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Focus on electrolyte capex, execution…

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 ~67% of overall revenue while the rest comes from inorganic chemicals

Q4FY23 Results: Revenues were above our estimates while EBITDA came in below estimates due to lower GPM

* Reported revenue growth of 30.1% YoY to | 203.9 crore, led by higher growth from both organic chemicals | 138 crore (up 39% YoY) and inorganic chemicals | 66 crore (up 14% YoY)

* Gross margins fell 240 bps YoY to 40.1% while EBITDA margin declined 100 bps YoY to 16%. Absolute EBITDA was up 22% YoY to | 32.6 crore

* PAT declined 8% YoY to | 14.3 crore

What should investors do? The stock appreciated at 48.3% CAGR in the last three years.

• We downgrade from BUY to HOLD as the current price more or less factors our FY25 estimates. However, electrolyte and new molecules development will be key monitorables for sustained growth from FY26 onwards

Target Price and Valuation: We value Neogen Chemicals at 24x FY25E EV/EBITDA to arrive at a revised target price of | 1410/share (earlier | 1535/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

* Greenfield expansion of electrolyte and specialty lithium salts for dedicated battery materials to aid revenue growth

* The management commitment towards achieving 25-30% growth in revenue and EBITDA levels on the back of volume growth in the legacy business including revenues from recently acquired BuLi chemicals

Alternate Stock Idea: Apart from Neogen Chemicals, in our chemical coverage we also like SRF.

* Trigger for SRF’s future revenue growth would be increasing specialty chemical business

* BUY with a target price of | 3000

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