NOCIL Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Revenue down 11.5% QoQ on China dumping: Revenue fell to INR 351 crores as aggressive, discounted imports from China pressured both volumes and realizations, particularly in export markets.
• Margins squeezed by price cuts outpacing raw material relief: Output prices fell faster than input costs, compressing gross margins sequentially despite lower raw material costs per kg.
• Export mix shifting from latex to tires: Non-latex export volumes grew significantly, compensating for a prolonged downturn in the latex and rubber gloves segment, where Malaysian demand remains at roughly half its peak.
• Domestic tire demand holds firm, non-tire penetration underway: The Indian automotive sector stayed robust, and the company is actively indigenizing products like DCBS for domestic tire customers while building its non-tire business.
• What to watch next quarter: Whether the recent positive price correction holds against the risk of renewed pricing pressure if Chinese domestic demand stays weak, and whether new customer approvals convert into material volumes.

China Dumping & Pricing Pressure

• The core headwind: A lack of domestic demand in China and lukewarm export demand drove a significant influx of heavily discounted rubber chemical imports, directly pressuring NOCIL's product realizations.
• Price cuts outpaced input cost relief: Raw material costs per kg fell, but the price corrections NOCIL had to offer were larger, compressing absolute gross margin sequentially. A lag effect, where lower-priced raw material arrives later, added to the squeeze.
• Inventory flush amplified the drop: Some of the price decline came from competitors pushing inventory nearing shelf-life limits into the market. That inventory has now cleared, and producers are operating on a more demand-linked basis.
• A tentative correction, not a turning point: Prices have corrected positively in the last few weeks to a month, but management explicitly warned that if Chinese demand stays low, pricing pressure cannot be ruled out.

Anand: "So, while for the immediate quarter, like I mentioned, there have been some price corrections. But I would expect that if there is lower demand in China, we possibly cannot rule out pricing pressure."

Volume Dynamics & Customer Traction

• Volumes marginally down QoQ, with a split picture: Domestic volumes were flattish with very small single-digit growth, while export volumes declined on global recessionary trends and Chinese competition.
• Non-latex exports are the offset: Export volumes grew significantly year-on-year, driven entirely by additional business from non-latex products for tire companies, compensating for the structural decline in the latex segment.
• China+1 traction is real but gradual: The company is seeing good traction from the China+1 theme and is working with strategic global key accounts, though converting approvals into volumes takes time as existing customers' own requirements soften.
• Volume holding is a deliberate, customer-by-customer call: Management described it as a quarterly position taken on whether a given order creates value, not a blanket strategy tied to export or domestic markets.
• Short-term volume outlook cautiously positive: Volumes should trend slightly positive over the next quarter and a couple of quarters, with the offset from new customer traction against existing-customer slowdown already happening to a certain extent.

Anand: "It's just kind of a quarterly position that you take in terms of what volumes you want to take. For vis-a-vis, whether you will actually create value or do not, it's a call that you take on a customer-to-customer basis."

Competitive Position vs China Sunsine

• Per-unit profitability held up better: Management's analysis indicates NOCIL is slightly ahead of China Sunsine on a performance per kg or per EBITDA basis, noting that China Sunsine's EBITDA performance dropped by a percentage that NOCIL's did not witness, even though China Sunsine included export subsidies as a key income contributor.
• Base effect caveat: China Sunsine had a particularly low first half due to COVID and lockdowns, so the comparison benefits from that base effect.
• New Chinese capacity is a wait-and-watch risk: China Sunsine is adding 30,000 tons of antioxidant capacity by December end. Management said they must wait for commercial production to start before assessing the demand-supply impact.
• Market share defense: When asked if NOCIL is losing market share given that import volumes have grown while its own volumes have not, management deflected, saying the position is "more or less stable from our evaluation," without addressing the specific data point.

Srinivasan: "But on a performance per KG or on a performance per EBITDA basis, etc, we believe we are under slightly ahead better than them. That is what our analysis indicates to us."

Export Markets & U.S. Opportunity

• U.S. antidumping duty expected to persist: The duty continues and, with bipartisan support in the U.S., management expects it to be extended under the current situation.
• U.S. revenue impact is muted for now: NOCIL is not charging any duty on the landed price to U.S. customers because other sources besides China, including India and the EU, also supply the market, so the duty does not create a pricing advantage.
• U.S. volume growth path is from existing customers: Growth in the U.S. will come from existing customers' additional locations, not from new customer acquisition. An index guidance from 100 to 300 was referenced.
• Latex segment remains deeply depressed: The rubber gloves industry in Malaysia is operating at about 50% of peak levels compared to 2021 to mid-2022, due to lower demand and competition from Chinese manufacturers.
• Specialty mix has slipped: The latex business has shown a downward slope, pushing the specialty percentage below 15%.

Srinivasan: "From a revenue perspective for NOCIL, I would say it is not making a difference because today, we are not charging any duty on the landed price to the U.S. customers because there is other source also besides China, India and EU also is supplying."

Domestic Market & Product Development

• Domestic tire industry remains robust: The Indian automotive industry continued its growth trend with stable OEM demand; passenger vehicles reported positive growth for April-September year-on-year, while commercial vehicles were flattish due to subdued monsoon, higher interest rates and new emission norms.
• DCBS indigenization achieved: The company succeeded in process engineering with planned modifications to manufacture DCBS in its MOR plant, part of a broader effort to work with domestic tire customers on import substitution opportunities.
• TBBS import substitution is slow: The pickup on TBBS product utilization is not very significant, with no timeline given for full utilization.
• Non-tire sector penetration underway: The company continues to build business beyond tires, penetrating the non-tire sector domestically.
• Infrastructure tailwind ahead: With increased infrastructure development, the company expects commercial vehicles to gain traction, and the Indian tire industry has ambitious plans to grow its top line by 2.2x over the next 10 years.

Costs, Sustainability & Capex

• Utility costs reduced sustainably: A reduction in other expenditure came from lower power and utility costs, driven by operations-team efforts to improve cost control measures that management described as sustainable.
• Cleanmax hybrid power agreement signed: The company entered into an agreement with Cleanmax for securing hybrid power and installed a 66 KVA power station line. It is also looking at core generation that will come next year, alongside on-site solar initiatives.
• No material inventory loss on aniline: Despite aniline price correction, no material inventory loss was taken.
• Capex on adjacencies remains exploratory: Management continues to look for opportunities with a structured approach but has nothing close to a decision.
• Debottlenecking capex undisclosed: When asked for the capital expenditure figure for debottlenecking, management declined, calling it "not material to be shared."

Anand: "Nothing at this point that we have to say that we are close to something as yet. So, I think as and when we get there, we will be able to share something on that front, Nitesh."

Guidance & Commitments

Key Metrics