Neogen: Kotak Institutional recommends buying the stock, says firm has first-mover advantage in EV battery chemicals

Neogen Chemicals, the fast-growing speciality chemical company, is gearing up for a multifold scale-up in the coming years by virtue of being the first mover and arguably the most credible entrant in India’s promising EV battery chemicals space, said domestic brokerage firm Kotak Institutional Equities.

In its recent report, the brokerage initiated coverage on Neogen stock with a 'buy' rating and a target price of ₹1,840 apiece. 

The brokerage views Neogen as one of the most credible growth stories in the Indian speciality chemicals industry, citing factors such as the company's experienced and reputable promoters, including PI's ex-ED Anurag Surana, its history of rapid growth driven by innovation and enterprise, and its strategic partnerships with industry leaders like Mitsubishi and global customers.

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The brokerage said the company is on track to become the first mover in the battery chemicals segment in India owing to the extensive work it has done in this space over the past few years—further validated by the technology partnership it has managed to strike with MUIS (Japan). 

Neogen is targeting an over 30% market share within battery electrolytes in India by 2030—a large opportunity. Separately, in its base business, the company continues to invest in new product development (both organically and inorganically) and is seeing traction in the CSM business.

The company forecasts revenues of ₹9.0–10.5 billion from its core business by FY2026, and an additional ₹25–29.5 billion from the battery chemicals segment by FY2028–29. Brokerage estimates align more closely with the lower end of the guidance range.

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Kotak anticipates that the company will maintain EBITDA margins in the range of 18–20% once its new capacities for battery chemicals are fully utilised by FY2029. While the brokerage expects the company's Return on Capital Employed (RoCE) to face pressure in the near term until utilisation increases, it foresees a recovery toward 20% in the subsequent years, driven by strong underlying economics.

Retaining a positive outlook on the company, the brokerage has underscored key risks associated with it. One area of concern is the balance sheet leverage, attributed to the company's prolonged working capital cycle and ambitious growth strategies. 

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“While management has been guided to reduce the net working capital cycle to 120 days (from 170-180 at present), progress has been slow amid industry challenges. The aggressive capex plan will exert further pressure on the balance sheet (peak net debt-to-EBITDA of 5X in FY2026E); any delay in project commissioning or ramp-up are key risks,” it stated. 

Additionally, the potential for dilution for equity holders is recognised as a real possibility in the future, although the allure of the growth narrative is deemed to outweigh this concern.

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Stellar rebound

Following a period of sustained selling pressure from October 2023 to March 2024, resulting in a 34% decline, Neogen Chemicals' shares have rebounded in April, registering a gain of 27% thus far. Reflecting on its long-term performance, the stock has yielded a remarkable return of 604% over the past five years.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.