NOCIL: Business Analysis

Company Background:

NOCIL Limited was incorporated in 1961 and is engaged in manufacturing of rubber chemicals. NOCIL is part of ‘The Arvind Mafatlal Group’ which has diverse business interests in Textiles, speciality chemicals, rubber chemicals and denim. NOCIL is India’s largest manufacturer of rubber chemicals. Other companies in the group are: 

1. Navin Fluorine: India’s No 1 manufacturer of fluoro chemicals.

2. Mafatlal Industries: Oldest company in the group involved in textile business

NOCIL’s main manufacturing plant is located in Thane-Belapur’s industrial zone. A new plant has been constructed in Dahej, Gujarat, which produces key intermediates. NOCIL has annual manufacturing capacity of 55,000 tonnes. Major clients include tyre companies - Apollo, Ceat, MRF & other rubber product manufacturers. Promoter’s shareholding is 37.6%; institutions hold 2.4%  shares.  

Product profile:

NOCIL’s product range comprising Antidegradants, Antioxidants, Accelerators, Pre- Vulcanization Inhibitors & Post -Vulcanization Stabilizers.

Products	Usage
Accelerators	Increase the speed of vulcanization & to permit vulcanization to proceed at lower temperature & with greater efficiency
Anti Vulcanization Inhibitor	Inhibitor of premature vulcanization of synthetic & natural rubbers during processing
Post Vulcanization Stabiliser	Improves Thermal Stability of cross links in rubber products
Antioxidants	Chemical compound that inhibits oxidation & can be used as a stabilizer in rubbers, etc.
Antidegradants	An anti-degradant or deterioration inhibitor is an ingredient in rubber compounds to deter the aging of rubber products

Management Background: 

NOCIL boasts an experienced management team which has implemented projects efficiently and cost effectively in the past. Dahej plant was fully set up by in-house technology. The facility is fully automated ensuring quality and consistency of products. 

Management has actively pursued the industry case with government against dumping to safeguard the local businesses. 

Management is continuously increasing its spending in R&D to develop specialised products. Management efficiently shifted its exports focus from plain vanilla products offering to specialised products where competition from Chinese & Korean manufactures is lower & margins are better. 

None of the Independent Director has relationship with the Company, its Promoters, or Directors, or Senior Management. 

Name	Responsibility	Annual Salary (INR lakhs)	Increase over last FY	Background
R.M. Gadgil	President Marketing	94.06	16%
P. Srinivasan	CFO	89.34	21%
V.K.Gupte	Company Secretary	39.01	29%
Mr. Hrishikesh A. Mafatlal	Chairman	13.6	62%	Chairman and a promoter director of NOCIL Ltd.
Mr. C. R. Gupte	Managing Director	242.8*	24%	Graduate in Chemistry and a Chartered Accountant. Heading the Rubber Chemicals business from 1995. He got included into Board as Managing Director since August, 2005.
Mr. S. R. Deo	Deputy Managing Director	167.54	23%	Inducted in Board as Deputy Managing  Director w.e.f. 1st April, 2015. Mr. Deo is M. Tech. in Chemical Engineering from IIT Kanpur and is associated with NOCIL for nearly 35 years

*31 times of the median salary INR 7.8 lakhs

#Average increase in salaries of employees other than the managerial personnel is 22%

Financial Analysis: 

NOCIL’s sales & operating profit have grown at CAGR of 10% over last 10 years. Net profit CAGR is healthier at 14%. The top line is stagnant over last 2 years due to significant slow down experienced by tyre / rubber industry. 

(in INR Crore)	Mar-07	Mar-08	Mar-09	Mar-10	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Total 10 Yrs (2007-16) / CAGR
Sales	304	360	465	436	453	481	488	596	719	715	10%
Operating Profit	20	(5)	51	48	50	33	20	59	112	138	10%
OPM%	7%	0%	11%	11%	11%	7%	4%	10%	16%	19%
Profit before tax	35	17	54	50	48	47	44	35	86	118
Tax%	31%	32%	33%	32%	31%	28%	4%	32%	34%	34%
Net profit after tax	24	11	36	34	33	34	42	24	57	78	374
NPM%	8%	3%	8%	8%	7%	7%	9%	4%	8%	11%	14%
ROCE		4%	13%	12%	11%	9%	8%	7%	14%	18%
Net Fixed Asset Turnover (High is better)		2.24	3.80	5.38	5.71	6.28	2.60	1.98	2.42	2.45
Receivables days (Low is better)		76	64	71	70	71	79	79	80	81
Inventory Turnover (High is better)		5	6	6	5	4	4	4	4	4
Net Fixed Assets (NFA)	159	162	83	79	79	74	301	302	293	290	7%
Debt to Equity ratio	0.0	0.2	0.1	0.1	0.0	0.2	0.4	0.4	0.4	0.1
Capex		4	-62	6	19	97	110	18	5	13	211
CFO	36	-16	54	47	25	-27	2	45	27	165	358
Free Cash Flow (FCF)											147

The demand for Rubber Chemicals is a derived demand and is directly a function of Global Rubber Consumption, which for the year remained relatively flat. The weakness in the price of crude oil had a favourable impact on the raw material costs. However, these reductions in costs were accompanied by reductions in selling prices of finished goods. NOCIL adjusts selling prices to regular customers to reflect these reductions in costs. The reasons for improvement in bottom line are:

1. NOCIL promoted exports of only high value / specialized products, and stayed away from high volume products with poor margins

2. Anti-dumping steps allowed NSCIL to increase its prices disproportionately to better the margins

3. Reduction in finance costs due to limited working capital requirements.   

Operating parameters have remained same over last 2 years.

Rubber chemicals suffer from dumping by low cost producers based in China and Korea. Government has put anti-dumping duties for import in India. NOCIL, however, has to compete with these low cost producers globally. 

NOCIL exited certain clients as business was un-remunerative & focussed exports of high margin products. This led to reduction in inventory levels by INR 55 cr, leading to a significant reduction in working capital borrowings (86 lakhs in FY16 from INR 75 cr in previous year) and bringing down financing costs.

The contribution of domestic sales has increased from 61% to 71% in last 3 years. This is expected as NOCIL benefitted from anti-dumping duties levied by government on import of rubber chemicals.  

NOCIL has generated strong free cash flows over last 10 years. During the same period, fixed assets grew at just half the rate of net profit (~14%).

RTA (Registrar & Transfer Agent) issue:

Sharepro Services (India) Pvt Ltd was NOCIL's RTA for last 16 years. SEBI banned Sharepro Services for violation of regulations in its accounts. 

NOCIL appointed M/s Makarand Joshi & Co., Practicing Company Secretaries to conduct an audit of the Company’s records, maintained by Sharepro. NOCIL has also appointed Karvy Computershare Private Limited (‘Karvy’) as the Company’s Registrar and Transfer Agent (RTA) effective 23 May 2016. NOCIL seemed to have acted with alacrity and followed the guidelines suggested by SEBI. 

Expenditure on R & D:

The R&D spending is low, but showing increasing trend. 

In Lakhs INR	FY2016	FY2015	FY2014
Capital	188.11	55.71	1.68
Recurring	428.31	361.77	311.41
Total	616.42	417.48	313.09
%ge of total Turnover	0.79	0.53	0.49

Sources of Moat:

Does NOCIL business has a ‘durable moat’? Let’s analyze the 3 key sources of moat:

1. Supply Side Advantage: The supply side advantage is driven from propriety technology and geographical location which may give business access to raw material at lower cost. NOCIL doesn’t seem to have access to any propriety technology to manufacture its products at large. NOCIL, however, is investing in technology & R&D which may give it superiority in specialised products. It doesn’t have a geographical presence to access cheaper raw material. 

2. Local Economies of Scale: NOCIL has annual capacity of 55,000 tonnes & is India’s largest rubber chemical manufacturer. It has undertaken an expansion plan involving intermediates for its main product range at Dahej. Dahej began its commercial operation in March 2013. Th current capacity utilization is ~80%. NOCIL seem to have slight advantage on local economies of scale with large capacity already in place. The future expansion will require lower Capex as the common infrastructure is already in place.

3. Demand Side Advantages: NOCIL has established brands across the product suite which allows its clients to get access to all their requirements at one place. However, the switching cost for client is low. Tyre industry forms major client base for NOCIL; these tyre companies are under stress due to low demand. In such a scenario they could try to safeguard their margins by sourcing rubber chemical from cheaper supplier. 

NOCIL seems to have moat due to its established brand, but the durability of moat will depend on its ability to continuously develop high quality products.   

Conclusion:

NOCIL is a leading company in a highly competitive industry with low switching costs for the clients. The fortunes of the company are linked to anti-dumping relief by government and continuous focus on R&D to develop specialised products. 

Disclaimer:

All data has been taken from public resources. I don't own any share of NOCIL at the of writing this article. I may or mayn't invest in NOCIL in future. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer's.

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Please refer to 'Disclaimer' page for further details.