-Turnover ratio of 2times however this capacity is planned to commission in Q2FY19 & conservatively may take upto 3 years there-after to reach full-utilisation levels. These conditions pose a challenge to NOCIL in our interpretation as even if demand increases until Q2FY19 NOCIL shall be virtually incapable of increasing output given the utilisation levels of current capacities.
5) Anti-dumping duty on imports from Korea & China for 6 of NOCIL’s products contributing ~50% of NOCIL’s revenues is in place until July 2019 and shall make NOCIL better-off in price competition against imports from these two countries and Chinese environmental concerns have also affected the Chinese manufacturers but the benefit on account of that cannot be quantified.
NOCIL’s restricted ability to increase output in intermediate terms coupled with highly competitive industry environment and increasing RawMat Costs in an industry that has 2-3% annual growth rate places many challenges for NOCIL in the intermediate term, only change in product-mix if any may marginally drive growth in the intermediate term.
This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.
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