Shares of Specialty chemical maker Neogen Chemicals, which is involved in manufacturing specialty organic bromine-based chemical compounds as well as specialty inorganic lithium-based chemicals compounds, has surged over 40% in a month. Brokerage firm ICICI Securities has a ‘Buy’ recommendation and sees further upside on the stock.
“The asset turn is expected to be around around 2.7x, which provides incremental revenue visibility of around ₹350 crore. Since both these business verticals are margin accretive thus, incremental revenue share from both segments is expected to aid gross margins and thereby OPM. This should inch up return ratios and thereby valuations in medium term, the brokerage said in a note on Wednesday.
The stock appreciated at 80% CAGR in last two years. The brokerage has retained ‘Buy’ rating on the back of better growth outlook of the custom synthesis business. “We value Neogen Chemicals at 40x P/E FY24E EPS to arrive at a revised target price of ₹1,515 per share (earlier ₹1,095 apiece).”
The brokerage said that Neogen’s Phase 1 and Phase 2 capex at Dahej bodes well for advance intermediates and custom synthesis revenue growth. Its higher share of value added business portfolio is expected to improve the margin profile of the business and allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further to act as key triggers for future price performance.
Apart from Neogen Chemicals, in its chemical coverage ICICI Securities also likes Sumitomo Chemicals. Trigger for Sumitomo Chemical’s future revenue growth would be increasing CRAMS opportunity from SCC Japan and Nufarm. It has a Buy with a target price of ₹505 per share.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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