Q2FY24 Result Review

TP Rs1,700 Key Stock Data

Neogen Chemicals HOLD CMP Rs1,547 NEOGEN IN/NEOE.BO

MDC
Long term growth remains intact Potential upside/downside 10% Sector Specialty Chemicals
Previous Rating HOLD Shares o/s (mn) 26
Summary Market cap. (Rs mn) 40,802
Price Performance (%)
Neogen Chemicals (Neogen) delivered subdued financial performance in the 3-m daily average value (Rs mn) 5.1
-1m -3m -12m
quarter. Lower lithium and bromine prices, higher financing and depreciation 52-week high / low Rs1,851 / 1,128
Absolute (10.6) (1.9) 10.1
costs led to lower than expected profitability. Revenue for Organic chemicals Sensex / Nifty 64,832 / 19,395
Rel to Sensex (9.5) (0.2) 3.8
segment grew by 24% YoY while the revenue for the inorganic chemicals
segment declined by 21% YoY owing to lower prices of lithium raw material. V/s Consensus Shareholding Pattern (%)
Traction in the existing business remains below optimum levels. However we EPS (Rs) FY24E FY25E Promoters 60.2
are sanguine on the company’s progress on the battery chemical front with IDBI Capital 20 28 FII 4.3
strong capex plans coupled with a top notch technology partner in the form of Consensus 27 41 DII 19.3
% difference (26.3) (31.3) Public 16.2
MUIS. Neogen is seeng strong interest for their battery chemicals segment from
domestic as well as overseas customers. We maintain our HOLD rating on the
Financial snapshot (Rs mn)
stock on account of rich valuations with TP of Rs 1,700.
Year FY22 FY23 FY24E FY25E FY26E
Key Highlights and Investment Rationale Revenue 4,873 6,862 7,272 9,692 12,324
Change yoy, % 45 41 6 33 27
 Positive developments on Battery Chemicals: Neogen has drawn up firm
EBITDA 866 1,116 1,236 1,745 2,218
plans to expand capacity of electrolytes from 10,000 MT to 32,000 MT and Change yoy, % 35 29 11 41 27
lithium salts capacity from 2,000 to 4,000 MT. The company is seeing healthy EBITDA Margin(%) 17.8 16.3 17.0 18.0 18.0
interest from prospective domestic and overseas customers for upcoming Adj.PAT 446 500 497 699 856
demand in CY25 and CY26. In terms of overseas geographies, Japan, Europe, EPS (Rs) 18 20 20 28 34
Change yoy, % 42.5 12.0 (0.5) 41 22
Korea and US have shown strong interest in sourcing from a non-Chinese
PE(x) 86.7 77.4 77.8 55.3 45.2
supplier which bodes well for Neogen. Dividend Yield (%) - - - - -
 Valuation & Outlook: Both advanced intermediates & CSM (pharma & agro as P/B (x) 8.8 8.0 7.4 6.6 5.8
RoE (%) 14.3 10.8 9.9 12.6 13.6
key customers) are expected to contribute healthy proportion of sales in the
RoCE (%) 16.7 15.6 14 15 15
coming years and would remain solid growth drivers even beyond. AI & CSM Source: IDBI Capital Research, Company
are the two more profitable businesses and would drive improvement in
profitability. However in the light of valuations being rich, we maintain our Jason Soans Aayush Rathi
[email protected] [email protected]
HOLD rating with a target price of Rs 1,700. +91-22-2217 1727 +91-22-2217 1840

November 10, 2023

Neogen Chemicals | Q2FY24 Result Review

Exhibit 1: Quarterly Snapshot (Consolidated)

Consolidated (Rs mn) Q2FY24 Q2FY23 YoY (%) Q1FY24 QoQ%
Net Sales 1,617 1,481 9.2% 1,649 -1.9%
Expenditure -1,358 -1,239 9.6% -1,368 -0.8%
as % of sales -84% -84% -83%
Consumption of RM -876 -789 11.1% -919 -4.6%
as % of sales -54% -53% -56%
Employee Cost -176 -119 47.9% -129 36.3%
as % of sales -11% -8% -8%
Other expenditure -306 -331 -7.6% -321 -4.5%
as % of sales -19% -22% -19%
EBITDA 259 243 6.9% 281 -7.6%
Depreciation -58 -39 49.2% -55 5.7%
EBIT 201 204 -1.2% 226 -10.9%
Other Income 19 4 350.0% 18 5.6%
Interest -111 -69 61.7% -108 3.1%
Exceptional 0 0 0
PBT 109 139 -21.5% 136 -19.7%
Total Tax -31 -41 -25.7% -39 -21.1%
Reported PAT 79 99 -19.8% 97 -18.8%
Discontinued Ops 0 0 0 NA
Adjusted PAT 79 99 -19.8% 97 -18.8%
Adjusted EPS 3 4 -19.8% 4 -18.8%
Margins (%) YoY (bps) QoQ (bps)
EBIDTA 16.0% 16.4% (34) 17.0% (99)
EBIT 12.4% 13.8% (130) 13.7% (125)
EBT 6.8% 9.4% (265) 8.3% (150)
PAT 4.9% 6.7% (177) 5.9% (102)
Effective Tax rate -28.0% -29.6% 158 -28.5% 51
Source: Company, IDBI Capital

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Neogen Chemicals | Q2FY24 Result Review

Conference call highlights:

 Performance Review: The consistent top-line performance is a result of incremental gains from recent
capacity expansion and stable demand for various products. This positive trend was further strengthened
by improved contributions from BuLi Chem (50% growth vs 13% growth in traditional business). The
company has seen improvement in EBITDA due to softening raw material prices and other input costs. This
improvement was further bolstered by a favorable business mix. The company's PAT was moderated
mainly due to higher finance costs and depreciation arising from ongoing expansion initiatives.
 Export Opportunities: The company sees opportunities in global markets, with products becoming
cheaper and favorable custom duty rates compared to China. The IRA act levies 25% additional import
duties on products sourced from China which benefits the company. The company is experiencing strong
traction from global customers, particularly from Korea, Japan, Europe, and the US.
 Domestic Demand: Domestic demand for the business remains robust since domestic clients usually
prefer to source materials from Indian companies rather than the Chinese players because of extreme
volatility in the prices from the Chinese players along with complex nature of the product.
 Revenue Potential (Organics Business) : It has a maximum potential of 1.65 bn, with a contribution of 1.5
bn from the traditional business and an additional 100-150 mn from BuLi Chemical Business.
 Finance Cost: The finance cost is anticipated to decrease in the near term due to strategic debt repayment
following the recent fundraise.
 Inorganic Chemicals: The decline in revenues (21% YoY) is primarily attributed to historically high lithium
prices during the same period last year. However, these prices have now normalized.
 Aggressive Capex: The company is firming up capex plans based on strong demand signals from
international customers, including some unbinding MoUs. Expecting partnerships with two Giga players in
H2 2024. The company has indicated that the total amount for the entire expansion of Electrolytes and
Lithium Salts is currently estimated to be in the range of 950-1100 crores.

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Neogen Chemicals | Q2FY24 Result Review

 Solid State Batteries: The primary concern in batteries and EVs is testing, with Solid State Batteries being
in a nascent stage. Both cost and technology are crucial factors, and the transition to widespread adoption
is expected to take about 7-10 years.
 Employee Expenses: Employee expenses saw a notable increase due to the addition of around 50
employees in Buli Chem, as the company establishes a dedicated team for Buli Chem. The company, on an
overall basis, aims to maintain employee expenses as a percentage of net sales within the range of 7-8%.
 Outlook: Earlier, the target was set at 8 bn (Topline). However, Q3 is not expected to see a significant
increase, but Buli is anticipated to contribute more in Q3, while revenue from batteries is expected to kick
in during Q4. A projected figure of 7-7.25bn is considered reasonable for FY24.
 Contracts: The contracts are index-based, with price resets determined by clauses with new customers.
The focus is on maintaining robust ROCE, aiming for an upward trajectory beyond 20% (considering pre-tax
Net Profit).
 Competition: In the battery chemicals Business, no other companies are actively competing till now except
GFL. The company aims for a substantial market share of 25-40% in the initial year.
 Potential Risk: The company can focus on liquid, lithium iron, and flow chemistry, with potential
modifications in the ongoing capex. However, there is a perceived risk associated with solid-state
batteries.
 Debt/Equity: The company aims to maintain a Debt/Equity ratio of 1.25x and intends to raise additional
funds if the need arises.
 Capital Expenditure update: The company is strategically expanding its operations, including boosting
Lithium Electrolyte Salts capacity to 1,000 MT by Q1/Q2 FY25. There's also a forward-looking proposal for
a greenfield expansion of Electrolyte and Lithium Electrolyte Salts at a new site, with a phased increase of
30,000 MT in Electrolyte capacity and 3,000 MT of Lithium Electrolyte Salts, operational by Q2/Q3 FY26.
Capital expenditure for these projects is under consideration, aligning with design finalization, emphasizing
the company's commitment to growth and innovation.

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Neogen Chemicals | Q2FY24 Result Review

Financial Summary

Profit & Loss Account (Rs mn)

Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E

Net sales 3,364 4,873 6,862 7,272 9,692 12,324
Change (yoy, %) 9.9 45 41 6 33 27
Operating expenses (2,721) (4,007) (5,746) (6,035) (7,948) (10,106)
EBITDA 644 866 1,116 1,236 1,745 2,218
Change (yoy, %) 10.9 35 29 11 41 27
Margin (%) 19.1 17.8 16.3 17.0 18.0 18.0
Depreciation (69) (117) (162) (217) (283) (363)
EBIT 575 749 954 1,019 1,462 1,855
Interest paid (138) (191) (289) (350) (498) (674)
Other income 1 11 45 37 7 7
Pre-tax profit 438 569 709 707 971 1,189
Tax (129) (124) (211) (209) (272) (333)
Effective tax rate (%) 29.4 21.9 29.7 29.6 28.0 28.0
Minority Interest 3.8 1.8 1.0 - - -
Net profit 313 446 500 497 699 856
Exceptional items - - - - - -
Adjusted net profit 313 446 500 497 699 856
Change (yoy, %) 9.3 42 12 (0) 41 22
EPS 12.5 17.9 20.0 19.9 28.0 34.2
Dividend per sh - - - - - -
Dividend Payout % - - - - - -

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Neogen Chemicals | Q2FY24 Result Review

Balance Sheet (Rs mn)

Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
Shareholders' funds 1,830 4,392 4,825 5,254 5,884 6,672
Share capital 233 249 249 249 249 249
Reserves & surplus 1,597 4,143 4,576 5,005 5,635 6,422
Total Debt 1,161 1,215 1,291 2,791 4,991 7,191
Other liabilities 149 204 325 325 325 325
Curr Liab & prov 1,779 2,183 4,097 4,173 4,719 5,313
Current liabilities 1,768 2,164 4,077 4,152 4,698 5,292
Provisions 11 19 21 21 21 21
Total liabilities 3,090 3,602 5,713 7,288 10,035 12,829
Total equity & liabilities 4,920 7,994 10,538 12,542 15,919 19,500

Net fixed assets 2,365 2,926 3,766 5,549 7,766 8,903

Investments 8 10 8 8 8 8
Other non-curr assets 145 134 207 207 207 207
Current assets 2,402 4,925 6,558 6,780 7,939 10,384
Inventories 1,140 1,946 2,930 3,071 4,093 5,205
Sundry Debtors 786 1,095 1,774 1,880 2,505 3,186
Cash and Bank 12 452 207 781 293 945
Loans and advances 464 1,432 1,648 1,048 1,048 1,048
Total assets 4,920 7,994 10,538 12,542 15,919 19,500

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Neogen Chemicals | Q2FY24 Result Review

Cash Flow Statement (Rs mn)

Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
Pre-tax profit 438 569 709 707 971 1,189
Depreciation 69 117 162 217 283 363
Tax paid (104) (98) (115) (209) (272) (333)
Chg in working capital 277 (882) (1,422) (172) (1,102) (1,198)
Other operating activities 155 308 363 350 498 674
Cash flow from operations (a) 836 14 (304) 893 378 695

Capital expenditure (231) (1,702) (773) (2,000) (2,500) (1,500)

Chg in investments - - - 600 - -
Other investing activities (1,115) 243 (172) - - -
Cash flow from investing (b) (1,346) (1,458) (945) (1,400) (2,500) (1,500)

Equity raised/(repaid) - 2,250 - - - -

Debt raised/(repaid) 696 (430) 1,361 1,500 2,200 2,200
Dividend (incl. tax) (47) (53) (69) (69) (69) (69)
Chg in monorities - - - - - -
Other financing activities (142) 117 (289) (350) (498) (674)
Cash flow from financing (c) 507 1,884 1,003 1,082 1,634 1,458

Net chg in cash (a+b+c) (3) 440 (245) 574 (488) 652

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Neogen Chemicals | Q2FY24 Result Review

Financial Ratios
Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
Book Value (Rs) 73.2 176 193 210 235 267
Adj EPS (Rs) 12.5 17.9 20.0 19.9 28.0 34.2
Adj EPS growth (%) 9.3 42 12 0 41 22
EBITDA margin (%) 19.1 17.8 16.3 17.0 18.0 18.0
Pre-tax margin (%) 13.0 11.7 10.3 9.7 10.0 9.6
Net Debt/Equity (x) 0.6 0.2 0.2 0.4 0.8 0.9
ROCE (%) 22.1 17 16 14 15 15
ROE (%) 18.5 14 11 10 13 14
DuPont Analysis
Asset turnover (x) 0.8 0.8 0.7 0.6 0.7 0.7
Leverage factor (x) 2.5 2.1 2.0 2.3 2.6 2.8
Net margin (%) 9.3 9.2 7.3 6.8 7.2 6.9
Working Capital & Liquidity ratio
Inventory days 124 146 156 154 154 154
Receivable days 85 82 94 94 94 94
Payable days 89 90 99 99 100 100

Valuations
Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
PER (x) 123.4 86.7 77.4 77.8 55.3 45.2
Price/Book value (x) 21.1 8.8 8.0 7.4 6.6 5.8
EV/Net sales (x) 11.8 8.1 5.8 5.6 4.5 3.6
EV/EBITDA (x) 61.9 45.5 35.6 32.9 24.9 20.2
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
Source: Company; IDBI Capital Research

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Neogen Chemicals | Q2FY24 Result Review

Notes

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BUY: 15%+; HOLD: -5% to 15%; SELL: -5% and below.

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Neogen Chemicals | Q2FY24 Result Review

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