After a 28 percent rise in NOCIL in the last 1 year, Axis Securities remains bullish on the rubber stock. The brokerage has picked NOCIL as its 'stock of the week' with a 'buy' recommendation and a target price of ₹283, indicating a 10 percent upside.
Axis is positive on the firm mainly due to strong replacement demand, strong growth outlook in the auto sector, and superior return profile.
Incorporated in 1961, NOCIL is engaged in the manufacture of rubber chemicals that are used by the tyre industry and other rubber processing industries. Rubber Chemicals which further include Antidegradants or Antioxidants, Accelerators and products for the non-automobile industry.
NOCIL also manufactures pre-vulcanization inhibitors and post-vulcanization stabilizers and is a market leader of rubber chemicals in India with a 40 percent market share and an established clientele.
Let's look at the brokerage's investment rationale for the stock:
1. As per the brokerage, strong demand in the domestic market and revival of exports is a positive for the stock. Tyre demand is robust in US and Euro region which will support exports and the overall demand is expected to grow by 7 percent in FY23, it noted.
2. Operational leverage: NOCIL has capacity of 110,000 MT, currently it operated at 75 percent capacity utilization, said Axis. It added that with the strong demand and product uptake the company is confident of achieving peak utilization by September 2023. The top line is expected to grow at 25 percent CAGR over the next 2 years, noted the brokerage.
3. China + 1 strategy a long-term positive: Many global and domestic tyre majors are looking to reduce their dependence on China and look to tap alternate supply chain partners in India, stated Axis.
"India, being a relatively smaller player in the rubber chemical industry with NOCIL having a dominant share in the Indian rubber chemical industry, the strategic shift will bode well for NOCIL’s growth over the longer term. Currently, China is the global supplier of rubber chemicals catering to 75 percent of requirements," explained the brokerage.
4. Superior return profile: Axis expects the company’s return on equity (RoE) to increase from 7 percent to 17 percent over FY21-24E, driven by a strong 54 percent PAT CAGR over the same period as it continues to maintain market share and captures on strong replacement demand.
The company's consolidated net profit surged 85 percent to ₹69 crore on a 44 percent jump in net revenue from operations to ₹463 crore in Q4 FY22 over Q4 FY21.
The company said that the selling price increase continues to offset input price rise with a time lag and to compensate for the higher freight cost as well as utility impact. It had implemented Price hikes in Q4 FY22 as announced earlier.
Operating EBITDA increased by 113 percent to ₹111 crore in Q4 FY22 from ₹52 crore in Q4 FY21. The operating EBITDA margin was 24.1 percent in Q4 FY22 as against 16.3 percent in Q4 FY21.
The company reported a 99 percent increase in consolidated net profit to ₹176 crore on a 70 percent rise in net revenue from operations to ₹1,571 crore in FY22 over FY21.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.