NOCIL

NOCIL

Market Cap- 1,660 cr

CMP- 103

Industry- Rubber Chemicals

Company Background

NOCIL today is the Largest Rubber Chemicals Manufacturer in India, NOCIL’s involvement in the Rubber chemicals business is over 4 decades with a 45% market share.

NOCIL is one of the few players in this business to offer a wide range of rubber chemicals to suit the customer needs.

NOCIL is today acknowledged as a dependable supplier of rubber chemicals. Globally company is recognized for technical capabilities and on this aspect alone, NOCIL enjoys an edge over other players in this business. The company has long term relationships with players in over 40 countries.

NOCIL is virtually debt free.

What are Rubber Chemicals?

Rubber chemicals are specialty organic chemicals. The manufacturing process involves complex chemical reactions and associated unit operations.

  1. Rubber chemicals are additives blended with natural or synthetic rubber during a manufacturing process.
  2. Rubber accelerators shorten the reaction time between rubber and sulphur.
  3. Rubber chemicals are used in processing and converting natural rubber and/or synthetic rubber into finished products (tyres, hoses, footwear, moulded components for vehicles, industrial belts, gloves, etc.).
  4.  Over 65% of rubber chemicals are used in the tyre industry.
  5.  Rubber chemicals constitute about 3-4% of total rubber consumption.

List of Products IncludeNote: Vulcanization & Accelerators- Vulcanization is a cross linking process in which individual molecules of rubber (polymer) are converted into a three-dimensional network of interconnected (polymer) chains through chemical cross links(of sulfur).

PRODUCTS LIST

  1. Accelerators : An accelerator is defined as the chemical added into a rubber compound to increase the speed of vulcanization and to permit vulcanization to proceed at lower temperature and with greater efficiency. Accelerator also Decreases the Quantity of Sulphur necessary for vulcanization and thus improving ‘aged’ properties of the rubber vulcanizates.
  • Anti-degradants/ Antioxidants: These are ingredients in rubber compounds which deter the ageing and inhibit degradation due to oxygen attack of rubber products, thereby enhancing service life.

Other applications: Pre-vulcanization inhibition, Post vulcanization stabilization, Latex based applications etc. & Improving Thermal Stability of cross links in rubber products.

Company has a presence across 22 rubber chemicals and very little dependence on China.

Who Uses these Products?

Rubber Chemicals are used by manufacturers who process and convert Natural Rubber and/or Synthetic Rubber into finished products, like Tyres, Hoses, Footwear, Moulded Components for vehicles, Industrial Belts, Gloves, etc.

Are rubber chemicals expensive raw materials for the rubber products?

Rubber Chemicals form a small cost portion for making rubber products thus helping the company protect its margins consistently. Hence, larger OEMs in times of down cycle do not cut margins of rubber chemical companies.

Promoter Salary

 Promoters and other directors are taking salary well below the line defined by the law i.e the remuneration of all promoters should not exceed more than 11% of the total profits.

CAPEX Done by the Company

PHASE 1 : CAPEX of 170 Cr. Navi Mumbai & Dahej Commissioned Production since Jun-18 & January -2019 respectively

Phase 2: CAPEX of 280 Cr. Expansion of production facilities for Rubber Chemicals in Phase 2 has been capitalised for Rs. 140 crores and remaining Rs. 140 crores will be completed by October2020.

NOCIL has doubled its capacity in the last two years from 55,000tonnes to 1,100,000 tonnes.

Dependency on the Tyre Industry

Growth in rubber chemicals is highly dependent on demand from the tyre industry – the largest consumer of rubber chemicals (~65%). The Indian tyre industry size is estimated at ~INR600b (as of FY18), with demand largely coming from two segments:  Original equipment manufacturers (OEM ~35-40% of demand) and Replacement market (aftermarket ~60-65%). The Indian automobile sales have grown consistently at ~10% p.a. over FY08-18, driving tyre demand from OEMs. This growth adds on to the on-road vehicle population in India, which fuels replacement demand.

Increased adoption of radial tyres which need more rubber chemicals with the capacity expansion of tyre industry along with imposed anti-dumping on Chinese rubber companies in the United States are good growth opportunities for the company. NOCIL’S doubling of capex puts them in a good position to benefit.

Typical Tyre replacement Cycle

Indian Tyre Companies Expanding Capacity

Product Category-wise breakup of Indian Tyre Industry:

Restrictions on china on dumping radial tyres in indian markets – Till recently the chinese radial truck & bus tyres (which is the bread and butter of tyre industry and accounts for 50% of revenue) were being dumped into the Indian market at very low prices due to a relatively subdued Chinese domestic demand. 40% of the consumption of these tyres has been through chinese imports. 

Recently the Indian government stepped in and has put restrictions on tyre imports.  All imports in this category will need approval inform of license from DGFT under commerce ministry. Given the procedures and permissions, these measures have the effect to dissuade imports.

Tyre segment is the single largest consuming segment for rubber chemicals. The overall demand for rubber chemicals as a group, therefore, is directly linked to total (natural + synthetic) rubber consumption.70% of the rubber chemicals are consumed by the tyres

Tyres consumption is largely dependent on automobile usage and sales. However, since 70% of the tyres market is replacement market, the tyre sector is not as cyclical as the automobile sector.  Overall Truck & Bus (T&B) tyres in India consume the majority of the rubber i.e. 55% of total revenue whereas globally it’s the PCR (Passenger Car Radials) that contribute the largest portion of the revenue.

This is mainly because of very low penetration of passenger vehicles in India – below 20 per 1,000 people whereas in China the number is ~69 per 1,000 people and 786 per 1,000 people in the US. 

Tyres in india have a life of approximately 6 years. The automobile has a life of about 15 years. This makes the replacement tyre market bigger than the OEM market.

Indian automobile sales have grown consistently at ~10% p.a. over FY08-18, driving demand for tyres from OEMs. This growth adds on to the on-road vehicle population in India, fueling replacement demand.  To grab this opportunity, tyre companies have lined up huge capex plans.

According to the company, the global tyre industry has committed ~USD7.5b toward expansion plans, while Indian tyre companies have lined up capex to the tune of INR-150-180b over the next few years. This is likely to accelerate tyre industry growth to 12-14% over the next 4-5 years. Given that the tyre industry is the largest consumer of rubber chemicals (~65%), growth in tyre demand bodes well for companies like Nocil.  Chinese ADD lifting in India to impact margins by 4% in FY 20.

Global Scenario

  1. Country wise Market share of Global Rubber Industry.

NOCIL Ltd produces rubber chemicals, where almost 70-75% of the global supply is concentrated in two countries: China & Korea (South Korea). (NOCIL Ltd conference call, May 2017, page 13):

Q. In china how much percentage of total capacity is consumed?

Ans: P. Srinivasan: China and korea put together accounts of 70 to 75% of the total rubber chemical capacity all over the world.

2. Global Market Demand expectations

The demand for rubber chemicals globally is set to increase by 3.5%.

Key Risks for NOCIL

1. Company faced a decline in revenue for FY 20 by ~19% compared to FY 19 and PAT margins fell by 3%. This was on account of ADD lifting on Chinese products, de growth of industry due to auto slowdown and corona virus impact in the last quarter.

2. April month of auto sale was almost negligible and globally too auto volume sales are slow. Near term auto slowdown will impact NOCIL revenue.

3. China Sunshine is running at full capacity whereas NOCIL is working at 65% capacity utilization at the present moment.

4. There are too many external factors affecting the business profitability: 

  • Cyclicality of Auto industry
  • Import regulations on rubber chemicals
  • Import regulations on tyres
  • US-China trade war
  • Capacity of other players in the market
  • Raw material prices

Tailwinds for NOCIL

1. There is past and ongoing capex in the tyre industry of India as highlighted earlier.

2. Company has a diversified set of products (~22 rubber chemicals) and specialized products.   Management is positive of the contribution of NOCIL to latex products like surgical gloves used in the healthcare industry. The impact will not be immediate but it will rise in the future.

3 The imposition of duties by the United States has made export opportunities for NOCIL attractive. In addition to the 10% custom duty they have imposed 15% tariffs which will make Chinese companies lose market share. Export revenue for NOCIL has been close to 30% in the last 5 years.

4. ADD further harms the Chinese players

Government has levied anti-dumping duty (ADD) on six products out of twenty manufactured by Nocil, which was effective until July 2019. According to NOCIL’s management, ~50% revenues are exposed to duty protection. With significant over capacity in China, the management is hopeful of ADD duty extension as there is a scope of significant injury to domestic industry from cheaper imports. However, effects of duty protection are overstated as competitors cut prices to compete with domestic players.

5. Rising environmental cost in China

China has progressively tightened environment norms over the last few years. This has resulted in major disruption in supplies for highly polluting chemical industries as they account for over 70% global rubber chemicals. Increased compliance audits have led to closure of smaller/unorganized units. This has led to disruption in supplies, which in turn, has wide ramifications for downstream users globally. 

Rising compliance costs among Chinese players has also increased the cost structure. China Sunshine financials suggests that environmental protection expenses for CY2017 was up 50%YoY to RMB99mn. This translated to 3.6% of CY2017 revenues, up from RMB66mn in CY16 or 3.2% of CY16 revenues.

 Attractive Valuations & Financials

Strong balance sheet & one of the most consistent operating performers

  1. NOCIL has doubled its capacity to 1,10,000 MT without adding any long term debt indicating strength of balance sheet.
  2. Cash Flow from Operations 10 year CAGR much higher than Revenue/EBIDTA/PAT CAGR.
  3. Consistent dividend payout ratio & track record
  4. FY21, Gross Margin higher than the previous 2 years in spite of drop in EBIDTA margins showing cost efficiencies.
  5. On valuations parameters ie EV/EBIDTA, PE & EV/CFO at multi year lows.

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