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Global recessionary trend puts a dent on volumes

* EBITDA at INR51.9/kg missed our estimate (down 22%QoQ), with realization being flat QoQ (at INR329/kg, up 20% YoY). Raw material costs in 2QFY23 were also flattish QoQ even as volumes declined 13% YoY and 23% QoQ at 11.8kmt, as a result of the global recessionary trends, which primarily impacted export volumes QoQ. Domestic volumes, however, showed moderate growth.

* NOCIL believes that demand is expected to be muted for the next couple of quarters and its guidance of optimal capacity utilization for its expanded capacity is uncertain and could well go beyond FY24 (earlier guidance of full utilization by Sep’23). We have always been conservative and have guided for the same by the end of FY24. We forecast revenue/EBITDA/EPS CAGR of 16%/9%/10%, respectively, over FY22-24.

* Amidst the current uncertainty on global economic recovery, the management is firm that with debottlenecking, it would not run into any capacity constraints in the next two to three years.

* Due to the miss in estimates in 2Q and slowdown in the global economy, we cut our EBITDA/EPS guidance for FY23 by 12%/13% and by 9%/ 11%, respectively, for FY24. With oil prices hovering around USD95/bbl and realizations remaining strong, we up our revenue estimate by 8%/5% for FY23/FY24, respectively.

* The stock is down 7% and has underperformed the Nifty index in the last six months. Valuing NOCIL at 22x FY24E EPS, we arrive at our TP of INR283. We reiterate our Buy rating on the stock.

Miss on EBITDA; GM sustains; EBITDAM declines sequentially

* Revenue came in below our est. at INR3.9b (up 4% YoY, down 24% QoQ) in 2QFY23.

* Gross margin was at 47.1% (v/s 46.4%/40.6% in 1QFY23/2QFY22, respectively) in the quarter.

* EBITDA was at INR615m (est. of INR982m, up 24% YoY, down 39% QoQ) in the quarter.

* EBITDA margin was at 15.8% (v/s 19.9%/13.2% in 1QFY23/2QFY22, respectively) in 2QFY23.

* PAT was at INR359m (est. of INR648m, up 18% YoY, down 45% QoQ) in the quarter.

Valuation and view

* The management guided for debottlenecking its existing units in the near term, even as it evaluates its plans for the next three-to-five years. Specialized products constitute 25% of the total revenue with limited room for expansion (industry standard is 12%).

* Despite a marginal 2% decline in growth in global rubber consumption in CY22’td compared to CY21, due to the current global slowdown, NOCIL has been able to maintain its market share during the period. Furthermore, the management expects that Europe+1 could play out in the medium term with no expected capacity constraints in the near future.

* The stock is trading at 18x FY24E EPS of INR13 and 11x FY24E EV/EBITDA. We expect return ratios to recover to 12-13% in FY23-24E. We reiterate our Buy rating on the stock.

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