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Strong growth despite RM inflation

Our View

Neogen’s 3QFY23 operating profit at Rs 301mn (+27% YoY; +24% QoQ), stood marginally below our estimates on higher than estimated raw material costs. Raw material cost inflation led to YoY and QoQ lower gross margin at 43%, the absolute Gross Margin at Rs 805 (+38% YoY; +16% QoQ), however stood stronger on continued demand traction and high plant utilization. Neogen is in process of implementing a Rs 1500mn capex in existing business which can potentially add Rs ~3000mn in revenue by FY25-26 at full utilization. In addition, Neogen’s board has approved a capital expenditure of Rs 4500mn in electrolyte salt and electrolyte capacity, to be commissioned in phases between Jun’23 & Sep’25. The battery chemical venture is expected to generate Rs 10-12bn in revenues by FY27. Maintain ADD.

Result Highlights

* Revenue: The Revenue for the 3QFY23 and 9MFY23 stood at Rs 1863mn (+40% YoY; +26% QoQ) and Rs 4823mn (+46% YoY). While Organic chemicals formed 73% of the revenue, the Inorganic formed 27% of the mix in 3QFY23; The proportion of domestic to exports stood at 47%:53%. High growth in revenue aided by strong demand traction and high plant utilization

* Consol. Ebitda & PAT: Consolidated Ebitda at Rs 301mn (+27%YoY; +24% QoQ). Consol. PAT at Rs 147mn (41% YoY; 49% QoQ). The Ebitda for 9MFY23 stood at Rs 790mn (+32% YoY). The Ebitda margin at 16.2%, during the quarter, however stood lower YoY & QoQ, primarily on higher raw material, utilities and employee expenses. Neogen improvised product mix to navigate high cost environment. Initiatives around scaling up the high-margin advanced intermediates and custom synthesis manufacturing business has started yielding positive results

* New Initiatives: The new 400mtcapacity for manufacturing electrolyte salts shall be operational by Jun’23 and shall be subsequently expanded to 1000mt by Jun’24 and 2000 mt by Sep’25. Neogen shall also be setting up a 1000 mt electrolyte plant at Dahej by Aug-Sep’23 (instead of 250mt pilot plant at Vadodara), which shall be later be expanded to 5000mt by Jun’24 and 10,000mt by Sep’25. The total capex for new capacity expansion is estimated at Rs 4500mn.

Valuation

Maintain ADD with a Mar’24 TP of Rs 1675/sh, as we value Neogen at ~40x FY25e. We believe that given Neogen’s unique ability to handle Lithium compounds, it holds immense promise in manufacturing of electrolytes for Li-Ion batteries, where a significant demand is expected to unfold over next decade.

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