Nocil : Comprehensive View

Nocil has been in the Rubber Chemical business for over the last 4 decades. It is the largest rubber chemical manufacturer in India. The company offers wide range of rubber chemicals and major customers of the company are tyre companies like Apollo Tyres, Ceat Ltd, MRF Ltd etc. NOCIL has set up new manufacturing facility at Dahej in Gujarat, with a much improved process technology to strengthen its position in the field of Rubber Chemicals. The said facility has started its commercial operations in FY 2012-13. The performance of Rubber Chemical Industry is largely dependent on the the performance of tyre and automobile Industry. 

The growth prospects for Rubber Chemicals are likely to be centered in the Asia Region. There are huge investments done by the tyre companies around Asia-Pacific Region. Over the last 3-4 years, the global rubber chemical industry has seen many large manufacturers restructuring their businesses and has strategically exited their rubber chemical operations. Many small players had to shut down their operations. This is due to high competition from China and Korean players as they customers. The gradual realignment of supply and demand due to restructuring / exits from rubber chemicals business have ensured that there is a greater awareness amongst customers of the need for stable and quality supplier like NOCIL. Also, major MNCs are trying to de-risk their supply chain by diversifying raw material procurement away from China. As risk associated with Chinese exports increase, MNCs are increasing preferring India amongst the developing countries for raw material supply. 

The company witnessed major turnaround in its financials in the year 2015 where it posted sales growth of more than 20% and Operating profit jumped by more than 90%. Though Sales declined in 2016 by 50 basis points Net Profit jumped by almost 37%. With crude oil prices expected to remain under pressure in near future the company is expected to maintain its high operating profit margin. 

We recommend 'Accumulate' rating on the counter on the basis of following Investment Rationale.

1. The company belongs to Arvind Mafatlal Group which has rich experience in Chemical Industry. 

2. The company has a long track record, established Brands and enjoys largest market share in the Rubber Chemical.

3. Operating Profit margin improved substantially and is expected to sustain at higher levels.

4. The company has reduced its debt significantly which in turn will improve the net profit margin.

5. The new plant at Dahej has reached 80% capacity utilization and is quite cost-effective.

6. Favorable government policies and strong government support for R&D.

7.Eastward shifting of Global Chemical Industry.

Valuations:   We expect the company to grow its sales at CAGR of 14% over FY17 & FY18. We expect PAT of Rs.86.9 cr and Rs.95 cr for the FY17 & FY18 respectively applying CAGR of 10.54%. At current market price of 60.25 the stock is trading at FY17 PE of 11.15x & FY18 PE of 10.21x. Recommend Accumulate on the stock with price TGT of 88.5 (15x of FY18 EPS)

Technical Outlook

The counter has managed to give a very powerful close above 60 levels with decent surge in volumes. On a daily chart it has been trading above its short term as well as long term moving averages. Across time frames i.e. Monthly, Weekly & Daily there is Bullish MACD crossover above Zero line which is a very positive signal. Other technical Indicators too looking quite bullish it is expected to show strength in near term. Technically as long as 52 level is not breached on a closing basis the view remains bullish.