Stock Pick from Specialty Chemicals

LOW PRICED SCRIP

Here Is Why

• Declining crude price to improve margins.

• Revival in the Indian automotive industry to spur demand.

• Benefit of expanded capacity is visible now.

Nocil is India’s largest manufacturer and supplier of rubber chemicals and is a part of the Arvind Mafatlal Group. It offers broad types of rubber chemicals for anti-degradants, antioxidants, accelerators, post-vulcanisation stabiliser, and pre-vulcanisation inhibitor. The company’s products are widely used in industries like tyres, industrial rubber products, consumer rubber products, and other segments of the rubber processing industry where they are mainly used for accelerating the vulcanisation process. Hence the diversified product portfolio aids the company to improve its volume growth.

Also, lower crude prices bode well for the company as its raw materials are based on crude oil derivatives. The raw material cost accounts for 66 per cent of its total operating expenses; hence lower crude prices would have a positive bearing on the company’s margin. The global crude oil prices have fallen by nearly 60 per cent since June when Brent crude climbed up to USD 116 and is now trading at around USD 49 per barrel. We believe crude prices will remain subdued in the near to medium term.

Nocil has a strong export market with exports contributing about 37 per cent to its total revenue while the balance is derived from the domestic market. A revival in the Indian automotive industry, especially in the commercial vehicle sector, will boost tyre demand which will help Nocil to post robust revenue growth. Over the years NOCIL has developed and marketed a few specialty products, specifically tailored for its major international customers, due to which it enjoys a niche position.

The company had undertaken an expansion plan involving Rs 250 crore to produce intermediates for its main product range at Dahej which was commissioned end FY13. The benefit of this expanded capacity is visible now; however full capacity utilisation of the plant will be achieved in FY16 and will have a significant positive impact on the company’s performance.

On the financial front, in the first half of FY15 the net profit of Nocil zoomed 4.4 times to Rs 23.1 crore on the back of better operating margin. Its topline grew 25 per cent to Rs 355 crore as against of Rs 283 crore in the same period. Its EBITDA margin improved by 558 bps to 14.5 per cent in H1 FY15 as against 8.9 per cent in H1 FY14. The company has had a consistent track record of paying dividend of Rs 0.60 paise for the past several years regardless of the ups and downs in its financial performance. The company’s trailing 12-month (TTM) EPS was at Rs 2.58 as per the quarter ended September 2014. The stock’s price to earnings ratio is 14.6.

In terms of valuation, Nocil is trading at 11.7x its FY16E earnings of Rs 3.25 per share. Therefore, we would recommend buying this scrip with expectation of 55-60 per cent upside from the current level in the next one year.