Neogen Chemicals battery materials ramp-up follows strong Q1FY27 growth and higher guidance

Investment View and Business Overview

ICICI Direct Research maintains a BUY rating on Neogen Chemicals with a target price of Rs 2,460, compared with a CMP of Rs 2,050. The view is supported by resilient core-business execution and the expected ramp-up of the company's battery-materials business.

Neogen manufactures specialty organic bromine-based compounds and specialty inorganic lithium-based compounds used in pharmaceutical and agrochemical intermediates, polymer additives and water-treatment chemicals. The company has earmarked Rs 1,795 crore of capital expenditure for lithium battery materials, supported by strategic ties with Japanese companies, to address opportunities in the electric-vehicle ecosystem.

Strong Q1FY27 Operating Performance

Neogen delivered a strong Q1FY27 performance despite a temporary shutdown at the Dahej plant. Revenue increased 34 per cent year-on-year to Rs 250.3 crore, supported by higher Organolithium throughput, healthy volumes, favourable mix and toll-manufacturing arrangements that ensured continuity during the Dahej disruption. The company reported record quarterly revenue in both Organolithium and Battery Chemicals.

Core-Business Growth Outlook

Management raised FY27 standalone, or base-business, revenue guidance to Rs 950 crore to Rs 1,050 crore from the earlier range of Rs 875 crore to Rs 950 crore. The revision reflects full Organolithium utilisation, sustained specialty-chemical demand and improved volume visibility.

Management indicated that FY28 standalone revenue could grow a further 10-15 per cent to around Rs 1,100 crore to Rs 1,200 crore, although formal guidance is pending. FY27 legacy-business EBITDA margin guidance remains 18 per cent plus or minus 1-1.5 per cent. The company has an FY28 objective of an 18-20 per cent margin despite Dahej restart costs, toll-manufacturing costs and freight inflation.

Battery-Materials Ramp-Up

For Neogen Ionics, management expects battery-chemicals revenue of more than Rs 300 crore in FY27, predominantly in H2FY27 as customer qualifications and commissioning progress. This comprises approximately Rs 200 crore from lithium electrolyte salts and Rs 100 crore from electrolytes.

• Four global electrolyte manufacturers have approved Neogen's manufacturing site.
• Management expects FY28 salts capacity utilisation of approximately 70-80 per cent.
• Current battery capital expenditure could support Rs 2,400 crore to Rs 2,900 crore of revenue at full utilisation by FY29.
• The designed capacity is approximately 30 GWh of electrolyte and 40 GWh of electrolyte salts.
• Management aims to place all battery-chemical sales under contracts by Q4FY27, reducing exposure to volatile spot prices.

The company did not provide battery-business EBITDA guidance because lithium pricing and initial capacity utilisation remain uncertain. However, it guided to a 20 per cent return on capital employed at full utilisation on approximately Rs 1,800 crore of invested capital.

Funding, Deleveraging and Project Execution

The board-approved Rs 600 crore qualified institutional placement is intended to deleverage the balance sheet, reduce finance costs, fund Organolithium expansion and support battery research and development. ICICI Direct assumes a hypothetical issue price of Rs 2,000 per share in its estimates. If the proceeds are entirely used to repay debt, management estimates annual interest savings of approximately Rs 40-50 crore.

Neogen has recovered Rs 164 crore of insurance proceeds, with Rs 186 crore still receivable. Management targets commercialisation of the Pakhajan plant in H2FY27. Earlier commissioning could offset a delay in domestic electrolyte demand through incremental salt production.

Valuation and Estimates

ICICI Direct values Neogen at 18 times FY28E EBITDA and derives a target price of Rs 2,460.

Key Risks and Research View

• Delayed offtake of battery chemicals could affect the expected growth trajectory.
• Significant balance-sheet leverage remains a key risk.

ICICI Direct characterises Neogen as a risky but interesting proposition. The electric-vehicle opportunity is supported by the company's ecosystem, but capital expenditure is heavily front-loaded and leverage remains high.