Neogen Q2FY24: Resilient Top-Line Amid Export Market Slowdown

Company Overview:

Neogen Chemicals specializes in the production of specialty chemicals for the pharmaceutical, engineering, and agro-chemical industries. Offering 248 products to domestic and international markets, the company operates four manufacturing sites and two R&D facilities. With a total production capacity of 463 liters cubic meters in organic chemicals and 39 liters cubic meters in inorganic chemicals, Neogen Chemicals exports to 29 countries, with the USA, Europe, and Japan contributing 31% to revenue in Q2FY24.

Capacity expansion in existing and battery business & Current project updates

In its existing business, Neogen Chemicals increased organic chemical capacity by 60,000 liters and inorganic chemical capacity from 1,200 MT (15 m^3) to 2,400 MT (30 m^3). In the battery chemical business, a new capacity of 400 MTPA was added for manufacturing Lithium Electrolyte Salts & Additives. The company aims to commission 29 m^3 of chemicals by March 2024, with an additional 31 m^3 commissioned by Q4FY24. This expansion is complemented by a recent fund raise of 253 Cr, which is expected to reduce finance costs.

Debt repayment from recent funds is expected to cut finance costs

In Q2FY24, the company successfully raised 253 Crores through preferential allotment, a strategic move aimed at retiring some existing debt. This capital infusion contributed to a reduction in interest costs in the near term. However, in the most recent quarter, PAT experienced a decline of 7.6% Year-over-Year (YoY) and a significant 20% Quarter-over-Quarter (QoQ) decrease, amounting to 9.14 Crores. This decrease in PAT can be attributed to escalated interest costs and increased depreciation during the period.

Despite a slowdown in the export market, top-line momentum continues to sustain.

Despite challenges such as global inventory destocking, a slowdown in the export market, and geopolitical uncertainties, Neogen Chemicals sustained a standalone revenue growth of 13.1% YoY (-1.1% QoQ) to 168 Cr in Q2FY24. This resilient top-line performance is attributed to recent capacity expansions and contributions from Buli chemicals.

Enhanced EBITDA (8.21% YoY) through Product Mix Optimization:

The company reported a standalone EBITDA of 26.2 Cr, marking an 8.21% YoY increase (-10.9% QoQ). This growth is attributed to an improved product mix and rationalization of raw material costs. While EBITDA margins experienced a slight decline, the overall operational efficiency improved.

Valuation and Key Ratios:

Neogen Chemicals is currently trading at a multiple of 77.5x EPS (TTM) at a market price of 1,542, with an industry PE standing at 32.7x. The company’s trading at 7.74x its book value of 199 Rs per share. The trailing twelve-month ROE and ROCE stand at 10.9% and 13.2%, respectively. In terms of EV/EBITDA multiple, the company ranks 4th among its top 8 peers, with a multiple of 34.4x, compared to the industry median of 16.1x. The interest coverage ratio of 1.98x in Q2FY24 signifies the company’s solvency.

Q2FY24 Results Updates: Standalone

➡️In Q2FY24, standalone revenue grew 13.5% YoY (-1.1% QoQ) to 168 Cr despite a slowdown in the export market, driven by an increase in capacity expansion.

➡️Gross profit grew 3.8% YoY to 71.9 Cr, with a 22.1% YoY increase in COGS. However, gross margin declined by 400 bps YoY to 42.7%.

➡️EBITDA boosted 8.2% YoY (-10.9% QoQ) to 26 Cr led by improved product mix. EBITDA margin down 78 bps YoY (172 bps QoQ) to 15.6%.

➡️Operating profit (EBIT) grew 4.61% YoY and down 13.1% QoQ to 21 Cr due to an increase in depreciation (27% YoY) with several CAPEX initiatives.

➡️PAT is down by 7.58% YoY (-20% QoQ) to 9 Cr on account of higher finance costs and depreciation.

➡️EPS for the quarter stood at 3.67 Rs while the previous quarter was 4.59 Rs.

Conclusion:

Neogen Chemicals, specializing in specialty chemicals, demonstrated resilience in Q2FY24 with sustained revenue growth despite global challenges. Capacity expansions in existing and battery businesses, coupled with successful debt repayment and enhanced EBITDA, contribute to the company’s positive outlook. While facing a decline in PAT due to increased finance costs, Neogen remains strategically positioned for future growth.

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