Buy Neogen Chemicals Ltd For Target Rs.1095 - ICICI Direct
Custom synthesis offers strong visibility ahead…
About the stock: Commencing operations in 1991, Neogen Chemicals manufactures specialty organic bromine-based chemical compounds as well as specialty inorganic lithium-based chemicals compounds.
* The company’s products find application in pharmaceutical intermediates, agrochemical intermediates, engineering fluids, polymers additives and water treatment chemicals to name a few
* Neogen has two segments viz. (i) organic chemicals, (ii) inorganic chemicals of which organic chemical constitute ~80% of overall revenue while the rest comes from inorganic chemicals.
Q1FY22 Results: Numbers were below estimates on account of spillover sales to the next quarter.
* Reported revenue growth of 11% YoY to | 84.6 crore, led by higher growth from inorganic chemical segment (up 55% YoY)
* Gross margins rose 690 bps YoY to ~45% while EBITDA margin improved 80 bps YoY to 18.5%, due to higher other operating cost (up 50% YoY) and employee expenses (up 30% YoY)
* EBITDA was up 15% YoY to | 15.6 crore
* PAT increased 20% YoY to | 7.4 crore owing to lower taxes (28.1% vs. 30% in Q1FY21)
What should investors do?
The stock appreciated at 65% CAGR in last two years.
* We retain BUY rating on the back of better growth outlook from custom synthesis business
Target Price and Valuation: We value Neogen Chemicals at 38x P/E FY23E EPS to arrive at a revised target price of | 1095/share (earlier | 1085/share).
Key triggers for future price performance:
* Phase 1 and Phase 2 capex at Dahej bodes well for advance intermediates and custom synthesis revenue growth
* Higher share of value added business portfolio to improve margins profile of the business.
* Allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further.
Alternate Stock Idea: Apart from Neogen Chemicals, in our chemical coverage we also like Sumitomo Chemicals.
* Trigger for Sumitomo Chemical’s future revenue growth would be increasing CRAMS opportunity from SCC Japan and Nufarm
* BUY with a target price of | 505
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