NOCIL Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Volume degrowth, but Q4 recovery expected: Domestic volumes fell as customers destocked and replacement tyre demand softened, while exports were flat. Management expects both to grow sequentially in Q4, with domestic volumes nearing Q2 levels.
• Latex market collapse hit exports hard: A 25% degrowth in the latex market drove a significant loss of export business, pulling 9M FY23 export revenue down to ₹350 crores from about ₹400 crores a year ago.
• Margins found a floor on lower input costs: Sequential cost reduction from improved raw material prices and lower other expenses provided some relief, even as overall price realizations moved downwards.
• Localization push is the structural story: The company is shifting procurement toward local suppliers and has new products in advanced approval stages, with commercialization expected in Q1 or Q2 FY24.
• What to watch next quarter: Whether the promised Q4 volume recovery materializes, the pace of new product commercialization, and any final decision on the deferred capex plan.

Volume & Demand Environment

• Domestic weakness driven by destocking: Customers reduced offtake due to inventory accumulation at their end, while lower replacement tyre demand compounded the drag. This led to negative sequential volume development, though YTD volumes remained positive versus the prior year.
• Exports flat despite recessionary headwinds: Export volumes held at Q2 levels as international customers kept inventories low in anticipation of a slowdown. Management believes this destocking cycle is now flattening out.
• Latex market a specific, severe drag: The latex market's 25% degrowth in rubber consumption disproportionately hurt NOCIL's export business, as the latex product share within exports fell significantly.
• Replacement tyre market softness: While the OEM segment performed well, the replacement market lacked similar robustness over the last couple of quarters, creating mixed volume development at tyre majors.
• Q4 volume recovery bet: Management expects sequential improvement in Q4, with domestic volumes nearing the Q2 level of 117 or better, and export volumes also growing. This is based on customer discussions and the view that destocking is ending.

Anand: "We were talking about destocking in the international markets, and that was more on account of the overall sentiment of the recession. And that's what actually played also with the customer. So when you speak to them, they do tell you that they want to keep inventories low, foreseeing lesser demand. But I expect that, that's kind of flattening out now."

Export Business & Competitive Position

• No market share loss, just destocking: Management stated clearly that it sees no indication of market share loss in export markets; the volume weakness is entirely attributable to customer destocking.
• Growth to come from displacing competitors: Incremental export volumes are expected to come from replacing the current business of competitors, leveraging NOCIL's position. Export share is targeted at 40% of overall business at peak capacity levels.
• Latex share collapse: The latex product's share within exports fell significantly due to the 25% market degrowth, making it a major contributor to the 9M export revenue decline from ₹400 crores to ₹350 crores.
• Confidence in medium-term export improvement: Based on customer discussions, management expressed confidence that export business will improve significantly from current levels in the coming years, though it declined to provide a specific growth metric for international markets.

Anand: "We don't see an indication of loss of any market share in the export markets. Clearly, there's been destocking in the marketplace."

Margins & Cost Structure

• Sequential cost relief from raw materials: Q3 costs came down sequentially due to a combination of lower operating volumes and price improvements in certain key raw materials.
• Other expenses declined: Other expenses fell by approximately ₹10 crores QoQ, from ₹100 crores in Q2 to ₹91 crores in Q3, driven by utilities and other fixed costs.
• Realization pressure broad-based: Overall price development moved downwards during the quarter. Management clarified that the latex market was not the major contributor to this realization pressure.
• Power costs stable: Power rates remained flattish with only marginal movement, and no significant change is expected. Management is looking to improve efficiency as capacities ramp up.
• Conversion cost optimization ahead: As volumes and operating rates improve, some optimization benefit on fixed costs is expected, despite ongoing inflationary pressures.
• FY24 EBITDA/kg expected stable: Management expects EBITDA per kg to remain at a stable level going into the next financial year, and emphasized this metric as the primary focus over segment-level value addition.

P. Srinivasan: "We are focusing on more EBITDA per kg getting into specific value addition because, ultimately, we have to look at the total cost of operations rather than getting into segment wise. So, we prefer to look at EBITDA per kg as a driving point."

Strategic Initiatives: Localization & New Products

• Raw material procurement shifting local: The company is changing its procurement strategy to shift more toward local purchasing, and has already executed this successfully in key raw materials. The endeavor is to develop more local suppliers.
• New product approvals progressing: Localization products are at approval stages at most customers, with additional plants approved in the last 4 to 6 months. Several are in advanced stages or close to completion.
• Commercialization timeline: New products are expected to begin contributing to business sometime in Q1 or Q2 of FY24. These are largely for tyre applications but can be cross-pollinated to other rubber applications.
• Niche accelerator opportunity: The new products are part of the accelerator line, specifically niche accelerators with a global market size of less than 15,000 to 20,000 tons. Opportunity exists in both domestic and international markets.

S.R. Deo: "I think we are changing our strategy in terms of raw material procurement. I will not be able to give you a percentage, but I think the objective is to shift more in terms of local purchasing. And I would say we have very successfully done it in key raw materials."

Capex & Capital Allocation

• Debottlenecking on track: Debottlenecking initiatives for some key products are progressing as planned and will be completed during FY24.
• New capex decision deferred: Management continues to evaluate the global economic scenario and will take a final call on the new capex at an appropriate time, implying no immediate commitment.
• Cash utilization under evaluation: Plans for cash utilization are being worked out, and management will communicate when finalized. The cash position as of 30th September was about maybe INR 150 crores; the 31st December figure was not disclosed.

Guidance & Commitments

Key Metrics