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Way2Wealth Brokers Pvt. Ltd. (CIN U67120KA2000PTC027628) SEBI Rgn. No. : INH200002739No. 14, Frontline Granduer, Walton Road, Bangalore-560001; Website: www.way2wealth.com Email: [email protected]

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Srinath Sridhar, CFA

Tel: +9122-40278991

[email protected]

SECTOR: Specialty Chemicals

INITIATING COVERAGECMP: `170/-

Target: `227/-Upside: 33.5%

12TH December 2018BUY

mailto:[email protected]

https://www.way2wealth.com/




Key Stock Data

CMP 170

Market Cap (` Crs) 2,803

52W High/Low 236 / 140

Shares o/s (Crs) 16.45 Cr

Bloomberg NOCIL IN

NSE Code NOCIL

BSE Code 500730

Company Details

Shareholding Pattern in %

Promoters 34.1

Domestic Institutional Investors 6.0

Foreign Institutional Investors 4.7

Public & Others 55.2

212 December 2018





Investment Rationale & Financials

312 December 2018

Nocil, an Arvind Mafatlal Group company, is India’s largest fully integrated producer of rubber chemicals. It possesses strong technicalexpertise, a wide product range and is an approved vendor at most tire majors domestically and globally. The company manufacturesboth intermediates and final products across two facilities in Navi Mumbai & Dahej with a combined capacity of ~55,000 MT.

Massive expansion instills confidence; volume led growth to drive profitability over FY18-21E

The commissioning of the Dahej facility (~15,000 MT) in FY13 that mainly manufactures intermediates has been a real game changer.Post that the company’s operations have consistently improved coupled by steady volume growth of ~10% CAGR over FY13-18. Duringthe aforementioned period, Nocil has recorded robust sales, EBITDA and PAT CAGR of 14.7%, 66.2% and 32.2% respectively. Giventhe 90%+ capacity utilization levels in FY18 and robust demand for its product offering the company has embarked upon a massivebrownfield expansion plan to double its capacity to ~110,000 MT for a capex of `425 crore that will be funded through internalaccruals. The said expansion will be executed in a phased manner with Phase 1 (`170 crore) due to commission by Q3FY19E and Phase2 (`255 crore) to be commissioned in H1FY20E. Furthermore, the expansion is expected to generate incremental revenues to the tune of~`850 crore i.e. ~2x asset turnover at optimal utilization levels, ~25% EBITDA margin levels on a conservative basis thereby implyingan impressive RoCE of 30%+. Therefore, the expansion instills confidence by providing visibility for a strong volume led growth of~18.5% CAGR over the FY18-21E period that should drive impressive bottom line performance.

Rubber chemicals market on firm footing; Industry leader Nocil set to benefit

Rubber chemicals can be broadly classified as accelerators, anti degradants and vulcanization agents. They are critical specialtychemicals that helps in improving the resistance of rubber to heat, oxidation, sunlight and other mechanical stress. The rubber chemicalindustry is considered to be a direct proxy play on rubber consumption with global demand pegged at ~1.1 million MT (~4% of globalrubber consumption) while domestic demand stood at ~60,000-62,000 MT (~3.5% of domestic rubber consumption) as of FY18. Nocilcommands a market share in excess of 40% at the domestic level and ~4.5% on the global front. Over the last few years the companyis witnessing robust demand growth for its product offerings due to improved competitiveness (on both price and quality front) againsttheir Chinese counterparts (~70% market share globally) coupled by steady revival of the automotive industry both domestically andglobally. Going forward, with the global rubber chemicals demand expected to grow at a steady CAGR of ~4% over (i.e. ~44,000MTPA) over the FY18-21E, Nocil is firmly positioned to benefit with expanded capacities in place.





Investment Rationale & Financials

412 December 2018

Tire industry expected to grow at ~11% CAGR over FY18-21E, Nocil to benefit

The tire industry is expected to grow at a CAGR of ~11% over FY18-21E given the strong demand push from the automobile sector thatis stated to grow at a similar pace over the same period. After adding incremental capacities of ~1.4 crore units in FY17 at a capex of~`4590 crore the tire industry has announced aggressive expansion plans with capital outlay to the tune of ~`13,640 crore executableover the next 7-10 years. Out of this ~`7000 crore worth of capex will be commissioned in FY18 and FY19 that will add an incrementalcapacity of ~1.2 crore units thereby indicating the bullishness of tire manufacturers on future growth prospects. Nocil derives ~65% of itsrevenues from the tire industry and given the expanded capacities in place and its existing long standing relationships with most tiremajors like MRF, JK Tire, Apollo, Ceat, Bridgestone, etc. it will definitely stand to gain.

Strong growth visibility backed by debt free balance sheet, healthy cash flows and excellent return ratios; initiate BUY

Nocil is the industry leader in rubber chemicals domestically and a credible supplier globally. The aggressive expansion plan hasbolstered the company prospects over the FY18-21E with sales, EBITDA and PAT envisaged to grow at a CAGR of 16.5%, 15.8% and14.4% respectively. On the balance sheet front, Nocil is a debt free company with net cash surplus of ~`260 crore. Nocil has an efficientbusiness model with net working capital days of 108 days and strong EBITDA margins of 27.4% as of FY18 resulting in a RoCE of22.2%. Going forward, given the strong financial performance we expect the company to deliver an average CFO of ~`217 crore overFY19-21E, implying a cashflow yield of 7.7%. Therefore, we value Nocil at `227 i.e. 16x P/E on average of FY20E & FY21E EPS of14.2 and initiate a BUY rating on the stock.

Financial Highlights (` Cr)

Source : Company ,Way2Wealth Research

Particulars FY17 FY18 FY19E FY20E FY21ENet Sales 742.2 967.6 1126.9 1315.0 1529.1EBITDA 159.2 265.4 324.1 346.9 412.2Net Profit 97.1 169.9 210.9 211.3 254.6EPS (`/share) 5.9 10.3 12.8 12.8 15.5RoNW 10.6 16.2 17.5 15.5 16.3RoCE 14.5 22.2 23.9 21.6 22.9P/E 28.6 16.5 13.3 13.2 11.0





Company Background

512 December 2018

Nocil Limited, an Arvind Mafatlal Group enterprise (reputed business house in India) was incorporated in 1961 under the nameNational Organic Chemical Industries Limited.

With over four decades expertise in the rubber chemicals space the company has evolved into India’s largest manufacturer(~55,000 MT capacity) spread across two manufacturing facilities in Navi Mumbai & Dahej.

Nocil offers a wide range of rubber chemical products making it a one stop shop for its customers. The company is acknowledged asa credible supplier both domestically and globally given its ability to consistently develop value added products by efficientlyleveraging its technical expertise.

Nocil markets its various categories of rubber chemicals under four registered brands namely PILFLEX – Anti degradants, PILNOX –Antioxidants, PILCURE – Accelerators & Post Vulcanization stabilizers and PILGARD – Pre Vulcanization Inhibitors.

The company has an excellent sales and distribution network with long standing relationships with customers in over 40 countries.They are approved suppliers for most tire majors like MRF, Apollo, Ceat, Pirelli, Goodyear, Bridgestone, Michelin, etc.

Senior management team at Nocil is known for its strong business acumen and prudent approach. In FY13 the management teamsprowess came to the fore after they successfully commissioned the `250 crore greenfield expansion at Dahej that was set up using inhouse technology. In hindsight, this expansion has proved to be the game changer at Nocil with EBITDA margins surging to 27.4% inFY18 from 4.3% in FY13 given the improved process technology that adopts a continuous process.

Expansion Plans – The prospect of tire industry that accounts for ~65% of revenues at Nocil look robust over FY18-21E due to strongautomotive production growth (up 14.8% YoY in FY18) and multiple government protection measures such as custom duty hikes and antidumping duty imposed on Chinese radial tires. With the company operating at 90%+ capacity utilization levels as of FY18 coupled byrobust demand for its product offering the management aims to seize this opportunity and has embarked upon a massive brownfieldexpansion plan to double its capacity to ~110,000 MT for a capex of `425 crore that will be funded through internal accruals. The saidexpansion will be executed in a phased manner with Phase 1 (`170 crore) due to commission by Q3FY19E and Phase 2 (`255 crore) tobe commissioned in H1FY20E.





Manufacturing Value Chain

612 December 2018

Natural or synthetic rubber polymer in their original form aresoft, sticky and extremely brittle and thereby possess limitedcommercial value.

Thus, various rubber chemicals (accelerator, anti degradant/oxidant & vulcanization agent) are used in the processing ofthe original rubber polymer. These chemicals impart specialproperties to improve resistance towardsheat, oxidation, mechanical stresses, etc. that providehardness, flex resistance and higher tensile strength to rubberthereby making it commercially viable for use in finalapplication.

Rubber chemicals are manufactured using second or thirdderivatives of crude such asbenzene, propylene, aniline, nitrobenzene, acetone andamines. Therefore, their raw material prices are loosely linkedto crude oil prices.

However, the backward integration at Dahej in 2013 andprudent raw material procurement practices at Nocil haveresulted in raw material costs as a percentage of sales drop to45.5% in FY18 from 64.7% in FY13.

Source : China Sunsine Annual Report





Product Profile and End Use Industries

712 December 2018

The tire industry accounts for ~70%of the overall rubber demand whilethe remaining ~30% comes frommultiple user industries likefootwear, belts, latex products, etc.

65%35%

Nocil end user revenue breakup

Tyre Non Tyre

Nocil product breakup

Source : Company Reports


Product Profile User Industries

Share in Rubber Consumption (%)

Car Tyre 61Other Tyre 9

Boots 10Tape / Tube 6

Latex 4Others 10

Product% of

RevenueBrand

Accelerators ~45-45 PILCUREAnti-oxidants

& Anti-Degradants

~40-45PILFLEX, PILNOX

Pre & Post Vulcanization

Inhibitors~10 PILGRID

Source : Company Reports, Way2Wealth Research

Source : International Rubber Study Group

Industry wise rubber consumption




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Investment Rationale





Aggressive Expansion to Drive Volume Growth

After witnessing two successive years of ~12% sales volume growth of rubber chemicals, Nocil is operating at 90%+ capacity utilizationlevels as of FY18. Therefore, given the robust demand for its product offering the company has embarked upon a timely brownfieldexpansion plan to double its capacity to ~110,000 MT for a capex of `425 crore that will be funded through internal accruals. The saidexpansion will be executed in a phased manner with Phase 1 (`170 crore) due to commission by Q3FY19E and Phase 2 (`255 crore) tobe commissioned in H1FY20E. Therefore, the expansion instills confidence by providing visibility for a strong volume led growth of ~19%CAGR over the FY18-21E period that should drive impressive top line and bottom line performance.


Expansion Timeline





Global & Domestic Rubber Statistics

1012 December 2018

9,72,705

9,81,250

10,20,910

9,94,415

10,44,075

11,12,210

4,44,160

4,83,575

5,36,130

5,53,370

5,98,580

6,33,975

14,16,865

14,64,825

15,57,040

15,47,785

16,42,655

17,46,185

FY13 FY14 FY15 FY16 FY17 FY18

Domestic Rubber Consumption Trend (tonne)

Natural Rubber Synthetic Rubber Domestic Rubber Consumption

11.4 12.2 12.1 12.7 13.214.1 14.2 14.7 14.8 15.2

25.6 26.3 26.8 27.5 28.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2013 2014 2015 2016 2017

Lakh

tonn

e

Global Rubber Consumption Trend

Natural Rubber Synthetic Rubber Global Rubber Consumption

o Domestic Rubber Consumption grew at a CAGR of 4.3%over FY13-18 to reach 17.5 lakh MT in FY18.

o This was largely aided by the tire industry that accounts for~70% of the rubber consumption which grew at 8% CAGRover FY13-18.

o As of FY18, domestic rubber chemicals demand was at~60,000-62,000 MT i.e. 3.5% of rubber consumption.

o Global Rubber Consumption grew at a CAGR of 2.7% over2013-17 to reach 28.4 million MT in 2017.

o As of 2017, global rubber chemicals demand was at ~1.1million MT i.e. 4.0% of rubber consumption.

o Revival of the auto industry in developed economies toresult in rubber consumption growth at ~3.5% CAGR overthe medium term that in turn drive rubber chemicalconsumption i.e. ~44,000 MTPA

Source : Indian Rubber Industry Statistics Source : International Rubber Study Group





Source : Company Reports and Way2Wealth Research

Nocil Firmly Placed to Extend Industry Dominance

45000

55000

55000

55000

55000

55000

65000

92000

11000033341

37333

46266

42926

48292

53529

58500

73600

89100

74 6884.1 78.0

87.897.3

90.080.0 81.0

0

20

40

60

80

100

3000045000600007500090000

105000120000

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

%tonn

e

Nocil Capacity, Production and Utilization trend

Installed Capacity Production Capacity Utilization

As of FY18, Nocil’s combined production capacity of both intermediates (~12,000 MT) and final products (~43,000) stood at 55,000MT. Therefore, its rubber chemicals sales volume is ~65-70% of its production depending on the product mix.

Over FY13-18, Nocil achieved a production and sales volume CAGR of ~10%, with utilizations inching to ~97% in FY18.

Rubber consumption over the same aforementioned period grew at a 4.3% CAGR thereby implying smart market share gains by Nocil.As of FY18, Nocil commands an impressive 40%+ market share on the domestic front & ~4.5% on the global front. The outperformanceis partly attributed to ADD on rubber chemicals over the period (applicable till June’19)

Going forward, Nocil is firmly placed to extend its industry dominance given the timely expansion, strong product demand, healthyprospects of the domestic automobile and tire industry and recovering global auto industry. All these factors provide Nocil the requiredplatform to achieve a sales volume CAGR of ~18.5% over FY18-21E.

The rubber chemical market at the domestic and global level are expected to reach ~82,000 MT (10% CAGR) and 1.24 million MT(4% CAGR) respectively by FY21E. As a result, Nocil is in a strong position to gain global market share beyond 7%+ levels amidst thereducing supplies from China due to both their stricter pollution control norms and escalating trade restriction with US.





Automobile sector trend over FY13-18o The overall automobile production grew at a CAGR of 7.1% over the FY13-18 period.o This was mainly supported by steady 2W numbers which grew by 8% annually while passenger vehicle, commercial vehicle and 3W

witnessed a paltry CAGR growth of 4.4%, 1.4% and 4.0% respectively.o The weak growth numbers over the last 5 years can be attributed to slowdown in business activity at the global level post the financial

crisis coupled by high interest rate scenario, below normal rainfall (2014,2015) and high inflation scenario domestically for major part ofthe period.

Overall automobile sector shifts gears with 14.8% YoY rise in FY18, expects ~11% CAGR growth over FY18-21Eo The FY18 revival was broad based with PV, CV, 2W and 3W witnessing annual growth of 5.5%, 10.4%, 30.4% and 16.1% respectively.o Better freight availability post GST, improving industrial activity and overloading restrictions have boosted both OEM and replacement

demand in the CV space. Therefore, we expect this segment to grow at a CAGR of ~10% over FY18-21Eo Normal to near normal monsoons over the last 3 years has helped boost farm income resulting in strong 2W demand from rural areas. As

a result, we expect 2W to grow at a CAGR of ~12% over FY18-21E.o Series of new launches and low penetration to aid PV sales to grow at a CAGR of ~10% over FY18-21E.

Robust Auto Sector Prospects a Key Trigger

32.3

30.9

32.2

34.7

38.0

40.1

43.7

47.6

51.9

8.3

7.0

7.0

7.9

8.1

8.9

9.8

10.8

11.9

8.4

8.3

9.5

9.3

7.8

10.2

10.8

11.5

12.2

157.

4

168.

8

184.

9

188.

3

199.

3

231.

5

259.

2

290.

4

325.

2

-75.0

150.0 225.0 300.0 375.0

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Lakh

s

Passenger Vehicles Commercial Vehicles Three Wheelers Two WheelersSource : SIAM and Way2Wealth Research

Automobile Industry Growth Trend





Indian Tire Industry: An Overview

13%

54%54%

13%

23% 14%

5%9%

4% 8%1% 2%

0%

20%

40%

60%

80%

100%

Volume Value

Volume and Value Split by Tire Category

Truck & Bus 2W/3WPassenger Vehicles Light Commercial VehiclesTractors & Farm Equipment Industrial, Construction & Aircraft

22%

18%60%

Tire Industry Revenue Split

Domestic OEM

Export OEM

Replacement

The Indian tire industry is highly competitive with a turnover of~`63,500 as of 2015-16. Domestic sales stood at ~`53,000 crore(Replacement and Original Equipment Manufacturer(OEM)) whileexport sales (OEM’s) stood at ~`10,500 crore.

The replacement demand dominates the domestic tire sales bycontributing ~70% to the turnover while OEM’s account for ~30%.

The main reason for the high share from replacement demand isbecause new vehicle sales (~2.1 crore vehicles) as a percentage ofregistered existing vehicles (~20.3 crore vehicles) is low at~10.3%.

Consequently, the domestic tire industry is less susceptible to shocksfrom auto sales numbers given its stable replacement demand. Thisis evident from the fact that domestic tire sales grew from~`25,000 crore in FY10 to ~`53,000 crore in FY16, implying aCAGR of 13.3% which outpaced the automobile sales numbers bya significant margin that grew at a CAGR of 7.1% over the sameperiod.

Truck & Bus tires is one of the most significant contributors to theIndian Tire industry accounting for ~54% sales by value and~13% sales by volume. On the other hand, 2W/3W account for~13% of the value but account for ~54% by volume. Passengervehicles, LCV’s and Tractors account for ~14%, 9% and 8% byvalue respectively.

Source : ATMA and Industry Reports

Source : ATMA and Industry Reports





Rubber chemicals to ride the strong tire industry growth over FY18-21E

Rubber chemicals are a critical input in the manufacture of tires and constitute ~3.5% of the overall raw material costs. Nocil derives~65% of its revenues from the tire industry thereby placing it in a sweet spot to ride the robust tire industry growth prospects that hasbeen triggered by strong automobile sales numbers in FY18. This is a huge opportunity for Nocil to increase its market share given theexpanded capacities in place and its existing long standing relationships with most tire majors like MRF, JKTire, Apollo, Ceat, Bridgestone, etc.

The tire industry is expected to grow at a CAGR of ~11% over FY18-21E given the strong demand push from the automobile sectorthat is stated to grow at a similar pace over the same period.

Recent supportive regulatory measures boost tire industry prospects further: 1) custom duty hike in passenger car radial tires to 15%from 10% earlier 2) ADD imposed on TBR tires imported from China PR in the range of $245.4-$452.3/MT.

The tire industry added incremental capacities of ~1.4 crore units in FY17 at a capex of ~`4590 crore. Sensing the robust demandoutlook most of the tire majors have announced aggressive expansion plans with capital outlay to the tune of ~`13,640 croreexecutable over the next 7-10 years. However, out of this ~`7000 crore worth of capex will be commissioned in FY18 and FY19 thatwill add an incremental capacity of ~1.2 crore units.

11.9 12.5 12.3 12.9 14.6 15.2 16.7 18.120.1

22.324.8

0

5

10

15

20

25

30

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Cro

reun

its

Tire Production Trend

Source : ATMA, Way2Wealth Research





Source : Company Reports, Way2Wealth Research

Robust volume led growth to drive 16.5% topline CAGR over FY18-21E

Rubber chemicals constitute only 3-4% of the overall rawmaterial costs of their customers (Tire and non tiremanufacturers). Therefore, any raw material price fluctuations(especially on the upside) follow a complete passthroughmechanism.

Majority of sales contracts at Nocil are fixed on a quarterlybasis as the costing is known given its usual raw materialinventory cycle of 60 days. As a result any price increases arepassed on with a quarterly lag by major industry participantsthereby helping them to maintain the delta.

As of FY18 net sales at Nocil stood at `967.6 crore from `488.2 crore in FY13, implying a healthy CAGR growth of 14.7%. Duringthe same period volume sales accounted for ~10% CAGR while the rest was contributed by realization growth.

In 2017, the Chinese government continued its efforts of enforcing stringent environmental protection norms. These tougher regulationsresulted in Chinese rubber chemicals sales dropping to ~7 lakh tonne (60-65% market share) in 2017 from ~8 lakh tonne in 2016creating a demand supply mismatch.

The steep drop in Chinese supplies aided other major industry participants like Nocil that witnessed a revenue growth of 31% YoY inFY18. This was driven by a volume growth of ~12.5% while ~16.1% was value driven (based on calculated realizations).

Going forward, we expect, sales at Nocil to reach `1529 crore in FY21E from `968 crore in FY18 (16.5% CAGR). This will be solelyvolume driven (18.5% CAGR) given the timely expansion that has been undertaken. The healthy tire industry prospects domestically& globally further boost Nocil’s potential to gain market share globally (escalating trade tensions between US and China as well asstricter environment protection norms in China making them less competitive)

Revenue Trend

715.2 742.2

967.61,126.9

1,315.0

1,529.1

400.0600.0800.0

1,000.01,200.01,400.01,600.0

FY16 FY17 FY18 FY19E FY20E FY21E

`C

r





The Ministry of Commerce had levied anti dumping duty (ADD) on certain rubber chemical imports from European Union & Republic ofChina for a period of five years effective till July 2019. The 6 products on which ADD is imposed contribute ~50% to Nocil’s revenue.According to the management, the ADD resulted in ~400 bps EBITDA expansion in FY15.

All the above factors cumulatively contributed to the stellar EBITDA performance over the FY13-18 period. During this period, EBITDAgrew at a CAGR of 66.2% to reach `265.4 crore in FY18 with corresponding EBITDA margins at 27.4% (4.3% in FY13)

Nocil began the year strongly with H1FY19 EBITDA margins at 29.5%. Given the strong product demand, reduced supplies from Chinaand existence of ADD till July 2019 we expect Nocil to end FY19 with an EBITDA of `324.1 crore with corresponding margins at28.8%.

Therefore, going forward, we expect Nocil to stage an impressive EBITDA CAGR of 15.8% over the FY18-21E despite marginscontracting to 27% in FY21E from 29.5% in H1FY19.

The brownfield nature of expansion, strong product demand and operating leverage benefits should be able to partly compensate anypossible revocation of ADD from July 2019

EBITDA to stage impressive growth despite margin contraction over FY18-21E

Source : Company, Way2Wealth Research

Post the Dahej expansion in 2013, Nocil further fortified itsposition of being a fully integrated producer of rubberchemicals in India. The highlight of this expansion was theinternally developed continuous process technology whichhelped improve EBITDA margins by ~10% over FY13-18 period

The company offers a wide product range, strong technicalexpertise and is an approved vendor at most tire majorsdomestically and globally.

Nocil’s product portfolio has undergone a massive shift with itsspecialty offerings contributing nearly 60% of revenues in FY18from ~30% in FY18.

EBITDA and EBITDA margin (%) Trend

139.

4

159.

2

265.

4

324.

1

346.

9

412.

219.521.5

27.4 28.8 26.4 27.0

10.0

15.0

20.0

25.0

30.0

0.0100.0200.0300.0400.0500.0


%`C

r

EBITDA EBITDA margin





PAT at Nocil is expected to grow at a healthy 14.4% CAGR over FY18-21E supported by the robust top line growth despite EBITDAmargin contraction during the same aforementioned period.

The company reported a PAT of `103.6 crore in H1FY19, up 40.6% YoY backed by strong EBITDA margin expansion which came in at29.5% from 24.6% in H1FY18.

The current business scenario in the rubber chemical space is favorable given the lower Chinese supplies globally, strong productdemand and existence of ADD in the domestic market which will allow strong EBITDA margins to persist through the year.Therefore, PAT in FY19E is expected to come in at `210.9 crore, up 24% YoY.

In FY20E, we have factored in a 240 bps YoY drop in EBITDA margins to 26.4% given the lower utilization levels of Phase 1expansion and possible revocation of ADD duty. Furthermore, higher depreciation expense from the expansion is also expected toimpact the PAT. As a result, PAT is expected to remain flat at `211.3 crore in FY20E.

Finally, PAT in FY21E is expected to resume its robust growth trajectory to reach `254.6 crore, up 20.5% YoY given the higheroperating leverage benefits accruing from higher utilization levels from both the phases of expansion.

PAT to grow at a healthy CAGR of 14.4% over FY18-21E


PAT and EPS Trend

78.3

97.1

169.

9

210.

9

211.

3

254.

6

4.9 5.9

10.312.8 12.8

15.5

0.0

5.0

10.0

15.0

20.0

0.0

100.0

200.0

300.0


`/ share`

Cr

Reported PAT EPS





EBITDA margins at Nocil have spiked by ~23% over the FY13-18 (27.4% in FY18), due to backward integration at Dahejin FY13 (~1000 bps), existence of ADD since FY14 (~400bps), value added product offerings and improved demandscenario.

This has resulted in healthy improvement in RoCE and RoIC that stood at 22.2% and 26.8% respectively in FY18 vs. 4.7%and 2.2% respectively in FY13.

Going forward, we expect average RoCE, RoNW and RoIC to remain at elevated levels of 22.7%, 16.4% and 25.3%respectively over the FY18-21E period given the robust topline growth expectations and steady margin profile.

The drop in core return ratios in FY20E is more of an optical blip given the low utilization levels of the proposed expansioncoupled by lower anticipated EBITDA margin levels given the high base in FY19E.

Improved operational efficiencies to hold core return ratios above 20% levels


Return Ratios Trend

14.6

14.5

22.2 23.9 21.6 22.9

10.2 10.6

16.2 17.515.5 16.314.2

15.2

26.8 26.8

21.626.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0


%

RoCE RoNW RoIC





Controlled Net Working Capital Cycle

Nocil has consistently improved on its working capital cycle with net working capital days at 108 days in FY18 from 121 days inFY13. This has primarily been on the back of better inventory management post its Dahej expansion which has resulted ininventory days improving from 87 days in FY13 to 57 days in FY18. Going forward, management believes that it can maintain networking capital days at ~105 days over FY19E-21E.

Nocil expected to deliver a healthy average CFO yield of 7.7% over FY18-21E

Nocil is a debt free company undertaking a massive expansion of doubling its capacity at a capex of `425 crore. The saidexpansion will be completely funded through internal accruals. During the FY13-18 period, the company has delivered a stellarfinancial performance and exhibited prudent capital allocation that has resulted in average CFO of ~`87 crore. Goingforward, given Nocil’s expanded capacities, controlled working capital cycle and robust financial prospects, we expect, thecompany to generate an average CFO of ~`190 crore over FY18-21E, implying a CFO yield of 7.7%.

Controlled net working capital and robust financials to generate healthy CFO

Net Working Capital Days Trend Cash Flow from Operation Trend

Source : Company Reports and Way2Wealth Research Source : Company Reports and Way2Wealth Research

172 135

109

195 191

264

-50

100 150 200 250 300


`C

r

109

100

108 105 105 105

92

96

100

104

108

112


Day

s





Delay in commissioning or ramp up in capacitiesNocil is largely operating at peak capacity utilization levels currently. Phase 1 of the expansion is progressing well as per schedule andshould be fully commissioned by Q3FY19E. The entire investment argument at Nocil, however, hinges on the doubling of capacity in atimely manner with a swift ramp up in production levels. Therefore, any delay in commissioning or ramp up of the said facilities will limitthe topline and bottom line growth at Nocil thereby adversely impacting the financial performance going forward. Keeping the pricemultiple constant we have conducted a variance analysis by tweaking the production levels in FY20E and FY21E to analyze the impacton target price.

Removal of ADD post July 2019 could impact EBITDA margins more than anticipated

Nocil enjoys ADD benefits till July 2019 on 6 products that contribute ~50% of their top line. As per management commentary thecompany benefitted ~400 bps at the EBITDA margin level when the ADD was imposed in FY15. Given the improved financialperformance of the company currently there is a high probability that the ADD would not get extended next year that can result inincreased dumping at lower prices thereby impacting the EBITDA margin levels at Nocil. However, the increased costs of environmentalcompliance, high labour & power costs and reduced export incentives in China has largely impacted their competitive advantage likeenjoyed previously. Therefore, the difference between average selling price of dumped imports vs. domestic manufacturers is expectedto diminish.

Risks & Concerns

66,240 69,920 73,600 77,280 80,960 80,190 202 208 214 219 225 84,645 209 215 220 226 231 89,100 216 221 227 232 238 93,555 222 228 233 239 244 98,010 229 234 240 245 251

Rubber Chemical Production in FY21E

Target PriceRubber Chemical Production in FY20E





Potential slowdown in end use industries can impact sales at Nocil

Rubber chemicals as we know is a direct proxy play on rubber consumption, which indirectly is dependent on tire manufacturers thatconstitute ~70% of rubber demand. Therefore, any domestic or global slowdown in automobile sales over FY18-21E would affect thetire requirement and eventually reduce rubber chemical offtake thereby impacting financial performance at Nocil.

Inability to pass on raw material price fluctuations to impact EBITDA margins

Rubber chemicals are manufactured using second or third derivatives of crude such asbenzene, propylene, aniline, nitrobenzene, acetone and amines. Hence, their raw material prices are loosely linked to crude oil pricesand could be subject to extreme price volatility. In this scenario if the company is unable to pass on the raw material price increasesand maintain its delta then it could have an impact on its EBITDA margins and consequent financial performance. However, with Nocil’sbackward integration in FY13, low value item for end use industries (~3.5% of the cost) and formalized system maintained by industryplayers in the past on transfer of raw material price fluctuations have mitigated this issue to some extent.

Competitive Rivalry

Rubber chemical industry being small in size is controlled by a few large players and is thus highly competitive with each player tryingto gain market share. In India, Nocil is the biggest player followed by Lanxess India and PMC Rubber which cumulatively cater to~60% of the domestic demand while the remaining ~40% is fulfilled through imports. Given the robust prospects and reducing supplyfrom China, Nocil has undertaken this massive expansion but any slowdown in eventual offtake could result in increased competitiverivalry with each player fighting to maintain its own market share.

Core promoter holding low

Promoter holding as of September 2018 stood at 34.1% out of which only 18.5% belongs to the core promoter group i.e. HrishikeshMafatlal family. The remaining belongs to Mafatlal Industries whose shareholding has dropped from 15.84% in September 2017 to15.58% in September 2018. Therefore, any further sale of shares from this entity could put pressure on the stock

Risks & Concerns





Valuation LevelNocil is the industry leader in rubber chemicals domestically and a credible supplier globally. The aggressive expansion plan hasbolstered the company prospects over the FY18-21E with sales, EBITDA and PAT envisaged to grow at a CAGR of 16.5%, 15.8%and 14.4% respectively. On the balance sheet front, Nocil is a debt free company with net cash surplus of ~`260 crore. Nocil hasan efficient business model with net working capital days of 108 days and strong EBITDA margins of 27.4% as of FY18 resultingin a RoCE of 22.2%. Going forward, given the strong financial performance we expect the company to deliver an averageCFO of ~`217 crore over FY19-21E, implying a cashflow yield of 7.7%. Therefore, we value Nocil at `227 i.e. 16x P/E onaverage FY20E & FY21E EPS 14.2 and initiate a BUY rating on the stock.

Valuations & Outlook

Source : Capital Line

One year forward P/E Trend

050

100150200250300350400450

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

Jan-

18

Apr

-18

Jul-1

8

Oct

-18

Close -Unit Curr 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X





Financials

2312 December 2018





Income Statement

2412 December 2018

(` Cr)

FY18 FY19E FY20E FY21E

Net Sales 955 1114 1301 1515Other Operating Income 12 13 14 14Total Operating Income 968 1127 1315 1529Growth (%) 34.6 16.5 16.7 16.3Raw Material Expenses 441 508 631 726Employee Expenses 71 75 87 100Other Operating Expense 190 220 250 291Total Operating Expenditure 702 803 968 1117EBITDA 265.4 324.1 346.9 412.2Growth (%) 48.2 22.1 7.0 18.8Depreciation 24.0 29.1 44.1 50.1Interest 1.2 0.6 0.3 0.0Other Income 14.6 18.7 12.8 17.9PBT 254.7 313.1 315.3 380.0Exceptional Item 0.0 0.0 0.0 0.0Total Tax 84.8 102.2 104.1 125.4PAT 169.9 210.9 211.3 254.6Growth (%) 38.3 24.1 0.2 20.5EPS (|) 10.3 12.8 12.8 15.5





Balance Sheet

2512 December 2018

(` Cr)(Year-end March) FY18 FY19E FY20E FY21ELiabilitiesEquity Capital 164.5 164.5 164.5 164.5Reserve and Surplus 882.2 1,043.7 1,199.7 1,395.1Total Shareholders funds 1,046.7 1,208.2 1,364.2 1,559.6Total Debt 5.0 5.0 0.0 0.0Deferred Tax Liability 98.9 98.9 98.9 98.9Minority Interest / Others 0.0 0.0 0.0 0.0Total Liabilities 1,150.5 1,312.1 1,463.1 1,658.5

AssetsGross Block 693.5 879.2 1,164.2 1,164.2Less: Acc Depreciation 169.0 198.1 242.3 292.3Net Block 524.5 681.1 922.0 871.9Capital WIP 45.7 60.0 15.0 15.0Total Fixed Assets 570.2 741.1 937.0 886.9Investments 285.8 227.0 112.0 307.0Inventory 155.3 183.1 213.9 249.0Debtors 243.4 274.6 320.9 373.5Loans and Advances 55.6 66.8 78.1 60.6Other Current Assets 0.0 0.0 0.0 0.0Cash 32.3 35.8 41.1 51.2Total Current Assets 486.5 560.4 653.9 734.3Current Liabilities 171.9 193.0 212.5 239.8Provisions 20.0 23.3 27.3 29.9Current Liabilities & Prov 191.9 216.4 239.8 269.6Net Current Assets 294.6 344.0 414.2 464.6Others Assets 0.0 0.0 0.0 0.0Application of Funds 1,150.5 1,312.1 1,463.1 1,658.5





Cash Flow

2612 December 2018

(` Cr)

(Year-end March) FY18 FY19E FY20E FY21E

Profit after Tax 169.9 210.9 211.3 254.6Add: Depreciation 24.0 29.1 44.1 50.1(Inc)/dec in Current Assets -151.8 -70.4 -88.3 -70.2Inc/(dec) in CL and Provisions 65.5 24.4 23.4 29.9Others 1.2 0.6 0.3 0.0CF from operating activities 108.8 194.6 190.8 264.3(Inc)/dec in Investments -104.9 58.8 115.0 -195.0(Inc)/dec in Fixed Assets -47.2 -200.0 -240.0 0.0Others -0.2 0.0 0.0 0.0CF from investing activities -152.4 -141.2 -125.0 -195.0Issue/(Buy back) of Equity 0.9 0.0 0.0 0.0Inc/(dec) in loan funds -10.0 0.0 -5.0 0.0Interest & Dividend paid -36.7 -49.9 -55.5 -59.2Inc/(dec) in Share Cap 0.0 0.0 0.0 0.0Others -1.8 0.0 0.0 0.0CF from financing activities -47.6 -49.9 -60.5 -59.2Net Cash flow -91.2 3.5 5.3 10.1Opening Cash 123.5 32.3 35.8 41.1Closing Cash 32.3 35.8 41.1 51.2





Ratios

(Year-end March) FY18 FY19E FY20E FY21EPer share data (|)EPS 10.3 12.8 12.8 15.5Cash EPS 11.8 14.6 15.5 18.5BV 63.6 73.5 82.9 94.8DPS 2.2 3.0 3.4 3.6Cash Per Share (Incl Invst) 19.3 16.0 9.3 21.8Operating Ratios (%)EBITDA Margin 27.4 28.8 26.4 27.0PAT Margin 17.6 18.7 16.1 16.7Inventory days 59.3 60.0 60.0 60.0Debtor days 93.0 90.0 90.0 90.0Creditor days 44.2 45.0 45.0 45.0Return Ratios (%)RoE 16.2 17.5 15.5 16.3RoCE 22.2 23.9 21.6 22.9RoIC 26.8 26.8 21.6 26.0Valuation Ratios (x)P/E 16.5 13.3 13.2 11.0EV / EBITDA 9.5 8.0 7.7 6.0EV / Net Sales 2.6 2.3 2.1 1.6Market Cap / Sales 2.9 2.5 2.1 1.8Price to Book Value 2.7 2.3 2.0 1.8Solvency RatiosDebt/EBITDA 0.0 0.0 0.0 0.0Debt / Equity 0.0 0.0 0.0 0.0Current Ratio 3.3 3.3 3.3 3.2Quick Ratio 2.2 2.1 2.1 2.0





Team

Analyst Designation Sector Email Telephone

Alok Ranjan Head – Research [email protected] +9122-6146 2902

Srinath Sridhar, CFA Research Analyst Chemicals [email protected] +9122-6146 2991

Chintan Gupta Research Associate Auto & Auto Ancillary [email protected] +9122-6663 8972

Ashwini Sonawane Research Associate FMCG, Consumer Durables [email protected] +9122-4019 2956

Tausif Shaikh Research Associate Pharma [email protected] +9122-6146 2974

Institutions Designation Email Telephone

Kaushal Jaini Vice President [email protected] +9122-40278919Neelam Vivek Nagvekar Institutional Sales Trader [email protected] +9122-2575 8931

Manisha Panchal Institutional Dealer [email protected] +9122-40278984





DisclaimerAnalyst Certification: I, Srinath Sridhar, CFA the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subjectsecurities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in thisresearch. The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (Way2Wealth Brokers Private Limited, hereinafter referred to asWay2Wealth) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.It is confirmed that Shivani V. Vishwanathan the author of this report has not received any compensation from the companies mentioned in the report in the preceding 12 months. 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These uncertainties include but are not limited to: the risk of adverse movements or volatility in the securities markets or in interest or foreign exchange rates or indices; adverse impact from aneconomic slowdown; downturn in domestic or foreign securities and trading conditions or markets; increased competition; unfavorable political and diplomatic developments; change in the governmental or regulatory policies; failure ofa corporate event and such others. This is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. No part of this material may be copied orduplicated in any form by any means or redistributed without the written consent of Way2Wealth. In no event shall any reader publish, retransmit, redistribute or otherwise reproduce any information provided by Way2Wealth in anyformat to anyone. Way2Wealth and its affiliates, officers, directors and employees including persons involved in the preparation or issuance of this report may from time to time have interest in securities / positions, financial orotherwise in the securities related to the information contained in this report.To enhance transparency, Way2Wealth has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.Disclosure of Interest Statement in Nocil Ltd. as on December 12, 2018

Name of the Security Nocil Ltd.Name of the analyst Srinath Sridhar, CFAAnalysts’ ownership of any stock related to the information contained

Financial Interest Analyst : Analyst’s Relative : Yes / NoAnalyst’s Associate/Firm : Yes/No

NIL

NoNoNo

Conflict of Interest NoReceipt of Compensation NoWay2Wealth ownership of any stock related to the information contained

NIL

Broking relationship with company covered NIL

Investment Banking relationship with company covered NIL

This information is subject to change without any prior notice. Way2Wealth reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time.Nevertheless, Way2Wealth is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.

2912 December 2018



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