“BUY” This Small Cap Chemical Stock For A Return of +31% Says Motilal Oswal

The stock of National Organic Chemical Industries Limited (NOCIL) has been recommended to buy by Motilal Oswal Financial Services Limited, an Indian brokerage company, with a target price of Rs. 320. The stock is expected to rise 31% from its current market price of Rs. 244 according to the brokerage. NOCIL is Indias largest rubber chemical manufacturer, with state-of-the-art technology for producing rubber chemicals. According to the brokerage The prices of Aniline, a key raw material for NOCIL, have shot up by 20% MoM in Nov21 (up 44% QoQ and 149% YoY) due to a supply crunch and other reasons mentioned below. This could result in a normalization of margin for NOCIL (recorded a peak margin of INR55/kg in the no Anti-Dumping Duty environment in 1QFY22). As the price of Aniline increases, the ability of the company to pass through the entire increase subsides (as highlighted in Exhibit 2), resulting in a margin compression. Motilal Oswal has said in its research report that In the current environment, where: 1) the Centre has not accepted the Directorate General of Trade Remedies (DGTR) recommendation to impose ADD on one of its key products, PX-13; and 2) there exists a risk of increased dumping from China (China Sunshine would complete its expansion over the next 1-2 quarters), the stock may be under pressure in the near term.Advertisement According to the brokerages call We build in an EBITDA/kg of INR35 for 2HFY22 (in line with the last three years average), with an improvement to INR45/INR50 over FY23E/FY24E, as capacity ramp-up and raw material prices normalize from current higher levels. For NOCIL, the priority would be to undertake debottlenecking at existing units in the near term, while long-term planning is under evaluation. Specialized products form 25% of total revenue, and any new capex announcement in this category would be both realization and margin accretive. Motilal Oswal has further clarified in its research report that NOCIL has an asset turnover of ~0.7x in FY21 (set to increase to 1.1x in FY24E). We expect return ratios to recover to 16-17% over FY23-24E (up from 7% in FY21). Valuing the stock at 22x Dec23E EPS, we arrive at a TP of INR320. We maintain our Buy rating. The stock has been picked from the brokerage report of Motilal Oswal Financial Services Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.