About the Company
Incorporated in 1989, Neogen Chemicals Ltd is India’s one of the leading manufacturers of Bromine-based and Lithium-based specialty chemicals. Its specialty chemicals product offerings comprise Organic as well as Inorganic chemicals. Its products are used in pharmaceutical and agrochemical intermediates, engineering fluids, electronic chemicals, polymer additives, water treatment, construction chemicals, aroma chemicals, flavors and fragrances, specialty polymers, Chemicals, and Vapour Absorption Chillers – original-equipment manufacturers, and with new upcoming usage in lithium-ion battery materials for energy storage and Electric Vehicles (EV) application. Over the years, Neogen has expanded its range of products and manufactures an extensive range of specialty chemicals that find application across various industries in India and the world. It has a product portfolio of over 246 products.
The company has two core divisions:
- Organic Chemicals
- Inorganic Chemicals
Investment Rationale:
- The company is well set to grow in the organic chemicals, especially in the EV segment with a strong market share which is expected to increase post-increase
- Strategic M&A & Partnership is well positioning the company to strongly well position to be a strong global player in the coming year
- The company looks attractive in terms of forward valuation and growth prospects
History of the Company:
Source: Investor Presentation
Business Segments:
Organic Chemicals
Under Organic Chemicals there are 4 sub-segments of the company has which are:
- Bromine Compounds
- Organolithium / Organometallic
- Advanced Intermediates
- Custom Synthesis & Contract Manufacturing
This segment alone contribute 85% of the total revenue in FY24
Inorganic Chemicals
Under Inorganic Chemicals, the portfolio includes specialty. These inorganic lithium-based chemical products find applications across industries such as Eco-friendly VAM for cooling air/water/process equipment, Pharmaceuticals, Specialty Polymers, Battery Chemicals & Construction Chemicals.
This segment alone contributes 15% of the total revenue
Geographical Classification
The majority of the Income comes from India which contributed 63% of the total revenue in FY24, Exports Contributed 27% of the overall revenue from countries primarily from the US, Europe, China, Korea & Japan in FY24.
Management
- The company is led by Mr. Haridas Kanani, Chairman and Managing Director of Neogen Chemicals. He oversees manufacturing, research and development, process technology, and the general operations of the company’s manufacturing units. Mr. Kanani holds a bachelor’s degree in chemical engineering from the Indian Institute of Technology (IIT), Mumbai.
- Dr. Harin Kanani is the Managing Director of the Company. He heads various business divisions of the Company including research and development, business development, growth strategy, quality control, purchase, marketing, and finance, He joined Neogen Chemicals Limited in 2008 as a General Manager and has been on the Board of the Company as a Director from 2013, and as a Managing Director from 2017.
- The promoters currently hold a 51% stake in the company, which is reasonable given the business’s size. However, the promoter holding has significantly diluted over the years, declining from 65% in FY21 to 51% in H1FY25. This dilution reflects the company’s increased reliance on equity fundraising to meet its growth and operational needs.
- The company’s board comprises experienced and diverse members, including qualified Chartered Accountants with strong fundraising expertise, professionals with specialized knowledge of the chemical and logistics industry, and professors with significant experience in chemicals. This diverse expertise is expected to enhance the company’s ability to make sound operational and strategic financial decisions.
- A key concern, however, is the frequent turnover in the Chief Financial Officer (CFO) position—the company has seen three CFO changes in the past five years. Such frequent changes raise red flags about the company’s ability to retain senior finance professionals, potentially affecting financial stability and continuity.
Deep-Dive on the Investment Rationale
The company is well set to grow in the organic chemicals, especially in the EV segment which is expected to increase post-increase
The company is executing a strategic plan to invest aggressively in organic chemicals, with a particular focus on the EV segment, which is witnessing robust global and domestic demand. A key aspect of its strategy is achieving complete integration into the electrolyte value chain, beginning with the production of salts and additives that depend on cell manufacturing. By emphasizing exports to developed markets such as the US, Europe, and Japan, the company aims to drive revenue growth and achieve significant margin expansion, leveraging its strong cost competitiveness (outside of China). This positioning, coupled with regulatory tailwinds like the IRA regulation and reduced dependence on China, positions the company as a key beneficiary of these emerging trends.
With growing capacity and scale, the company is well-positioned to capitalize on rising EV demand worldwide. It has outlined plans to ramp up production capacity for electrolyte salts to 2 KT and 5 KT by 2026-27, aligning with increasing global demand. As per industry estimates, the global non-Chinese demand for electrolytes is expected to reach 1,125 KT, providing a significant growth runway. Similarly, in lithium salts, the company has initiated production with a capacity of 0.4 KT, but given the projected demand expansion to 141 KT, there is immense potential for scaling up in the coming years.
By aligning its strategy with strong export focus, regulatory support, and global demand trends, the company has laid a solid foundation for sustained growth in the electrolyte and lithium salt segments. These investments, coupled with its cost advantages and ability to meet evolving market needs, make it a strong contender for capitalizing on the expanding EV market globally.
Strategic M&A & Partnership is well positioning the company to strongly well position to be a strong global player in the coming year
To gain a competitive edge in the industry, the company has established a strategic partnership with Mitsubishi for technical expertise and has acquired Buli Chemical, further strengthening its capabilities. These collaborations ensure the company possesses robust technical expertise, enabling it to serve both traditional segments (bromine and additive chemicals) and the emerging battery chemicals segment effectively.
The company also holds a license from Mitsubishi, which provides a strong foundation for scaling operations. As the company builds scale and expands, there is a high likelihood of securing an exclusive license from Mitsubishi, which would serve as a significant competitive advantage. This exclusivity could position the company to excel amidst growing competition, particularly in non-Chinese markets, and solidify its leadership in the segment in the coming years.
The company looks attractive in terms of forward valuation and growth prospects
As of November 23, the company trades at a high valuation of 127 times earnings, making it appear expensive and exorbitant at present. However, considering the company’s potential for exponential growth over the next 3–4 years, the outlook changes significantly. The management has projected EBITDA growth in the range of ₹600–850 crores by FY27, translating to an EV/EBITDA multiple of 7–10 times FY27 estimates, which makes the company an attractive investment opportunity for mid-to-long-term holding.
The company’s strategic focus on backward integration to complete the electrolyte value chain, from salts to additives tailored for cell requirements, underpins its growth potential. Additionally, its strong emphasis on R&D and a growing share of revenues from export markets position the company for sustained long-term success. These factors collectively enhance the company’s appeal, despite its current high valuation, making it a compelling prospect for investors looking at future growth opportunities.
Risk/Threats
Higher Working Capital Days:
Geopolitical Risk & Cyclical in Nature: The company does face geopolitical risk, especially in Q3FY24 the company lot of issues in the transportation and logistic costs primarily due to the Middle East Geopolitical Issue which impacted there gross margin and the company in nature is quite cyclical as their end users are predominantly currently are agro and pharma which currently contribute around 60-80% of the revenue segment as these end users are in lull which had led the company with a lower sales growth and impacting the gross and operating margins for the business
Raw Material Volatility:
Raw Material Prices of Lithium
The company has a major risk of raw material volatility the company is dependent on the raw material bromine and lithium which is a core components for the manufacturing of these chemicals over the years these chemicals have all-time low impacting the revenue growth despite a strong volume they get from the customer, For Instance in Q2FY25 the company had a very strong volume despite the revenue has not been along reflect that. Where the Operating Margins has been fluctuating margin from 12 to 18%.
Increased Leveraged in the Balance Sheet: The company has shown a very poor CFO (Cash Flow from Operations) to PAT (Profit After Tax) conversion, with CFO being just ₹4 Crores over the past 4 years, while PAT has been ₹65 Crores. In a B2B business, a CFO to PAT ratio of at least 60% would be considered reasonable. However, the company’s cash flow is low primarily because a significant portion of it is tied up in receivables. Due to very high receivables the company bill discounting and factoring from banks to get a working capital loan to run the business with the foray into battery chemicals these trends are set to grow as well.
Valuation
The company trades at a market capitalization of ₹5,121 crores, with valuation multiples reflecting significant overpricing (P/E of 127x, EV/EBITDA of 45x, and a PEG ratio of 11x). Despite these lofty valuations, the business is experiencing strong de-growth driven by lower realizations for lithium additives and salts, Chinese de-stocking, and geopolitical issues impacting export costs. Additionally, poor cash flow conversion to PAT, due to high debtor and inventory days, has led to increased working capital loans and equity dilution. While the company has raised funds from marquee investors and FIIs, these financial headwinds remain a concern.
Operating in a cyclical industry, the business requires a nuanced understanding of market cycles. While its current financial metrics paint a challenging picture, the company has a strong competitive edge, built on over 30 years of expertise and a transition from commodity chemicals to specialized products. With significant R&D investments and a focus on pharma and agrochemical intermediaries, the company is poised to benefit from favorable industry tailwinds. Its robust capex in electrolyte salts and additives is expected to generate ₹2,000-2,500 crores in revenue by FY27 (3-4x current levels) with a potential EBITDA of ₹800 crores, supported by margin expansion and export market growth.
However, investors must remain cautious. The cyclical nature of the business, high working capital requirements, and price volatility of its end products pose significant risks. A drop in price realizations could severely impact growth projections, making the investment thesis vulnerable to external pressures. While the company’s global market presence and long-term growth potential are compelling, these risks warrant a careful evaluation before investing in the business.