PL Stock Report: NOCIL (NOCIL IN) - Company Update – Near term challenges persist - Downgrade to 'Reduce'

NOCIL (NOCIL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt. Ltd.

Rating: REDUCE | CMP: Rs246 | TP: Rs226

Company Update – Near term challenges persist

Quick Pointers:

§ Michelin and Bridgestone, the two largest tyre manufacturers globally continue with cautious near-term outlook

§ Utilization still at ~65% while management speaks of possible further expansion

We expect NOCIL IN (NOCIL) to face near-term headwinds as near term outlook from Michelin and Bridgestone, the two largest global tyre manufacturers remains weak. Michelin has marginally raised its projections for CY23 from -3%/0% for passenger cars and light trucks to -1%/+1%. However, it has cut down its truck tyre outlook from previous -4%/-1% to -6%/-4% respectively. Similarly, Bridgestone expects “challenging conditions to continue throughout 2024 mainly in N. America and Europe”. In 9MCY23, global OEM demand for tyres has grown by 6% while demand for replacement tyres has declined by 1%. Reiterate cautious stand on the company with a target price of Rs226 (unchanged) valuing it 20x FY26 EPS of Rs11.3. Downgrade to ‘Reduce’

Two largest global tyre manufacturers guide near-term headwinds: As per Michelin, global tyre sales in Oct’23 for passenger cars/light trucks appear towards the upper end of -1/+1% guidance for CY23. However, truck tyre market excluding China appears towards lower end of guidance of -6%/-4% for CY23. Bridgestone also cites challenges to continue throughout CY24 due to economic slowdown, high labor/energy cost, sustainability related costs and geopolitical risks.

A lacklustre CY23: In 9MCY23, global demand of tyres from OEMs increased by 6% YoY while that from replacement market declined by 1%. For truck tyres too, global demand from OEMs rose by 9% YoY while that from the replacement market declined by 2%. For NOCIL, 60-70% of demand comes from tyres and 60-70% of demand within tyres comes from replacement market.

Is China springing back?: China Sunshine, in its update mid-Nov’23, mentioned that for 9MCY23, Chinese auto sales registered 8.2% growth YoY while new energy vehicles also registered 37.5% growth. While the company recorded 16% volume growth YoY, average sales price (ASP) declined 18% YoY on account of both decline in raw materials as well as “flexible pricing strategy”. It is also expected to commence commercialization of its 20ktpa MBT (accelerator) expansion early 2024, which may intensify competition.

Rubber prices remain weak: We forecast EPS CAGR of 23% during FY24-26E. However, FY23-26E CAGR stands at meagre 8%. Natural rubber prices, another indicator of demand for rubber chemicals, also appears tepid at 15% below long term prices.

Key risks to our call: Rise in demand of tyres, foray into adjacencies, new capex.

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