Every week, we recommend a well researched fundamental equity investment as our ‘Pick of the Week’. Handpicked after a thorough analysis of the business, industry, and economy, this recommendation has a higher potential of earning good returns over a horizon of 6 - 9 months.

INVESTING RATIONALE

Margins supported by benign RM prices: Although, the topline for NOCIL reported de-growth, company reported Gorss Margin expansion of 160bps/130bps YoY/QoQ at 57.7% in Q2FY20. GM expansion was on account of soft RM prices especially benzene and aniline for which NOCIL has entered into long term agreements. Further, a relatively better product mix also supported the expansion in GMs. Management expects RM prices to remain benign and thus support margins. However, EBITDA Margins were under pressure due to lower absorption of fixed costs, however with Dahej plant commencing operations management remains hopeful of recovery in EBITDA Margins going forward.

Dahej plant commissioning to support growth: With new Dahej plant commissioning, NOCIL would stand to benefit from this in terms of its global positioning in the rubber chemicals market as a leading supplier of choice for tyre companies globally as well as domestically. NOCIL has already commenced operations at this plant and is expecting to secure approvals for new products from this plant. With exports reporting decent growth, the company is looking to further explore opportunities in the US and Russian markets.

Outlook: Management indicated recovery in volumes to happen only from Q4FY20 onwards once Dahej plant begins commercial operations. While, near term growth challenges remain we continue to believe in the long term growth opportunities for the company given capex commitment of USD 10bn by global tyre companies and Rs. 150-180bn by domestic tyre companies. Further, with US consuming ~10% of rubber chemicals globally, the ongoing tariff war between US-China has only opened up opportunities for NOCIL.

We recommend a BUY on this stock with a TP of Rs 112.

* Note: Stock Investment horizon approx. 6-9 months. CMP as on 6th December, 2019.