Merger With BuLi Chemicals Will Strengthen Market Position In Pharma And Agrochemicals

Key Takeaways

• The merger and strategic product expansions aim to strengthen Neogen's market position and boost future export and domestic revenue growth.
  
• Diversification into semiconductors and greenfield initiatives reflects adaptive strategies to broaden revenue streams and capture emerging market opportunities.
  
• Neogen Chemicals' revenue and growth could be hindered by fluctuating raw material prices, competitive imports, international approval delays, geopolitical changes, and gigafactory setup challenges.

Catalysts

Engages in the manufacture and sale of specialty chemicals in India.

• The merger of BuLi Chemicals with Neogen Chemicals is expected to streamline operations and reduce costs, enhancing the company's market position in the pharma and agrochemicals sectors. This could positively impact the net margins and overall earnings.
  
• The introduction of new lithium products and expansion into EU, Korea, and Japan markets positions Neogen for growth in export revenues, underpinning future revenue expansion.
  
• Expansion initiatives, such as the increase in production capacity of lithium electrolyte salts and additives, align with India's growing demand for battery materials, signaling potential revenue growth as domestic battery production scales up.
  
• Neogen Chemicals' adaptation to the slowdown in agrochemicals by diversifying into semiconductors, flavors, and fragrances indicates a strategic move to stabilize revenue streams and support earnings growth.
  
• The company's progress with the greenfield battery material facility using MUIS technology and the commitment to start commercial production by FY '26 indicate future revenue and earnings growth potential from the burgeoning electric vehicle and battery storage markets.

Neogen Chemicals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Neogen Chemicals's revenue will grow by 51.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ₹1.7 billion (and earnings per share of ₹72.0) by about March 2028, up from ₹493.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.8x on those 2028 earnings, down from 92.3x today. This future PE is greater than the current PE for the IN Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.56%, as per the Simply Wall St company report.

Neogen Chemicals Future Earnings Per Share Growth

Risks

• Neogen Chemicals faces risks from fluctuating raw material prices, such as lithium and bromine, which could impact its revenue projection of ₹950 crores to ₹1,000 crores by FY '26 if prices do not normalize soon.
  
• The company's financials might be affected by competition and lower pricing from Chinese imports in the battery chemicals market, which could pressure margins as Neogen attempts to maintain competitive prices.
  
• The delay in gaining approvals for electrolyte salts from international customers could impact revenue growth expectations for the battery chemicals segment, as commercial scaling may be pushed further out.
  
• Ongoing geopolitical and regulatory changes, such as potential modifications to the U.S. Inflation Reduction Act, may impact Neogen's ability to secure long-term international contracts, thus affecting projected export revenues.
  
• The ramp-up challenges for new gigafactories in India, including those related to customer site-based setup and learning curves, could delay supply agreements and slow capacity utilization growth, impacting revenue and earnings forecasts for the electrolyte segment.

Valuation

• The analysts have a consensus price target of ₹2408.0 for Neogen Chemicals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3150.0, and the most bearish reporting a price target of just ₹1860.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹26.7 billion, earnings will come to ₹1.7 billion, and it would be trading on a PE ratio of 53.8x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹1726.1, the analyst price target of ₹2408.0 is 28.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.