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Another strong quarter aided by an uptick in demand

? NOCIL delivered a beat on our EBITDA estimate (at INR66/kg, -18% QoQ), with realization being flat QoQ (at INR333/kg, +27% YoY) in 1QFY23. Raw material costs were higher; however, volumes grew 16% YoY and 11% QoQ to 15.3kmt, which were boosted by easing of supply chains and an uptick in demand from OEMs as well as replacement demand.

? The company’s focus will be on growing its volumes, which it has been successfully executing. We expect volumes sold to post 22% CAGR over FY22- 24, with NOCIL likely to post a 13% revenue growth during the same period.

? Due to the beat in estimates in 1QFY23, we factor in an EBITDA/kg of INR50 for FY23 (up from INR45/kg) leaving our FY24E figure unchanged at INR45/kg. Owing to this, we also increase our FY23 absolute EBITDA and EPS guidance by 16% and 18%, respectively, and raise FY24 revenue estimate by 8%, ceteris paribus.

? Management believes that some near-term demand slowdown may occur and has guided that the optimal utilization for its expanded capacity could be delayed by three to six months (earlier guidance of full utilization by Sep’23). We have been conservative always and have guided for the same by end-FY24. We forecast revenue/EBITDA/EPS CAGR of 13%/14%/17% over FY22-24E, respectively. Management further guided for capacity debottlenecking, which may add further volume growth in the future

? The stock is up 18% and has outperformed the Nifty index in the last six months. Valuing NOCIL at 22x FY24E EPS, we arrive at our TP of INR319. We reiterate our BUY rating with a 15% potential upside.

Beat on EBITDA even as margins decline sequentially

? NOCIL’s revenue came in above our estimate at INR5.1b (+48% YoY, +10% QoQ).

? Gross margin contracted QoQ to 46.4% in 1QFY23 (v/s 49.4% in 1QFY22).

? EBITDA was above estimate at INR1b (+70% of est., +39% YoY, -8% QoQ).

? EBITDA margin stood at 19.9% (v/s 23.9%/21.1% in 4QFY22/1QFY22).

? PAT was at INR656m (+39% YoY, -4% QoQ) in 1QFY23

Valuation and view – Maintain BUY

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

? The Indian Tyre industry is likely to grow 7-9% in volume terms in FY23. Domestic Tyre companies are planning to ramp up production, with a planned capex of INR200b over the next three years.

? The stock is trading at 19x FY24E EPS of INR15 and 12x FY24E EV/EBITDA. We expect return ratios to recover to 13-14% in FY23-24 (up from 7% in FY21). We maintain our BUY rating on the stock

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