Buy Neogen Chemicals Ltd For Target Rs.2160 - ICICI Direct
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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
Q3FY22 Results: The topline broadly stayed in line with our estimates while bottomline was lower due to higher than estimated depreciation and finance cost.
Reported revenue growth of 56% YoY to | 132.6 crore, led by higher growth from both segments such as organic chemical (up 52% YoY) and inorganic chemical segment (up 69% YoY)
Gross margins expanded 260 bps YoY to ~44.1% while EBITDA margin fell 180 bps YoY to 18%, due to higher other (+ 98% YoY) & employee cost (+ 61% YoY)
EBITDA was up 41% YoY to | 23.8 crore
PAT increased 23% YoY to | 10.5 crore owing to higher depreciation and finance cost post commissioning of phase I & II unit at Dahej
What should investors do? The stock appreciated at 90% 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 50x P/E FY24E EPS to arrive at a revised target price of | 2160/share (earlier | 2160/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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