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Decent numbers; management reiterates guidance…

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

Q2FY23 Results: Numbers were solid on a like-to-like basis but below our estimates due to lower than expected growth in the inorganic segment.

* Revenue grew 31% YoY to | 148.1 crore, led by higher growth from both organic chemicals (up 9% YoY) and inorganic chemicals (up 123% YoY)

* Gross margins rose 345 bps YoY to ~46.8% while EBITDA margin declined 178 bps YoY to 16.7%. Absolute EBITDA was up 18% YoY to | 24.3 crore

* PAT declined 12% YoY to | 9.9 crore

What should investors do? The stock appreciated at 55.7% CAGR in the last three years

* We retain BUY rating on the back of better growth outlook from both organic and inorganic segments tracking capex and visibility

Target Price and Valuation: We value Neogen Chemicals at 45x P/E FY24E EPS to arrive at a revised target price of | 1680/share (earlier | 1645/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 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 PI Industries.

* Trigger for PI Industries future revenue growth would be strong order backlog in CSM and proposed foray into pharma CDMO

* BUY with a target price of | 3710

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