Infrastructure Spending In India Will Drive Future Tire Demand

Key Takeaways

• Increased infrastructure spending in India could boost demand, positively impacting NOCIL’s revenue in the commercial vehicle sector.
  
• Strengthening operational efficiencies and expanding global reach may result in improved net margins and future growth in international revenues.
  
• Intense import competition, declining demand, and global rubber consumption de-growth pose significant risks to NOCIL's revenue, margins, and future growth prospects.

Catalysts

Engages in the manufacture and sale of rubber chemicals for tire and other rubber processing industries in India and internationally.

• NOCIL expects demand to pick up due to increased infrastructure spending in India, particularly in the commercial vehicle sector, which could drive tire demand. This would likely impact future revenue positively.
  
• The company is focused on operational efficiencies, including stabilizing their cogeneration turbine and enhancing renewable energy sources, which might help in improving net margins in the future.
  
• NOCIL is expanding its global reach and improving customer relationships through strategic engagement and product approvals, indicating potential future growth in international revenues.
  
• R&D efforts towards launching value-added products could differentiate NOCIL in a competitive market, positively affecting future earnings through potential new revenue streams.
  
• The initiation of antidumping duty investigations may protect against aggressive low-priced imports, potentially stabilizing prices and improving net margins.

NOCIL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NOCIL's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 10.6% in 3 years time.
• Analysts expect earnings to reach ₹2.1 billion (and earnings per share of ₹12.79) by about March 2028, up from ₹1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹2.3 billion in earnings, and the most bearish expecting ₹1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.0x on those 2028 earnings, up from 23.4x today. This future PE is greater than the current PE for the IN Chemicals industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.51%, as per the Simply Wall St company report.

NOCIL Future Earnings Per Share Growth

Risks

• Continued intense pricing pressure from imports and product dumping by Chinese, Korean, and EU players could negatively impact domestic prices, thereby putting downward pressure on NOCIL's revenue and net margins.
  
• A sequential decline in revenue and volumes due to lower customer demand and aggressive imports suggests potential risks in sustaining or growing future revenues.
  
• Operating margins have been significantly affected, with the operating EBITDA margin dropping to 8% for Q3 FY '25, indicating challenges in maintaining profitability and potentially impacting future earnings.
  
• The global de-growth in rubber consumption, as noted by the marginal decline in CY '24 compared to CY '23, poses risks to NOCIL's growth prospects, which could impact future revenues and volumes.
  
• Uncertainty regarding the imposition of antidumping duties and the time it may take to materialize introduces additional risk to protecting domestic market share and sustaining profitability, influencing future earnings and margins.

Valuation

• The analysts have a consensus price target of ₹247.889 for NOCIL 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 ₹331.0, and the most bearish reporting a price target of just ₹188.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹19.9 billion, earnings will come to ₹2.1 billion, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of ₹172.9, the analyst price target of ₹247.89 is 30.3% 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.