NOCIL Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Volumes dipped on Chinese dumping, exports a bright spot: Revenue and volumes declined marginally QoQ as a surge of Chinese supply pressured both domestic and international markets, yet export volumes grew 14% YoY on a 9-month basis.
• Domestic market held share but not immune: The domestic market stayed flattish and NOCIL did not lose market share, but aggressive Chinese dumping continues to weigh on volumes and pricing.
• Margins supported by self-help on costs: Power, fuel and other operational efficiencies delivered sustainable cost reductions, partially offsetting top-line pressure.
• FY25 pitched as the year approvals convert to volumes: Management spent FY24 working on multiple customer projects and expects many approvals to finally fructify in FY25, driving higher volumes.
• What to watch next quarter: Whether the promised QoQ volume improvement materializes, the pace of export buildup from newly won customers, and any signal on a capex cycle restart.

Demand & Competitive Environment

• Chinese dumping is the dominant headwind: Subdued demand inside China has pushed a consistent influx of supply into both domestic and international markets, compressing volumes and pricing for NOCIL.
• Domestic market is flattish but share is intact: Management stated it has not lost market share in the domestic market, though the overall environment remains cautious with procurement still affected by a trickle-down of destocking.
• Tire industry fundamentals are supportive: India is the world's third-largest automotive market, tire production is expected to grow from OE, replacement and export opportunities, and tire exports are making a slow recovery barring Red Sea hiccups.
• Non-tire sector holds promise: Strong growth plans in auto components and allied sectors underpin a positive outlook for the non-tire segment.
• Red Sea disruption is manageable: No major impact on customers or business; freight costs rose marginally and discussions with customers on how to address it are ongoing.
• Destocking is fading but not gone: Destocking occurred over the last few months, yet a trickle-down effect persists, manifesting as more cautious procurement given external uncertainty.
• Raw material sourcing shift is a structural buffer: Critical raw materials are being moved from imports to indigenous sources, reducing overall inventory procurement time and helping mitigate customer destocking.

Export Business

• Exports are the growth engine: Continuous efforts to bolster export business have yielded positive traction, with year-on-year volume growth of 14% on a 9-month FY24 basis despite the difficult environment.
• New customer wins are building a pipeline: Newer businesses with customers obtained in recent months will build up gradually in the next quarters; management is quite positive this buildup will be positive.
• Non-latex exports are on a positive trajectory: While the latex part of the imports business has remained flat due to Malaysian market conditions, non-latex products have developed positively.
• Export margins are structurally lower: For a similar product, exports carry lower margin than domestic because of duty protection in India; the export market is different from the domestic one.
• Management will not quantify the export ramp: Aspiration to grow exports is there and discussions are moving in that direction, but management declined to put a specific number on it.

Anand: "Yes. So like I mentioned, they've already started accruing and we expect that this should start building up as we go along into the next quarters, for sure. And we have the right products, yes."

Volume & Growth Outlook

• Q4 is expected to be better than Q3: Management stated Q4 should improve sequentially, though it declined to quantify the step-up.
• FY25 is the year approvals convert: FY24 was spent working on many projects; the outlook is that FY25 will see many approvals finally fructifying and resulting in higher volume.
• Domestic growth ambition is market-plus: The company sees a good opportunity to grow at market growth rates and a few percentage points above that in an incremental manner.
• Global rubber consumption provides a tailwind: Projections are for 2.5% to 3% global growth, with emerging markets at a higher rate; NOCIL has outperformed rubber consumption by a wide margin historically.
• Latex has bottomed out: Some recovery is happening, though not necessarily in significant volumes; management's view is the market has bottomed out, with some production shifts occurring within Asia.
• Approval cycles are long and sticky: The approval process can take anywhere from 6 months to over a year, depending on how present the company is with the customer, creating a natural barrier but also a slow ramp.

Anand: "Definitely grow at market growth rates and a few percentage points above that in an incremental manner. That's clearly our outlook."

Margins & Costs

• Power and fuel savings are sustainable: Efforts to reduce power and utility costs compared to last year have yielded positive results that are maintained and sustainable.
• Operational efficiencies added to the cost story: Beyond fuel cost reduction, other operational efficiencies have also played out, contributing to the cost base improvement.
• Spreads are expected to hold: Despite a volatile raw material situation, management expects at least to keep similar value-addition levels.
• Management declined to disclose the specific power and fuel cost number: When asked, it pointed to the broader other expenditure figure instead.

Product Mix & Capacity

• Speciality business is steady at 15-17% of the mix: The value-added segment is operating at a similar level; aspiration to increase it is there, and the company will try to capitalize as the market opens up.
• Speciality capex is lighter: Capital investment for specialized applications is much lower compared to conventional rubber chemicals, so capacity is not directly proportional to business proportion.
• Overall capacity utilization is 62-65%: The company is operating well below full capacity, leaving room for volume growth without new capex.
• Expansion plans are under study but not imminent: Management is closely studying the situation; when asked if 70-75% utilization would trigger expansion, it called the question premature and said plans will be taken to the Board when finalized.

Srinivasan: "It will be operating in a similar level, but our aspiration to increase it will be there. So as and when the market opens up, we will definitely try to capitalize on those opportunities."

Competitive Dynamics & Data Gaps

• Import data is contested: An analyst cited EXIM data showing China imports declining; management pushed back, arguing imports come in advance of demand and rubber chemicals fall under different customs chapters (29 and 38), so the data needs validation.
• LANXESS capacity in India is unknown to NOCIL: Management said it would not be able to put a number on how much capacity the competitor has in India.
• Market share quantification was declined: When asked to quantify market share in CY23 vs CY22, management said it could not do that specifically but asserted a large, sizable market share in the domestic market.
• Value mix and export realization are sensitive: Management declined to share the value split between domestic and exports, and would not quantify how different export realization is versus domestic, calling it sensitive information.

Guidance & Commitments

Key Metrics