NOCIL Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Volume growth held back by logistics, not demand: Volumes grew 11% YoY but dipped slightly QoQ due to logistical challenges; without them, volumes would have been marginally higher than Q1.
• Pricing pressure is structural and global: Aggressive dumping by Chinese, Korean and EU players is compressing prices and making raw material pass-through difficult, a dynamic management calls sometimes "rational or irrational."
• Export engine still running double digits: H1 FY25 export volumes grew double digits despite geopolitics, container shortages and freight costs, supported by multi-year customer engagements.
• Cogen turbine and freight tailwinds are now live: A turbine was commissioned this quarter with partial benefit; management expects twin benefits of cogen plus lower freight rates next quarter alongside operating leverage.
• What to watch next quarter: Whether sequential volume growth resumes from the Q2 base, the pace of margin recovery as cogen and freight benefits flow through, and any movement on the antidumping study.

Volume & Demand Dynamics

• YoY growth intact, QoQ stumble is temporary: 11% YoY volume growth was driven by stable domestic tire replacement demand and recovering exports; the sequential dip is attributed to staggering of volumes and logistical bottlenecks, not real degrowth.
• OE tire growth moderating: OE growth is expected to soften, with 2-wheelers faring relatively better while commercial vehicles face demand moderation against a high base.
• Natural rubber disruption easing: A temporary slowdown in compounding production occurred due to shortages and very high natural rubber prices; prices have since begun easing and availability is improving.
• Replacement market steady: The replacement market is still doing reasonably better than last year across regions.
• Global demand context: Rubber consumption has been flattish over 6-8 years due to China auto degrowth and COVID interruptions; when recoup happens, growth goes to ~3-4%.

Anand: "I cannot say that we are immune to it surely. We also will be susceptible. But at least it's holding us in good stead. And we are positive."

Pricing & Competitive Environment

• Dumping pressure is the headline risk: Chinese, Korean and EU players are taking aggressive pricing actions and dumping product, especially in India where demand attracts more competition. Chinese players, facing low domestic demand and low utilization, sometimes take "rational or irrational" decisions to grab volumes, pressuring all players' pricing.
• Raw material pass-through is challenged: Raw material prices remained marginally higher during the quarter, but passing on cost increases has been difficult due to fierce competition.
• Pricing strategy is judicious, not defensive: Management adopted a balanced approach between price and volume; selling prices were largely maintained for the quarter.
• Customer pricing mix is hybrid: Most pricing holds for a quarter with large customers, some even longer; long-term relationships see less volume fluctuation, while other customers show more fluctuation. It is a mix of contracted and spot pricing, though management declined to disclose proportions.
• Competitor pricing behavior: Competitors start with cost-plus pricing but then shift to market-based pricing, creating downward pressure when any player lowers prices.

Anand: "Everybody is trying to really grab volumes because there is lower demand in some of the markets. We know that the Chinese economy as such, utilization levels are at a... So sometimes they do take some -- I would put it as rationale or irrational decision to take some volumes."

Margins & Cost Structure

• EBITDA margin squeezed by operating costs: Operating EBITDA margins were impacted by a 10% sequential increase in production activity leading to higher operating costs, plus certain freight costs.
• Other expenses spike explained: Higher other expenses came from three sources: production increase anticipating higher sales dispatch that did not materialize, loading expenses proportionate to manufacturing activity, and exports to Western destinations including packing material. The cogen turbine was commissioned this quarter but benefits were partially offset by these factors, a one-time effect expected to stabilize.
• Power cost trending down: Power consumption per metric ton has declined ~10% over 2 years due to process improvements and better plant utilization rates. The newly commissioned turbine/renewable power project will add further benefit as stable capacity operation is achieved.
• Raw material efficiency improving: Ongoing work on yields and raw material consumption is showing positive traction on a regular basis, contributing to cost of production reduction.
• Gross margin upside is limited: Management sees room to improve gross margin "maybe a 1% here and there" but not significantly, due to chemistry composition constraints.
• Operating leverage to kick in: As volumes go up, operating leverage will provide margin support; management declined to quantify the relationship, citing dependence on product mix.

Srinivasan: "I think we have some room to play, but I don't think it's that significant, but maybe a 1% here and there it can improve definitely."

Export Business & Market Share Opportunity

• Exports growing double digits despite headwinds: H1 FY25 export volumes showed double-digit growth despite geopolitical tensions, container shortages, Red Sea issues and rising freight costs.
• Negligible market share outside India: Management highlighted that NOCIL has negligible market share outside India, framing this as a growth opportunity with customers.
• Long-term engagements are the moat: Export recovery and double-digit volume growth were achieved despite aggressive competition, attributed to long-term engagements built over 2-3 years and longstanding customer relationships.
• China +1 tailwind is real: Management framed the China +1 dynamic as customers seeking to derisk supply chains for ingredients critical to running their plants, positioning NOCIL as a stable alternative.
• Regional growth skews to North America: Management expects more growth in North America than South America; South America volumes are "by and large" lower than 5% of total.

Anand: "If you really bottom line that, it's nothing about reducing your supply chain risk, right? And as a player, as a large, if I put myself in the shoes of any of our customers who buy something that is very dependent on ingredients that run their plant, I'm always looking to derisk my supply chains to ensure that I have a stable supply chain."

Capex & Strategic Initiatives

• Dahej brownfield plant on track: The ₹250 crores capex is for a brownfield new plant, not a debottlenecking project. The plant is expected to be ready by September '26, followed by 3-4 months for trials and approvals; business should start coming in Q4 FY '27.
• Customer approvals progressing: Customer approvals are an ongoing process across multiple customers and sites, progressing quarter-to-quarter; volumes from these approvals are already being reflected in volume development.
• Specialty mix gradually improving: Specialty and specialized application products have increased over the years, with some fluctuation in the last 1-2 years, contributing more robustness to the bottom line. No significant change this quarter versus the previous quarter.
• New product development targets better margins: New developments are focused on better margin products, less on the commodity space. Products are in trial phases at different stages, targeting applications with more resilience.
• Green chemistry in the pipeline: Management confirmed work on green chemistry, including safer substances and greener renewable options; products are "in the works" but no launch date was given.
• Inorganic growth exploration ongoing: Management confirmed structured exploration of inorganic options, but no specific timeline or deal was disclosed.
• Adjacent chemistry traction is early: Some sales have happened in adjacent chemistry applications but are not material enough to report; projects have been worked on for 2-4 years and are showing some traction.

Srinivasan: "We have announced that by September '26, 30 months from the date of announcement, we'll be ready with the plant ready for completion. Thereafter, the trials and approvals thereafter. So, it may take 3, 4 months thereafter. So that's why you said fourth quarter of FY '27, the business should start coming in."

Guidance & Commitments

Key Metrics