NOCIL (NOCIL IN)

Rating: BUY | CMP: Rs115 | TP: Rs199

July 9, 2019 China Sunsine AR Analysis - Near term

pressures visible, NOCIL’s EPS cut by 10-13% in
Company Update FY20-21E
☑ Change in Estimates | ☑ Target |  Reco
Quick Pointers:
Change in Estimates
Current Previous  Industry consolidation is likely to accelerate as China tightens scrutiny on
FY20E FY21E FY20E FY21E polluting units with frequent environment inspections.
Rating BUY BUY
Target Price 199 221
Sales (Rs. m) 11,394 13,530 11,993 14,992  China Sunshine (CS) is likely to focus on steady capacity expansion of rubber
% Chng. (5.0) (9.8)
chemicals including 20,000 tons for accelerators in CY19.
EBITDA (Rs. m) 2,621 3,382 2,998 3,748
% Chng. (12.6) (9.8)
EPS (Rs.) 10.4 13.3 11.9 14.7  Exports account for 38% of CS sales; US share was just 2.2% for CY18 v/s
% Chng. (12.7) (9.6)
6.9% in CY14 while EU share increased to 9% in CY18 vs 5% in CY14.

Key Financials - Standalone  We trim Nocil’s FY20-21E estimates by 10-13% as we lower EBIDTA margin
Y/e Mar FY18 FY19 FY20E FY21E and realization assumptions due to sub optimal capacity utilization from auto
Sales (Rs. m) 9,676 10,429 11,394 13,530
EBITDA (Rs. m) 2,629 2,903 2,621 3,382
slowdown and benign raw material prices.
Margin (%) 27.2 27.8 23.0 25.0
PAT (Rs. m) 1,689 1,841 1,710 2,185 China Sunsine (CS; Mkt cap- USD400m) is a world’s leading rubber chemicals
EPS (Rs.) 10.3 11.2 10.4 13.3 player with a production capacity of 172,000tons including 30,000tons of
Gr. (%) 44.1 9.0 (7.1) 27.8
DPS (Rs.) 2.5 2.5 2.3 3.0 insoluble Sulphur. CS had a stellar CY18 led by high realization (+11%YoY)
Yield (%) 2.2 2.2 2.0 2.6 and increased volume (+8%YoY). Our analysis on CS Annual Report suggests
RoE (%) 17.4 16.7 13.8 15.9
that industry consolidation will continue considering China’s strict
RoCE (%) 26.1 25.1 21.0 24.0
EV/Sales (x) 1.7 1.7 1.6 1.2 environmental norms, benefitting non-Chinese players like Nocil. However,
EV/EBITDA (x) 6.2 6.1 6.8 4.7 sluggish near term demand in domestic and Chinese market is a concern,
PE (x) 11.2 10.3 11.1 8.7
P/BV (x) 1.8 1.6 1.5 1.3 and we cut Nocil’s EBIDTA margin estimates by 200bps for FY20 to 23% (FY19
27.8%) due to sub optimal capacity utilisation. We expect lower realisations
for FY20-21E given benign raw material prices. However, we expect EBIDTA
Key Data NOCI.BO | NOCIL IN
margin to improve to 25% in FY21E led by demand revival and operating
52-W High / Low Rs.188 / Rs.112
Sensex / Nifty 38,721 / 11,559 leverage. Outlook for rubber chemicals remain bright over medium term given
Market Cap Rs.19bn/ $ 277m
Shares Outstanding 165m
global tyre capex of USD8bn and high capacity utilization of >80%. Reiterate
3M Avg. Daily Value Rs.99.84m BUY on Nocil with a PT of Rs199 (15x PER FY21E; Rs 221 earlier).

Shareholding Pattern (%) China Sunsine CY18 Annual Reports v/s NOCIL
Promoter’s 33.78
Foreign 4.23
Domestic Institution 5.11 Stellar year for CS: CY18 was a stellar year for CS as operating profit and PAT
Public & Others 56.88 increased to RMB768m (+33%YoY) and RMB641m (+88%YoY) respectively. PAT
Promoter Pledge (Rs bn) 1.50
growth was higher than PBT growth of 49%YoY due to lower tax rate at Shandong
Sunsine, main subsidiary of 15% given the benefits of ‘High Tech Enterprise’.
Stock Performance (%)
Meanwhile, Nocil’s FY19 EBIDTA and PAT increased just 10% YoY and 9% YoY
1M 6M 12M
Absolute (10.9) (28.9) (31.4) due to capacity constraints. CS’s EBIDTA margins expanded 220bps YoY to 23.4%
Relative (8.9) (33.9) (36.8)
in CY18, while for Nocil margins were up 60bps YoY to 27.8%. Nocil’s expansion
plan to double the capacity to 110,000tons (including intermediates for internal
Avishek Datta consumption) is likely to come on stream by Oct-19.
avishekdatta@plindia.com | 91-22-66322254

July 9, 2019 1
 NOCIL

CS - a year of wild swings: CY18 was a year of two halves with strong growth in
H1 led by supply disruptions due to tight environment norms. For H2, profitability
was impacted due to sluggish demand (China new car sales were at 28.1mn units,
down 2.8%YoY; first decline in 28 years) and resumption of plant operations by
other players post technological upgrade. Near term demand outlook in China is
weak due to ongoing US-China dispute, however, global tyre demand growth is
expected to revive to 3.8%CAGR over CY18-25E will boost demand for rubber
chemicals over medium term.

Sales momentum continues: For CY18, CS revenues increased 20% YoY to

RMB3.2bn with sales volumes of 151,486 tons (+ 8%YoY). Blended realization
increased to RMB21.5/ton (+11%YoY) as the company benefitted from supply
disruptions caused by tight environment norms in H1CY18. Nocil’s sales increased
just 8%YoY to Rs10.4bn with value growth of 60% and the rest due to volume
growth (3%).

Industry consolidation remain the norm in China: Industry consolidation is likely

to continue in China as strict implementation of environmental norms make it
difficult for smaller players to compete. Accordingly, CS plans to increase capacity
by 20,000tons while Nocil will expand production capacity (including intermediates)
by 55,000tons by October 2019.

US export share comes down sharply: Exports account for 38% of China Sunsine
revenues. Of that, two-third is exported to rest of Asia while US accounts for only
2.2% of CY18 sales. US share has come down from ~7% in CY14. The company
has also increased its exports to EU, which accounted for 9% of CY18 sales vis-à-
vis 5% in CY14. With the ongoing US-China trade dispute, we expect CS to focus
more on non-US markets.

This opens up opportunities for major player like Nocil, which has multi-decade
relationship with global Tyre players. Nocil has made a modest beginning and sent
samples (from the first phase of capex, which was commissioned at Dahej in Jan
19) of 500tons to existing customers in US and approval is expected shortly. US
market offers a big market opportunity to the company.

Benign raw material prices to lower realisation: All major input prices has seen
sharp deceleration due to sharp correction in crude oil and Benzene prices.
increased availability in aniline due to slowdown in Methylene Diphenyl Di-isocyante
(MDI) demand resulted in the spreads dropping significantly lower over Benzene
spot prices. Benign raw material prices are passed on to consumers, which will
lower realizations. Nocil has entered into long-term contract for aniline at an
attractive fixed spread over Benzene prices, as per their recent Annual report, which
will provide downside support to margins.

Pollution and environment charges on an uptrend: Tightening environment

norms in China signifies that CS’s pollution related expenses excluding plant and
machinery has increased at 18% CAGR over CY15-18 to RMB80m, which accounts
for 2.4% of CY18 revenues. We expect that stringent environment norms and
frequent checks will keep pollution expenses high.

July 9, 2019 2
 NOCIL

Working capital cycle improves: CS’s working capital cycle matches Nocil’s trade
receivables and payables. However, Nocil maintains a high inventory cycle.
Accordingly, for CY18, CS net-working capital cycle was at 71 days against 85 days
in CY17. Whereas for Nocil it remains largely unchanged at 106 days for FY19 as
Nocil maintains an inventory for 60 days against 24 days for China Sunsine

Liquid balance sheet: CS had net cash and equivalents of RMB1,038m

(~USD150m) as on CY18 end and continued to fund their capital investments from
internal accruals. Similarly, Nocil also had net cash equivalent of Rs1.4bn as on
FY19 end and proposes to fund its expansion plans from internal accruals.

Return ratios remain healthy: Buoyed by smart earnings growth, CS ROEs were
at 32% for CY18 against 22% in CY17. Nocil’s ROE’s continue to remain steady at
17% and are likely to ramp up with new capacities.

Nocil margins to come off in FY20: Sluggish demand outlook coupled with new
capacities coming on stream for Nocil will mean EBIDTA margins are likely to
correct to 23% for FY20E (27.8% in FY19). We also factor in lower realization of
5% each for FY20/21E as company passes on benefits of lower raw material prices
to customers. However, we expect margins to recover to 25% in FY21E due to twin
tailwinds of demand revival and operating leverage.

Key assumptions for Nocil’s volume and margins

FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Production incl intermediates (MT) 44,415 44,415 49,967 51,466 59,186 73,983 88,779
Sales volume (MT) 32,169 36,190 40,714 41,935 48,226 60,282 72,339
Realisation (Rs/kg) 220 205 238 249 236 224 236
Sales(Rs m) 6,449 7,422 9,676 10,429 11,394 13,530 17,048
EBIDTA (Rs m) 1,382 1,580 2,629 2,903 2,621 3,382 4,262
EBIDTA (%) 19.3 21.3 27.2 27.8 23 25 25
EBIDTA (Rs/kg) 43 44 65 69 54 56 59
PAT (Rs m) 778 1,165 1,689 1,841 1,710 2,185 2,485
EPS (Rs/sh) 4.8 7.2 10.3 11.2 10.4 13.3 15.5
Source: Company, PL

Nocil- sensitivity to FY20E assumptions

Base case assumptions Sensitivity FY20 EPS % chg
15% volume growth 5% volume growth 10.4 -9%
23% EBIDTA margin 20% EBIDTA margin 10.4 -13%
Source: Company, PL

Nocil- Sensitivity to FY21E assumptions

Base case assumptions Sensitivity FY21 EPS % chg
25% volume growth 5% volume growth 13.3 -16%
25% EBIDTA margin 20% EBIDTA margin 13.3 -21%
Source: Company, PL

July 9, 2019 3
 NOCIL

Story in charts

CS has steadily expanded capacity to 172,000tons

Rubber accelerators Insoluble sulphur Anti-oxidant

2,00,000
172,900
1,80,000
1,60,000
1,40,000
1,20,000

Tons
1,00,000
80,000
60,000
40,000
20,000
-

CY19E
CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

CY17

CY18
CY07
Source: Company, PL

CS operated at over 90% utilization for last two years (add line of
utilization)

Rubber accelerators Insoluble sulphur Anti-oxidant

Others Utilisation
1,60,000 100%
1,40,000 90%
80%
1,20,000
70%
1,00,000 60%
Tons

80,000 50%
60,000 40%
30%
40,000
20%
20,000 10%
- 0%
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18

Source: Company, PL

CS sales increased at 12%CAGR over last five years

Rubber accelerators Insoluble sulphur Anti-oxidant Others

3,500

3,000

2,500
RMB m n

2,000

1,500

1,000

500

-
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18

Source: Company, PL

July 9, 2019 4
 NOCIL

Realization trend of CS and Nocil are a mirror image

Blended realisation(RMB/ton) Nocil (RHS)

30 300

25 250

20 200

RMB/ton

Rs/kg
15 150

10 100

5 50

0 0

CY08

CY09

CY10

CY13

CY14

CY15

CY17

CY18
CY07

CY11

CY12

CY16
Source: Company, PL

CS US export share has come to 2% in CY18

China Rest of Asia America EU Others

3% 1% 1% 2% 2%
100% 6% 6%
5% 5% 9%
90% 6.9% 6.5% 6.0% 4.7%
2.2%
80%
24% 24% 25% 24% 25%
70%
60%
50%
40%
30% 61% 63% 62% 64% 62%
20%
10%
0%
CY14 CY15 CY16 CY17 CY18

Source: Company, Company, PL

CS has widened ROE gap with Nocil since CY2016

CS ROE Nocil ROE

35% 32%
30%
24%
25% 22%
20% 18% 17% 17% 17%
14% 13% 14%
15%

10%

5%

0%
CY14/FY15 CY15/FY16 CY16/FY17 CY17/FY18 CY18/FY19

Source: Company, PL

July 9, 2019 5
 NOCIL

Financials
Income Statement (Rs m) Balance Sheet Abstract (Rs m)
Y/e Mar FY18 FY19 FY20E FY21E Y/e Mar FY18 FY19 FY20E FY21E

Net Revenues 9,676 10,429 11,394 13,530 Non-Current Assets

YoY gr. (%) 30.4 7.8 9.2 18.8
Cost of Goods Sold 4,406 4,668 5,241 6,224 Gross Block 6,569 6,569 10,819 10,919
Gross Profit 5,270 5,761 6,153 7,306 Tangibles 6,569 6,569 10,819 10,919
Margin (%) 54.5 55.2 54.0 54.0 Intangibles - - - -
Employee Cost 674 678 911 1,082
Other Expenses 1,968 2,180 2,621 2,841 Acc: Dep / Amortization 1,576 1,805 2,107 2,515
Tangibles 1,576 1,805 2,107 2,515
EBITDA 2,629 2,903 2,621 3,382 Intangibles - - - -
YoY gr. (%) 66.4 10.4 (9.7) 29.1
Margin (%) 27.2 27.8 23.0 25.0 Net fixed assets 4,994 4,764 8,713 8,404
Tangibles 4,994 4,764 8,713 8,404
Depreciation and Amortization 229 230 301 409 Intangibles - - - -

EBIT 2,400 2,673 2,319 2,974 Capital Work In Progress 392 2,892 392 150
Margin (%) 24.8 25.6 20.4 22.0 Goodwill 28 30 33 37
Non-Current Investments 812 812 812 812
Net Interest 12 6 - - Net Deferred tax assets (1,003) (1,279) (1,538) (1,869)
Other Income 143 100 272 336 Other Non-Current Assets 288 313 341 371

Profit Before Tax 2,531 2,767 2,591 3,310 Current Assets

Margin (%) 26.2 26.5 22.7 24.5 Investments 2,245 - - -
Inventories 1,550 1,670 1,825 2,167
Total Tax 845 926 881 1,126 Trade receivables 2,434 2,623 2,865 3,403
Effective tax rate (%) 33.4 33.5 34.0 34.0 Cash & Bank Balance 276 1,315 1,068 2,893
Other Current Assets 298 328 360 396
Profit after tax 1,686 1,841 1,710 2,185 Total Assets 13,317 14,749 16,412 18,636
Minority interest - - - -
Share Profit from Associate - - - - Equity
Equity Share Capital 1,645 1,645 1,645 1,645
Adjusted PAT 1,689 1,841 1,710 2,185 Other Equity 8,730 10,079 11,332 12,934
YoY gr. (%) 44.9 9.0 (7.1) 27.8 Total Networth 10,374 11,724 12,977 14,579
Margin (%) 17.5 17.7 15.0 16.1
Extra Ord. Income / (Exp) - - - - Non-Current Liabilities
Long Term borrowings - - - -
Reported PAT 1,689 1,841 1,710 2,185 Provisions 153 153 153 153
YoY gr. (%) 44.9 9.0 (7.1) 27.8 Other non current liabilities 1 1 1 1
Margin (%) 17.5 17.7 15.0 16.1
Current Liabilities
Other Comprehensive Income - - - - ST Debt / Current of LT Debt - - - -
Total Comprehensive Income 1,689 1,841 1,710 2,185 Trade payables 1,139 1,227 1,341 1,592
Equity Shares O/s (m) 164 164 164 164 Other current liabilities 653 365 402 442
EPS (Rs) 10.3 11.2 10.4 13.3 Total Equity & Liabilities 13,322 14,749 16,412 18,636
Source: Company Data, PL Research Source: Company Data, PL Research

July 9, 2019 6
 NOCIL

Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY18 FY19 FY20E FY21E Year
Y/e Mar FY18 FY19 FY20E FY21E

PBT 2,531 2,767 2,591 3,310 Per Share(Rs)

Add. Depreciation 229 230 301 409 EPS 10.3 11.2 10.4 13.3
Add. Interest 12 6 - - CEPS 11.7 12.6 12.2 15.8
Less Financial Other Income 143 100 272 336 BVPS 63.1 71.3 78.9 88.6
Add. Other 985 251 231 300 FCF 10.6 (4.3) 1.3 14.6
Op. profit before WC changes 3,757 3,254 3,124 4,019 DPS 2.5 2.5 2.3 3.0
Net Changes-WC (743) (538) (280) (624) Return Ratio(%)
Direct tax (845) (926) (881) (1,126) RoCE 26.1 25.1 21.0 24.0
Net cash from Op. activities 2,169 1,790 1,963 2,270 ROIC 19.7 19.7 16.0 18.2
Capital expenditures (432) (2,503) (1,753) 138 RoE 17.4 16.7 13.8 15.9
Interest / Dividend Income - - - - Balance Sheet
Others (2,245) 2,250 - - Net Debt : Equity (x) (0.2) (0.1) (0.1) (0.2)
Net Cash from Invt. activities (2,677) (253) (1,753) 138 Net Working Capital (Days) 107 107 107 107
Issue of share cap. / premium 62 - 35 (127) Valuation(x)
Debt changes (50) - - - PER 11.2 10.3 11.1 8.7
Dividend paid (352) (492) (492) (457) P/B 1.8 1.6 1.5 1.3
Interest paid (12) (6) - - P/CEPS 9.9 9.1 9.4 7.3
Others - - - - EV/EBITDA 6.2 6.1 6.8 4.7
Net cash from Fin. activities (352) (498) (457) (583) EV/Sales 1.7 1.7 1.6 1.2
Net change in cash (859) 1,039 (247) 1,825 Dividend Yield (%) 2.2 2.2 2.0 2.6
Free Cash Flow 1,738 (713) 210 2,408 Source: Company Data, PL Research
Source: Company Data, PL Research

Quarterly Financials (Rs m)

Y/e Mar Q2FY19 Q3FY19 Q4FY19 Q1FY20E
Net Revenue 2,720 2,612 2,416 2,400
YoY gr. (%) 19.5 4.8 (12.4) (10.5)
Raw Material Expenses 1,194 1,175 1,109 1,056
Gross Profit 1,526 1,438 1,306 1,344
Margin (%) 56.1 55.0 54.1 56.0
EBITDA 789 725 591 569
YoY gr. (%) 46.1 4.2 (30.2) (29.1)
Margin (%) 29.0 27.8 24.5 23.7
Depreciation / Depletion 56 56 63 64
EBIT 733 669 528 505
Margin (%) 27.0 25.6 21.8 21.0
Net Interest 1 1 2 1
Other Income 32 20 23 20
Profit before Tax 764 688 549 524
Margin (%) 28.1 26.3 22.7 21.8
Total Tax 236 242 191 173
Effective tax rate (%) 30.8 35.1 34.8 33.0
Profit after Tax 528 447 358 351
Minority interest - - - -
Share Profit from Associates - - - -
Adjusted PAT 528 447 358 351
YoY gr. (%) 38.8 (0.7) (29.8) (30.9)
Margin (%) 19.4 17.1 14.8 14.6
Extra Ord. Income / (Exp) - - - -
Reported PAT 528 447 358 351
YoY gr. (%) 38.8 (0.7) (29.8) (30.9)
Margin (%) 19.4 17.1 14.8 14.6
Other Comprehensive Income - - - -
Total Comprehensive Income 528 447 358 351
Avg. Shares O/s (m) - - - -
EPS (Rs) - - - -
Source: Company Data, PL Research

July 9, 2019 7
 NOCIL

Price Chart Recommendation History

(Rs)
No. Date Rating TP (Rs.) Share Price (Rs.)
250
1 04-Jul-19 BUY 221 117

201 2 13-May-19 BUY 221 117

3 05-Apr-19 BUY 252 141
152
4 22-Mar-19 BUY 252 144
103 5 01-Feb-19 BUY 252 139
6 07-Jan-19 BUY 270 161
54
Jul - 16

Jul - 17

Jul - 18

Jul - 19
Jan - 18

Jan - 19
Jan - 17

7 29-Nov-18 BUY 270 169

Analyst Coverage Universe

Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)
1 Bharat Petroleum Corporation BUY 499 380
2 GAIL (India) BUY 482 308
3 Hindustan Petroleum Corporation BUY 326 289
4 I.G. Petrochemicals BUY 477 257
5 Indian Oil Corporation BUY 207 157
6 Indraprastha Gas BUY 360 303
7 Mahanagar Gas BUY 1,179 828
8 NOCIL BUY 221 117
9 Oil & Natural Gas Corporation BUY 223 167
10 Oil India Accumulate 236 178
11 Petronet LNG BUY 306 253
12 Reliance Industries Accumulate 1,406 1,284

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

July 9, 2019 8
 NOCIL

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July 9, 2019 AMNISH

Digitally signed by AMNISH AGGARWAL
DN: c=IN, o=Prabhudas Lilladher Private Limited,
ou=organisation, cn=AMNISH AGGARWAL,
serialNumber=7a6f13691881d5a8af6353865a61b48b704
9
AGGARWAL
0e72f4a1bf53182e368b3ca14a5e4, postalCode=400015,
2.5.4.20=c9b37ca6a8c78a11d6c42a4b6014e984fdf135dc
1449611df0dc682d08443fc6, st=Maharashtra
Date: 2019.07.09 11:29:45 +05'30'