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Uncertain outlook; lack of guidance on optimum utilization

* NOCIL's EBITDA/kg stood at INR34.3 in 2QFY24, down 34% YoY, in line with our estimate. However, sales volumes increased 9% YoY to 12.9tmt. Management believes that there could be some positive volume growth in FY24. Realization was up at INR273/kg, down 17% YoY.

* Management highlighted that aggressive dumping persisted in 2Q, driven by a lack of domestic demand in China and export markets where China typically supplies rubber chemicals. Aggressive pricing negatively impacted the company’s performance in the quarter, leading to lower realizations.

* Demand from the latex industry still remains subdued with the industry operating at 50% of peak levels observed in CY21 and part of CY22. There is high competition from Chinese players in this industry as well. Latex volumes, which typically accounted for 30% of NOCIL's export volumes, have now decreased to 12-15%.

* Optimal capacity utilization for the expanded capacity is uncertain due to an uncertain global macro environment. Due to the underperformance in 1H and bleak outlook in the near to medium term, we cut our FY24 EBITDA estimate by 8% and revenue/ EBITDA/ PAT estimate by 5%/ 13%/ 10% for FY25.

* The stock has underperformed since our initiation and with earnings likely to be weaker going ahead, we downgrade the stock to neutral. We have also cut our target multiple from 25x to 20x. The stock is trading at ~21x FY25E EPS of INR10.2 and ~13x FY25E EV/EBITDA. Our target price is at INR205.

In-line EBITDA and margin; PAT beat on higher ‘other income’

* Revenue came in at INR3.5b (vs. est. INR3.4b, down 10% YoY). Gross margin stood at 43.4% in 2QFY24 (vs. 47.1% in 2QFY23).

* EBITDA stood at INR441m (vs. est. INR435m, down 28% YoY). EBITDAM was at 12.6% (vs. 15.8% in 2QFY23).

* PAT was at INR269m (vs. est. INR220m, down 25% YoY), due to higher-than expected ‘other income’ at INR49m.

* For 1HFY24, revenue stood at INR7.5b (down 17% YoY), EBITDA at INR984m (down 40% YoY) and PAT at INR605m (down 40% YoY).

* EBITDAM was at INR13.2% (down 500bp YoY). 1HFY24 EBITDA was at 45% of our full-year FY24 estimate.

Operational details

* Sales volumes stood at ~12.9tmt (up 5% from our estimate, up 9% YoY). Volumes in the export market slowed down due to recessionary trends with domestic volumes.

* Realization was at INR273/kg (down 17% YoY) with EBITDA/kg at INR34.3 (down 34% YoY). The decline in realization occurred due to the challenging external environment.

Valuation and view

* No new capacity is planned for the next few years. Going forward, the company will focus only on maintenance capex. The initial assumption of full utilization was predicated on the expectation that increased demand would drive higher volumes. However, this scenario is not anticipated in the near to medium term.

* We estimate a revenue/ EBITDA/ PAT CAGR of 3%/2%/7% over FY23-25 with subdued demand from the international market, mainly in the latex segment and from the tyre market in the European region. Volumes are likely to be tepid in the near to medium term with CAGR estimate of 6% over FY23-25.

* The stock has underperformed since our initiation and with earnings likely to be weaker going ahead, we downgrade the stock to Neutral. We have also cut our target multiple from 25x to 20x. The stock is trading at ~21x FY25E EPS of INR10.2 and ~13x FY25E EV/EBITDA. Our target price is at INR205.

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