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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

Phase 1 Dahej plant commissioned:

* The company incurred a capex of | 75 crore for Phase 1 at Dahej while the same for Phase 2 remains at | 55 crore. The phase 1 capacity would largely cater to the custom synthesis business while the same for phase 2 is expected to be for advanced intermediates

* The asset turn is expected to be around ~2.7x, which provides incremental revenue visibility of ~| 350 crore. Since both these business verticals are margin accretive thus, incremental revenue share from both segments is expected to aid gross margins and thereby OPM

* This should inch up return ratios and thereby valuations in medium term

What should investors do?

The stock appreciated at 80% CAGR in last two years.

* We retain BUY rating on the back of better growth outlook of the custom synthesis business

Target Price and Valuation: We value Neogen Chemicals at 40x P/E FY24E EPS to arrive at a revised target price of | 1515/share (earlier | 1095/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 is expected to improve the margin 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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