Stock Idea: NOCIL

NOCIL [NSE: NOCIL | BSE:500730]

CMp: 22.95 | tp: 21 |duration: 12 months July 11, 2010

company

National Organic Chemical Industries (NOCIL) commenced manufacture of rubber chemicals in the year 1975. NOCIL, at present, is the largest manufacturer of rubber chemicals in India with a customer profile that spans most of the global market. It manufactures anti-degradants, antioxidants, accelerators, sulfur donor, post vulcanization stabilizer and pre vulcanization inhibitor extensively used in the rubber industry world over. NOCIL is a part of the Arvind Mafatlal Group.

In 2005, NOCIL hived off its non-operational petrochemical division to the Reliance group. The steep increase in the crude oil prices in the international market led to an increase in the cost of naptha and other essential inputs resulting in a sharp increase in production costs. Besides, due to the excess manufacturing capacity of the petrochemical product in and around India in recent times, coupled with random dumping of these products, the company`s produce became uneconomical. Consequently, the business suffered to a point that it was no longer feasible for the division to be operated.

COMPANY DATA

Share Data

Market Cap (Rs)	368.23 Cr
Issued Shares (mn)	160.7
52 wk High/Low	32.70/18.75

Valuation Ratios

To 31 Mar	FY09	FY10	FY11E
Net Sales (Rs in Cr)	476.85	443.55	450
EPS (Rs)	2.25	2.12	1.9
+/- %	221%	-5.7	-10.3
P/E (x) (Industry P/E 17.65)	-	10.80	12.07

Shareholding Pattern (%)

Promoters	32.83
FIIs	1.14
MFs	0.03
Public	48.64
Others	17.36

positives

1. New crude discoveries within India could result in cost savings and thereby reducing the input raw material cost significantly.

2. Indian auto market is growing rapidly, which results in a big jump the vehicle tire sales could directly impact the top-line of NOCIL. NOCIL being the market leader in rubber chemicals manufacturing in India could significantly is well positioned to garner a lion’s share of this segment’s growth.

3. Except the Euro zone worries, the world economy seems to be picking up. This could result in better sales of automotives and in-turn NOCIL can get benefitted in the long run.

4. Dividend paying company

5. Around the same time, your Company also received the final order from the Directorate of Anti Dumping (DAD), New Delhi, and accepting Company’s contention of severe dumping taking place in the Indian Market. Company operations are expected to compete better in FY10, with support from the DAD being more vigilant.

concerns

1. Pricing pressure on input raw-materials. Thought the crude oil pricing has been pretty stable for a major part of this year, it is generally accepted that crude oil pricing will move towards the $100 mark very soon.

2. A slowdown in the US and European economies will result in a significant lowering of export revenues. Global auto majors like GM and Ford are in the process of restructuring their operations, with focus on cost cutting.

3. FOREX variations. Euro & USD are having wild swings in their value and this could impact earnings significantly, especially considering the fact that NOCIL’s export revenues where around Rs.230 cr for FY09 and is a significant part of the total revenue.

4. Pricing pressures due to increased dumping of cheap products in the markets are also affecting the top-line of NOCIL.

valuations

Though there are a few positives for NOCIL, the negatives, especially cheap products, FOREX variations etc far outweigh the positives. NOCIL is expected to report a flat growth for FY11, and is trading at 12.07 PE FY11. The target price for NOCIL for duration of 12 months would be around Rs.21 and hence recommend on a “SELL” on this counter.

future prospects

NOCIL’s business model highly depends on the world crude oil pricing and growth of auto industry. NOCIL has already faced a similar situation in the early 2000, when it had to hive off its petrochemical division to Reliance. In fact, companies like these can be more valuable with groups like Reliance, which have the advantage of sourcing raw-materials and hence significantly reducing the operating income. In future, it will not be a surprise, if NOCIL is the target of acquisition by oil sourcing companies like Reliance, Essar oil, Videocon, Cairn, or even ONGC.

disclaimer

I am a newbie into equity research. This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.

I dont hold this stock