NOCIL Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Resilient margins despite Chinese dumping: EBITDA margin expanded for the third straight quarter and absolute EBITDA rose ~INR5 crores on flat volumes, even as Chinese competitors priced aggressively in international markets.
• Export mix is pivoting fast: Latex export volumes collapsed 56% YoY and now represent only 10-15% of total exports, but non-latex export volumes grew ~15%, driven by tyre customers.
• China Plus One is real and underway: The company continues to gain customer approvals at additional sites, with some already secured in the last 4-6 months and commercial lots at various stages.
• FY24 revenue seen repeating FY23: Management expects to match last year's sales performance based on current trends, with an endeavour to grow further if the situation permits.
• What to watch next quarter: Whether Chinese aggressive pricing eases as forecast toward September/October, the pace of new product approvals converting to commercial volumes, and any movement toward an anti-dumping petition.

Chinese Overcapacity & Pricing Pressure

• The structural imbalance: Chinese demand is only 35-40% of global demand while 75-80% of global capacity sits in China, a mismatch that forces Chinese producers to dump excess output into international markets whenever domestic consumption weakens.
• Recent escalation: Aggressive Chinese pricing has been underway for a couple of months but became noticeably more intense in the weeks leading up to the call, as China's post-COVID economic recovery failed to materialize as expected.
• Imports into India: Chinese import volumes have not increased significantly and remain around similar ranges, with only short-period fluctuations, suggesting the pricing pressure is felt more in export markets than domestically.
• Smaller players exiting: The share of smaller Chinese producers, once around 15%, has already fallen much lower, indicating that sustained low prices are forcing capacity rationalization at the margin.
• Strategic response: NOCIL's approach is to build long-term strategic relationships where customers align on NOCIL as a supply source, rather than competing purely on transactional pricing, though this does not fully insulate against Chinese overcapacity risk.

Anand: "While we know that the Chinese demand is still about only 35% to 40% of the global demand, while 75% to 80% of capacity sit in China."

Export Mix Transformation

• Latex collapse: Latex export volumes fell 56% YoY, from an index of 100 to 44, driven by the post-COVID normalization of surgical glove demand and intensified Chinese competition in Southeast Asia where NOCIL had held high market share.
• Non-latex offset: Non-latex export volumes grew approximately 15% over the same period, with tyre customers absorbing the slack, so that latex now constitutes only 10-15% of total export volumes.
• Mix improvement expected: Management stated the export mix should start improving from here, implying the latex drag has largely played out and non-latex growth can now drive the aggregate.
• Thailand as a growth vector: Many global tyre customers are expanding plants in Thailand, and NOCIL already supplies sizable quantities there, positioning it to capture incremental volumes as those facilities ramp.

Margin & Cost Performance

• Margin expansion despite headwinds: EBITDA margin has increased for three consecutive quarters even as realizations declined over the last 3-4 quarters, with EBITDA per kg around INR37 in Q4 and absolute EBITDA improving by about INR5 crores this quarter on similar volumes.
• Employee cost stability: Employee costs were INR23.6 crores this quarter versus INR23.2 crores in the prior quarter, with Q1 carrying the annual increment load and associated retiral provisions as per actuarial valuation under Indian accounting standards.
• Price correction timeline: The high price regime of Jan-Mar '22 and Apr-Jun '22 delivered an overall 7% price increase for FY23, but price corrections began from January '22 onwards, meaning the current lower-realization environment is already well-established.
• No margin guidance: Management explicitly declined to speculate on margins returning to peak levels of 20-25%, stating it depends on the market situation and they do not wish to give a specific number.

Customer Approvals & Capacity

• Multi-site approvals progressing: The company has started providing samples to key domestic and international tyre customers for approvals at additional sites, with some customers already approving new sites in the last 4-6 months and commercial lots at different stages of the qualification process.
• Typical approval timeline: For customers where NOCIL already supplies other sites, the approval process typically takes 3-8 months, suggesting a steady cadence of conversions through the second half of FY24.
• Basket expansion: NOCIL is present with all tyre customers on at least one product and is now expanding its basket with 4-5 customers, deepening wallet share even where it already has a foothold.
• Debottlenecking underway: Some small capacity expansion has been commissioned, with more to be commissioned during the year, though management characterized the additions as small numbers.
• Existing portfolio deemed sufficient: Management stated the existing product portfolio alone is sufficient to achieve the long-term goal of doubling market share, with no new specific products factored into that ambition at this point.
• Non-tyre specialty products: Import-substitution products are getting initial approvals but volumes are not yet significant; other innovation and development work remains ongoing and will take time to contribute materially.

Anand: "While the overall volumes may not grow, we are looking to substitute existing shares with customers, so we can still gain some foothold and grow even in a challenging environment."

Demand Environment

• Domestic resilience: The domestic market continues to be robust, with volumes marginally improving in the quarter, while Asian and American markets are holding up.
• European weakness: European tyre manufacturers face continued degrowth due to weak demand, creating a headwind for export volumes into that region.
• Broad demand slowdown: Rubber consumption in the Oct-Dec '23 quarter declined approximately 3%, reflecting a genuine softening in end-market demand beyond just inventory destocking.
• FY23 full-year split: Exports degrew 21% for FY23 while domestic grew 6-7%, yielding an overall 4% improvement, underscoring how domestic strength partially offset the export drag.

Guidance & Commitments

Key Metrics