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Clarity over pricing power; higher margins to sustain

* NOCIL reported higher-than-estimated realization (pricing action taken in Apr’21 to offset the increase in input cost), while volumes came in below estimates (as operating activity at the customer was interrupted for 2–3 weeks by the second COVID wave). This translated to in-line revenue, although margins expanded.

* The gross margin stood at INR129/kg (v/s INR94/kg in 4QFY21 and INR97/kg in 1QFY21). EBITDA also rose to INR55/kg in 1QFY22 (from INR33/kg in 4QFY21 and INR14/kg in 1QFY21), resulting in an EBITDA margin of 21% (+550bps QoQ), with conversion cost declining further to 28% (as capacity ramps up). Production ramp-up has been reported on a MoM basis for the past year. Utilization levels in July 2021 have exceeded pre-COVID levels on a monthly run-rate basis.

* The management has guided that with no further supply surplus in the market, NOCIL should be able to pass on the cost going forward as well. That said, it expects a moderately higher cost impact in 2QFY22 (as this comes with a lag of one quarter), for which the company has further corrected the pricing in July’21.

* Factoring in the beat on realization and margins, we revise our respective variables, resulting in an upward revision in EPS by 31%/14% for FY22E/FY23E.

* The management continues to believe that optimal capacity utilization for the expanded capacity (of 110ktpa) would be achieved by 1HFY24. Although, conservatively, we expect the same by end-FY24 (translating to a volume CAGR of ~20%). As a result, we forecast a revenue/EPS CAGR of 28%/47% over FY21–24E. Valuing the company at 22x Sep’23 EPS, we arrive at Target Price of INR340. Reiterate Buy.

Revenue in-line; margins expand

* Revenue was in line with our est. at INR3.4b (+233% YoY; +7% QoQ).

* Realization was 18% higher than estimated at INR262/kg (+32% YoY; +23% QoQ). Volumes sold were 14% below estimate at 13.2kmt (+145% YoY; -13% QoQ).

* EBITDA came in at INR727m (+42% est.; +44% QoQ).

* EBITDA/kg stood at INR55 – the highest in the last eight quarters.

* PAT stood at INR471m (+31% QoQ – as other income was lower).

Valuation and view – maintain Buy

* The management guided that the priority would be to conduct debottlenecking at existing units in the near term, while long-term planning for the next 3–5 years is under evaluation. Specialized products form ~25% of the total revenue, and any new capex announcement in this category would be both realization and margin accretive.

* The recent import restriction on various classes of tyres to India should further help domestic tyre companies to operate at higher utilization rates. Domestic companies such as Apollo Tyres, CEAT, and MRF are planning to ramp up production as the Tyre industry is expected to witness considerable growth.

* The stock is trading at 19.5x FY23E P/E and 13x FY23E EV/EBITDA, with an asset turnover of ~0.7x (which is set to increase to 1.1x over FY23–24E). We expect return ratios to recover to 16–17% over FY23–24E (up from 7% in FY21). Maintain Buy.

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