Neogen Chemicals Ltd : Growth to be driven by new business vertical; maintaining a Buy - Anand Rathi Stock Brokers
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Buy Neogen Chemicals Ltd For Target Rs.1,875
Bolstered by sustained demand from key end-user industries with higher utilisation at the recently expanded capacities and firm realisations, Neogen’s Q3 performance was good. It is strong in bromine and lithiumbased specialty chemicals and we expect revenue/PAT to clock 31%/ 49% CAGRs over FY23-25, driven by more revenue from high-valueadded products, the greater CSM contribution, higher utilisation at the recently commissioned capacities and sustained industry demand. Further, starting of revenue contribution from electrolyte and lithium salts would support future growth.
Strong performance, some margin pressure. Q3 revenue grew 40% y/y, 26% q/q, to Rs1.9bn due to higher volumes and realisations. Higher lithium prices persisted in Q3. Neogen passed them on to maintain absolute EBITDA. Higher input prices squeezed the gross margin 91bps y/y, 353bps q/q, to 43.2%, while the EBITDA margin contracted 177bps y/y, 20bps q/q, to 16.2%. With the greater contribution from high margin advanced intermediates and the CSM business coupled with higher utilisation, we expect margins to improve.
Capex for battery chemicals. Neogen announced Rs4.5bn greenfield capex over FY23-FY26 for battery chemicals. It is adding capacities for electrolyte and specialty lithium salts to 10,000 tons and 2,000 tons respectively in phases, to be commissioned over FY24-FY26. Revenue would start flowing in from FY24 and utilisation would reach optimal levels in FY26/ FY27. The company aims to generate Rs10bn-12bn revenue from this capex, and a further ~Rs3bn3.5bn at its existing business on adding capacities. Management talked of 30%+ revenue CAGR over the next 3-4 years, generating ~Rs20bn-22.5bn revenue by FY26/27.
Valuation. We retain our Buy rating, at a higher TP of Rs1,875, 40x FY25e EPS. Risks: Delay in utilisation picking up at the recently-commissioned capacities, raw-material price fluctuations, delay in EVs picking up and lengthening of clients’ product lifecycles.
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