Q3FY24 Result Review

TP Rs1,385 Key Stock Data

Neogen Chemicals HOLD CMP Rs1,293 NEOGEN IN/NEOE.BO

MDC in base business impacts growth

Weakness Potential upside/downside 7% Sector Specialty Chemicals
Previous Rating HOLD Shares o/s (mn) 26
Summary Market cap. (Rs mn) 34,101
Price Performance (%)
Neogen Chemicals (Neogen) delivered subdued financial performance in the 3-m daily average value (Rs mn) 4.5
-1m -3m -12m
quarter. Lower lithium and bromine prices, higher financing and depreciation 52-week high / low Rs1,851 / 1,232
Absolute (14.2) (16.6) 2.3
costs led to lower than expected profitability. Revenue for Organic chemicals Sensex / Nifty 71,072 / 21,616
Rel to Sensex (12.2) (25.5) (14.9)
segment declined by 5% YoY while the revenue for the inorganic chemicals
segment declined by 30% 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 FY26E Promoters 56.9
are sanguine on the company’s progress on the battery chemical front with IDBI Capital 11 21 31 FII 4.5
strong capex plans coupled with a top notch technology partner in the form of Consensus 22 34 42 DII 22.0
% difference (50.8) (35.5) (26.1) Public 16.6
MUIS. We lower our PAT estimates for FY24/FY25/FY26 by 41%/20%/5%. We
maintain our HOLD rating on the stock with downward revised TP of Rs
Financial snapshot (Rs mn)
1,385(Earlier Rs 1,700) and cut target multiple from 50x to 45x on FY26 EPS.
Year FY22 FY23 FY24E FY25E FY26E
Key Highlights and Investment Rationale Revenue 4,873 6,862 6,997 9,514 12,454
Change yoy, % 45 41 2 36 31
 Funding of Battery Chemicals, a key monitorable: Neogen has drawn up firm
EBITDA 866 1,116 1,050 1,617 2,242
plans to establish capacity of electrolytes to 32,000 MT and lithium salts Change yoy, % 35 29 (6) 54 39
capacity to 5500 MT by FY26. The company is seeing healthy interest from EBITDA Margin(%) 17.8 16.3 15.0 17.0 18.0
prospective domestic and overseas customers for upcoming demand in CY25 Adj.PAT 446 500 295 563 812
and CY26. Considerable capex of Rs 15 bn is envisaged over FY24-FY26 which EPS (Rs) 17 19 11 21 31
Change yoy, % 42.5 12.0 (40.9) 90 44
is bound to increase debt levels considerably or lead to further equity dilution
PE(x) 75.3 67.3 113.8 59.7 41.4
 Outlook: Both advanced intermediates & CSM (pharma & agro as key Dividend Yield (%) 0.2 0.2 0.2 0 0
customers) are expected to contribute healthy proportion of sales in the P/B (x) 7.7 7.0 6.7 6.1 5.3
RoE (%) 14.3 10.8 6.0 10.6 13.7
coming years and would remain solid growth drivers even beyond. AI & CSM
RoCE (%) 16.7 15.6 11 14 15
are the two more profitable businesses and would drive improvement in Source: IDBI Capital Research, Company
profitability. However the base business remains weak in the near term due to
weak demand impacting realisations. Agrochemical demand is expected to Jason Soans Aayush Rathi
jason.soans@idbicapital.com aayush.rathi@idbicapital.com
revive only by H2CY24. +91-22-2217 1727 +91-22-2217 1840

February 13, 2024

Neogen Chemicals | Q3FY24 Result Review

Exhibit 1: Quarterly Snapshot (Consolidated)

Consolidated (Rs mn) Q3FY24 Q3FY23 YoY (%) Q2FY24 QoQ%
Net Sales 1,644 1,863 -11.7% 1,617 1.7%
Expenditure -1,442 -1,561 -7.7% -1,358 6.2%
as % of sales -88% -84% -84%
Consumption of RM -910 -1,057 -14.0% -876 3.9%
as % of sales -55% -57% -54%
Employee Cost -167 -122 36.7% -176 -4.9%
as % of sales -10% -7% -11%
Other expenditure -364 -381 -4.5% -306 19.0%
as % of sales -22% -20% -19%
EBITDA 203 301 -32.7% 259 -21.7%
Depreciation -57 -41 38.6% -58 -0.9%
EBIT 146 260 -44.0% 201 -27.7%
Other Income 16 14 12.9% 19 -16.4%
Interest -105 -67 58.0% -111 -5.1%
Exceptional 0 0 0
PBT 56 207 -73.0% 109 -48.7%
Total Tax -46 -60 -23.1% -31 51.6%
Reported PAT 11 147 -92.8% 79 -86.6%
Discontinued Ops 0 0 0 NA
Adjusted PAT 11 147 -92.8% 79 -86.6%
Adjusted EPS 0.4 6 -92.8% 3 -86.6%
Margins (%) YoY (bps) QoQ (bps)
EBIDTA 12.34% 16.2% (384) 16.0% (369)
EBIT 8.85% 14.0% (511) 12.4% (360)
EBT 3.41% 11.1% (772) 6.8% (335)
PAT 0.64% 7.9% (724) 4.9% (425)
Effective Tax rate 82.71% 29.1% (5,364) 28.0% (5,471)
Source: Company, IDBI Capital

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Neogen Chemicals | Q3FY24 Result Review

Conference call highlights:

 Realisations for Battery Chemicals: Realisation for Electrolytes business is expected to be around $10/kg
with Lithium salts at $27-35/kg. Neogen is targeting ROCE of 20%+ for this business with margins of
17-18%. Larger volumes and trials are being undertaken by the company. Pricing for Electrolytes is lower
than Japanese and Korean pricing and competitive with Chinese pricing.
 Electrolytes to be sourced locally: Electrolytes have stringent purity, acidity and moisture requirements
which make it uneconomical for them to be transported in large volumes. However lithium salts can be
transported relatively easier as the quantity for the same is lesser and their shelf life is longer.
 Demand outlook: Agrochemical demand is expected to revive only by H2CY24. Certain pharma cetegories
like ARV and cardio are seeing weak demand in intermediates and certain other niche and complex
categories are seeing demand recovery. Gradual demand recovery seen in pharma/agrochem.
 Historically low lithium prices: Lithium carbonate prices are at historical lows of $10-12/kg when $20-25
was considered to be the long term average. This has majorly impacted realisations for the business.
 Profit Impact: Profitability was impacted in Q3FY24 owing to lower realisations, investments in Neogen
Ionics and liquidation of higher cost inventory.( impact of Rs 75 mn)
 Asset turn: The company expects a base business of Rs 10bn on current gross block of Rs 4bn at average
lithium prices. On battery chemicals, the minimum turnover expected is Rs 25bn on capex of Rs 15bn over
FY24-FY26 depending on lithium prices. Both businesses are expected to yield margin of 17-18%. The 30
ktpa plant is expected to achieve full capacity by FY28/FY29. Ideal Debt to EBITDA is targeted at 3x
however Rs 15 bn capex is expected to stretch the balance sheet and funding will be a key monitorable.
 CSM Business: CSM forms 14-15% of the business. Neogen is seeing increased competition in the pharma
side from the Chinese, demand from agrochem is weak and good traction from flavours and fragrances.
Good demand is seen for N-butyl lithium led chemistry. The company has developed 7-8 molecules with
multi step synthesis which should see good demand going ahead.

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Neogen Chemicals | Q3FY24 Result Review

Exhibit 2: Change in estimates

FY24E FY25E FY26E
Old New (%) Chg Old New (%) Chg Old New (%) Chg
Revenue (Rs mn) 7,272 6,997 -4% 9,692 9,514 -2% 12,324 12,454 1%
EBITDA (Rs mn) 1,236 1,050 -15% 1,745 1,617 -7% 2,218 2,242 1%
EBITDA margin (%) 17% 15% -200bps 18% 17% -100bps 18% 18% -
Net profit (Rs mn) 497 295 -41% 699 563 -20% 856 812 -5%
EPS (Rs) 19.1 11.2 -41% 26.9 21.3 -21% 32.9 30.8 -6%
Source: Company; IDBI Capital Research

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Neogen Chemicals | Q3FY24 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 6,997 9,514 12,454
Change (yoy, %) 9.9 45 41 2 36 31
Operating expenses (2,721) (4,007) (5,746) (5,948) (7,896) (10,212)
EBITDA 644 866 1,116 1,050 1,617 2,242
Change (yoy, %) 10.9 35 29 (6) 54 39
Margin (%) 19.1 17.8 16.3 15.0 17.0 18.0
Depreciation (69) (117) (162) (217) (283) (363)
EBIT 575 749 954 832 1,334 1,879
Interest paid (138) (191) (289) (415) (560) (758)
Other income 1 11 45 37 7 7
Pre-tax profit 438 569 709 454 781 1,128
Tax (129) (124) (211) (159) (219) (316)
Effective tax rate (%) 29.4 21.9 29.7 35.0 28.0 28.0
Minority Interest 3.8 1.8 1.0 - - -
Net profit 313 446 500 295 563 812
Exceptional items - - - - - -
Adjusted net profit 313 446 500 295 563 812
Change (yoy, %) 9.3 42 12 (41) 90 44
EPS 12.1 17.2 19.2 11.2 21.3 30.8
Dividend per sh 1.8 2.0 2.6 2.6 2.6 2.6
Dividend Payout (%) 14.9 11.8 13.7 23 12 8

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Neogen Chemicals | Q3FY24 Result Review

Balance Sheet (Rs mn)

Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
Shareholders' funds 1,830 4,392 4,825 5,052 5,546 6,289
Share capital 233 249 249 249 249 249
Reserves & surplus 1,597 4,143 4,576 4,803 5,297 6,040
Total Debt 2,019 - 2,247 5,122 7,322 9,522
Other liabilities (709) 1,419 (632) (2,007) (2,007) (2,007)
Curr Liab & prov 1,779 2,183 4,097 4,111 4,679 5,342
Current liabilities 1,768 2,164 4,077 4,090 4,658 5,322
Provisions 11 19 21 21 21 21
Total liabilities 3,090 3,602 5,713 7,226 9,994 12,858
Total equity & liabilities 4,920 7,994 10,538 12,278 15,540 19,147

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 6,516 7,561 10,031
Inventories 1,140 1,946 2,930 2,955 4,018 5,259
Sundry Debtors 786 1,095 1,774 1,809 2,459 3,219
Cash and Bank 12 452 207 704 36 504
Loans and advances 464 1,432 1,648 1,048 1,048 1,048
Total assets 4,920 7,994 10,538 12,278 15,540 19,147

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Neogen Chemicals | Q3FY24 Result Review

Cash Flow Statement (Rs mn)

Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
Pre-tax profit 438 569 709 454 781 1,128
Depreciation 69 117 162 217 283 363
Tax paid (104) (98) (115) (159) (219) (316)
Chg in working capital 277 (882) (1,422) (47) (1,145) (1,338)
Other operating activities 155 308 363 415 560 758
Cash flow from operations (a) 836 14 (304) 881 260 595

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) (415) (560) (758)
Cash flow from financing (c) 507 1,884 1,003 1,016 1,571 1,373

Net chg in cash (a+b+c) (3) 440 (245) 497 (668) 468

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Neogen Chemicals | Q3FY24 Result Review

Financial Ratios
Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
Book Value (Rs) 70.4 169 186 194 213 242
Adj EPS (Rs) 12.1 17.2 19.2 11.2 21.3 30.8
Adj EPS growth (%) 9.3 42 12 -41 90 44
EBITDA margin (%) 19.1 17.8 16.3 15.0 17.0 18.0
Pre-tax margin (%) 13.0 11.7 10.3 6.5 8.2 9.1
Net Debt/Equity (x) 1.1 -0.1 0.4 0.9 1.3 1.4
ROCE (%) 22.1 17 16 11 14 15
ROE (%) 18.5 14 11 6 11 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 2.9
Net margin (%) 9.3 9.2 7.3 4.2 5.9 6.5
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 97 99 100

Valuations
Year-end: March FY21 FY22 FY23 FY24E FY25E FY26E
PER (x) 108.8 76.3 68.2 115.3 60.6 42.0
Price/Book value (x) 18.6 7.8 7.1 6.7 6.1 5.4
EV/Net sales (x) 10.7 6.9 5.3 5.5 4.3 3.5
EV/EBITDA (x) 56.1 38.8 32.4 36.7 25.6 19.2
Dividend Yield (%) 0.1 0.2 0.2 0.2 0.2 0.2
Source: Company; IDBI Capital Research

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Neogen Chemicals | Q3FY24 Result Review

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Neogen Chemicals | Q3FY24 Result Review

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