Omkar Speciality Chemicals Ltd -- OSCL

From The AR of the last year:

  1. Term loans
    a) From Banks were secured by way of hypothecation of stock, spare parts and book debts and first charge on land, building and plant and machinery
    present and future situated at Plot No. F-24, Plot No. W -92(A), W-94(A), W-95(A) Plot No.F-9, F -10/1, Plot No. B-34, MIDC, Badlapur, Dist: Thane and Plot no. D 27/5,
    Lote Parshuram Industrial Area, Taluka - Khed , Ratnagiri in Maharashtra
    b) Personal guarantee of the promoter directors of the company
  1. Working Capital Loans
    a) From Banks were secured by way of hypothecation of stock, spare parts and book debts and first charge on land building and plant and machinery present and future
    situated at Plot No. F-24, Plot No. W -92(A),W-94(A),W-95(A), Plot No B-34, Plot No. F-9, F -10/1, MIDC, Badlapur, Dist : Thane & Plot no. D 27/5, Lote Parshuram
    Industrial Area, Taluka - Khed , Ratnagiri in Maharashtra
    b) Personal guarantee of the promoter directors of the company

Companies Term Loan rating is BBB+ and Debt equity ratio is close to one. Most of the banks will ask some collateral other than whatever is available with the company. Generally, it is promoter’s shares.

We also need to go through the AR for the current year which is not available currently to understand what is the rate at which money has been raised from Venus. We can also get an approximate number from the next quarters result as that will show the amount of debt and finance cost. Till then we will have to wait.

One of the oldest small cap specialist Mudar pathreya recommends OSCL in todays Business Standard.

Mudar is a v old smallcap specialist who recently recommended Oriental Carbon & Chemicals LTD(OCCL) when it was hovering in the range of 400.At least the visibility of the co is increasing.

However the point raised by TheStocklady on why OSCL is raising funds from an unknown Venus India Asset Finance is also important? is a known finance co or bank not willing to extend loan?

Views Invited.

Discl-Invested recently

one concern I have is inordinate amount of debt - Rs. 175 Cr. in total as per AR - the company can barely service its interest on the loan with the present cash flows - interest cover is barely 1.5. In such a turbulent global environment, having 150 days receivables with forex volatility and such debt and pledged shares amplifies the risks

I really like the path the company is taking but at CMP, I think a slight dip in sales can be catastrophic and can induce pledged share selling.

Request you to think over it.

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Screener.com shows Interest coverage ratio as 3.02

FY15 EBIT was 42.7 cr while interest expensed was 14.5 cr, so Interest coverage was near 3x.
Though they also capitalized a part of their interest, & if we consider that also to be expensed, Interest coverage was near 2x.

However, since company is running at 72% utilization & large part of Balance sheet is in Capital WIP, Interest coverage is bound to be a bit worrisome.

Things have improved a bit if you look at Q1 numbers.

On Working capital days, good thing is that company is aware of the issue & is working towards improving it. In Fy15, they were able to improve it from 203 days to 143 days.

Prepared a small pdf of key points from 2015 AR.

Please find attached- Omkar_Notes.pdf (1.2 MB)

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my worry is that when a promoter pledges shares and borrows at 200-300 bps from a private financier above bank rate of interest, it’s typically a sign of drying liquidity. A fact that is corroborated further by:

  • Omkar capitalizing interest (this is typically done only for ultra long gestation projects like refinery, oil drilling ). typically projects that require 4-5 years for completion

  • at 13 % on Rs. 175 Cr. of debt, it’s almost Rs. 22-24 Cr. of interest payment. can this go up further and slide further is my big worry.

Look at ROIC - its about Rs. 38 Cr. ebitda at say tax rate of 30 % which is about Rs. 28 Cr. or so. which is about 13-14 % on total capital invested of Rs. 270 Cr. odd - just above cost of debt and certainly nowhere close to being above cost of equity.

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  1. Omkar had borrowings of Rs 223 crore as at 31/03/2015 on consolidated basis. Finance cost on gross basis was Rs 22.65 crore for FY2015. After capitalising Rs 8.17 crore of interest, net charge towards finance cost Rs 14.48 crore.
  2. Net fixed assets deployed/under deployment of 271 crore include CWIP of Rs 121 crore as the company is expanding its capacity in Chiplun and Lasa unit. However, their present level of revenues at Rs 263 crore in relation to that is small; Not sure what level of revenues is targeted by the company when commercial production is achieved.
  3. Iodine derivative segment, which is among major portfolio of the Company, the prices of iodine based raw material continued to fall & consequently the Company suffered on topline growth as per own admission of the management. Even though the production volumes of iodine derivatives grew by 16-17%, it didn’t result in topline growth.
  4. Company is working on Working capital cycle that has improved to 143 days compared to 203 in FY 2014 but remains to be seen if they can bring greater efficiency. Shorter debtor cycle in export segment might be of help.
  5. Though they are capitalizing interest and maintaining operating margins of 19% or so, I don’t see the ROCE meaningfully expanding from here.

I don’t closely track Omkar but as it appears from its financials & trend, a setback on business front or inability of the company to commensurately increase the revenues due to internal or external factors can adversely affect it’s operational performance, given the finance cost and other fixed costs.

In present environment when iodine prices are soft and commodities highly uncertain to call, any setback can severely test company’s resilience to financially withstand a downturn. Investors need to be cautious.

Discl - Not invested.

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I attended the AGM held today. Here are key takeaways.

Products with process patents are generating roughly 65% of revenues. The exclusivity of a process remains with the co. even if the patent is not granted yet. The co.'s strength is heterogenous catalysts,Mr. Omkar also is a PhD in heterogenous catalysts. Heterogenous catalyst is the X factor used to tweak a product process to derive more yield,the co. thus passes on a good chunk of extra yield to the customer in form of lower costs and keeps some benefit for itself. The products with process patents earn 40% types operating margins. The co. has filed 18 process patents and has received grants for 3,2 earlier and 1 very recently as mentioned by Mr. Omkar. He also mentioned it’s very difficult to estimate the market size of patented products but said its huge. There are 4 criteria that need to be fulfilled to introduce a new product,market size,diversified customer base,backward integration/existing chemical family and ability to file a patent for the same. The co. is looking to reduce dependence on iodine based products. Selenium derivatives and Resolving agents have fat margins among commoditised products. The co. plans to introduce 3 new products,one for Vitamin C,one for Folic Acid and one a Vet API. The co. is expected to get environmental clearance for Chiplun plant very-very soon,after trial runs and commercialisation it will contribute 20-25 crs of sales in the last quarter. Capex for this fiscal will be 40 crs approx. of which most is done,for next year it’s slated to be 30 crs. approx.,plans to take Lasa to 600 MT capacity. The co. is looking to enter veterinary formulations in 15 month’s time,forwardly integrate its API business,it expects to win contracts from existing customers which buy API and outsource formulations,will acquire a readymade facility with all approvals and infrastructure in space. Recognised Sequent Scientific as a competitor,Mr. Omkar said difference between the 2 is that Sequent follows conventional processes while Omkar follows catalytic processes,it’s forte. Plans are in place to reduce WC cycle,iodine supplier from Chile has put up a facility at Nava Sheva due to which capital blocked due to transit time will reduce and co. has consciously tightened credit terms-brought down from 60 days to 30 days,has lost only 10-12% business because of the same. Debt is on books mainly due to a long WC cycle and reduction of same will release capital and also help reduce pledge of shares. Target is to bring WC down from 120 days to 90 days,achievable in a couple of quarters. QIP is taking time because of market conditions and mainly because co. aims to dilute at a higher valuation,QIP might get priority if co. can zero in on an acquisition. Sales growth is expected to be at 30-35% CAGR for next few years.

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Omkar results out today.

Sales increased from 66 cr in q2 fy 15 to 101 cr in q2 fy 16.

Net profit increased from 6.4 to 9 crores.

Half yearly EPS is at 8.35. (There is an error in the figure of eps reported in the result put on bse)

Looks like the good times are continuing for the company.

total debt at 215 crores as compared to 200 crores as at end of q2 fy 15. (there’s variation in long term and short term figures but overall figures are as put up here)

Promoter pleding continues.

disc: invested.

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Yes, good set of numbers indeed.

Below are the concall details:

Date: 26 October 2015, Monday
Time: 2:30 PM
Dial-in Numbers: 022-39600659 / 022-67465959
Hosted by: Dr. Omkar Herlekar

Disclosure: Invested

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How do u deal with the growing debt in company.

I was put off by the company because it has been constantly raising money from markets.

a. The company raised 80 crores through IPO in 2011

b. Raised another 80 odd crores from 2012 to 2015 through borrowings (and even now it continues)

c. There were talks about it going for a private placement and diluting stake to raise more money in current year

d. Not to forget promoter himself seems to be pledging shares for raising money for himself

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Omkar Specialty Chem - Concall Update – 2H will be better than 1H on topline growth (Fund raising on cards if they go for acquisition)

· Revenue breakup - Of the total sales, for Q2 about 44% came from Iodine derivatives, about 34% from intermediates, about 17% from API’s, Selenium derivatives about 4% and rest came from resolving agents. During Sep’15 quarter, about 92% sales came from India and rest were from exports. For 1H, about 31% of total sales came from Iodine derivatives, about 43% from intermediates, about 20% from API’s, Selenium derivatives about 4% and rest came from Resolving agents. For 6 months ended Sep’15, domestic sales contribute about 61% of total sales and rest were from exports.

· Higher trading volume led margin contraction - OPM was lower on YoY basis by about 190 bps YoY, as sales for Q2 included Rs 20crs of trading business. These trading business were relating to sales on trail and error of products before going for a complete commercialization. As per the management, commercialization of some of these new products which are iodine derivatives will take place in H2FY16.

· Leverage - Gross debt stood at Rs 218cr vs Rs 224cr in Mar’15. There were deferment of some short term debt in consultation with banks which led to increase in LT debt from Rs 60cr to Rs 115cr while ST debt declined from Rs 140cr to Rs 100cr as of Sep’15. D/E at 1.17x vs 1.32x in Mar’15. Company plans to reduce debt by Rs 20-25cr by Mar’16.

· WC Cycle – Company’s WC cycle stands at 103 days as of Sep’15 vs 111 in Jun’15 and 143 days in Mar’15. Company targets to bring it down to 90 days over a period of time. In near term WC cycle will be around 95-100 days.

· Capex and expansion - Unit V received environmental clearances of its Unit V at its Chiplun facility and commercialization to start from Nov 2015 onwards. Thus the overall capacity of the company will increase gradually by 3000 tons by early FY17 and will further increase by another 2000 tons by early FY18. The company has done most of the capex and residual capex of about Rs 15 crore will be required further if any. At optimum capacity utilization of all the plants and units, the company can generate revenue of around Rs 800-850cr.

· 2H will be better than 1H on topline growth – Management guided that H2FY16 will show higher revenue growth on YoY basis than H1 growth. Further, OPM is expected to improve further and will inch towards 21%. As per the management, new products in higher margin segments and newer geographies will drive higher margins and revenues going forward

· Fund raising only if company go for acquisition (Key Overhang) – Company is look out for Formulation API plant in veterinary space with approved facilities for EU/US markets. Company will fund it through equity (QIP) mostly. Not yet zeroed down to any potential target and its strategic plan to integrate its business. For ongoing business, no need for funds and is currently FCF positive.

· Update on Pledge - Mgmt guided that pledge to come down gradually going forward. Pledge was to fund WC requirement

Overall…fund raising and another acquisition is unnerving…

Discl…not invested… will wait for better entry point

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Adding below Omkar IR’s response to few questions that I had asked them over the e-mail.

  1. Finance Costs -

  2. I heard in the concall that the short term debt has been converted into long term debt. E.g. given was of a 1 year loan getting converted into a 2 year loan. What is the purpose of re-structuring debt like this?
    Ans.- Since, the STL were putting pressure on cash flow, hence, some of the Short Term debts have been renegotiated with lenders and converted as Long Term debts.

  3. The above restructuring i.e. converting short term debt into long term I assume should result in interests costs going down. But I see that the finance costs have been going up. What is the reason for finance costs going up despite a re-structuring like above?
    Ans.- The conversion was done at the end of quarter hence there is no significant change in interest cost. The additional finance cost is due to interest on Loan against shares.

  4. Has any extra debt been taken? And, if yes then for what purpose?
    Ans.- Rs.4 crore additional limits were sanctioned by Bank to meet the additional working capital requirement of Lasa.Has our company being capitalizing interests costs? If yes, then why? No interest capitalization during the quarter.

  5. Process Patents-

  6. Assuming that these process patents result in reducing costs, what is the impact of these process patents on costs i.e. by what percentage are the costs brought down?
    Ans.- Around 15%.

  7. If possible can the impact of these process patents on Margins be stated?
    Ans.- The impact of these process patent can be seen in the long run.

  8. What were the savings in H1 FY16 and Q2 FY16 because of these process patents?
    Ans.- Direct saving cant be quantified but Increase in sales revenue, Having good concrete order book in Hand are the Advantages and results of Having Process patents.

  9. Do these process patent provide any competitive advantages over competitors?
    Ans.- Yes.

  10. Don’t competitors come up with such process patents?
    Ans.- So far the competitors have not developed such processes.

  11. Raw Materials-

  12. What is the outlook going ahead on raw material prices?
    Ans.- We expect the raw material prices to remain stable in near future. As most of our RM are basic petro Chemicals.

  13. What is the percentage of imported raw material costs as a part of overall raw material costs and as a percentage of sales?
    Ans.- Will be Provided shortly.

  14. Does our company enter into any forward contracts to hedge currency fluctuations? If yes, then can you state the amount of such forward contracts as on date?
    Ans. No. Generally we have natural hedging on account of forex inflow on the export sales made by the company.

  15. Are there any inspections and certifications lined up from regulated markets in Europe and USA for our plants? If yes, then from which markets and regulators? And till when will our plants receive those
    certifications or approvals?
    Ans.- Yes. We are planning approval of TGA as Our API has high demand in Australia and New Zealand(2-3 Months approx.). Also at later stage were are planning to Get US FDA as well. (Around a year’s time Max)

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really good job . where should we get Q2 con call now in transcript

I am not sure if Omkar provides the same on their website. But in any case I think researchbytes also provides the transcript.

Regards.

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Hitesh bhai,

What should be the fair PE band for this kind of capital intensive, leverage co, low RoE, despite very good growth.

Just wanted to know how market perceives these kind of chemical speciality comp, I have never invested in such co.

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I think it could range between 10-15 PE if its showing good growth which it is currently doing.

It could go up to 20 PE if there is roaring bull market or if there is froth in the counter.

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Omkar talking about acquisitions and new business :
http://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/omkar-speciality-chemicals-forays-into-vitamins-segment/articleshow/50159778.cms

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Omkar rating downgraded…

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=a9f188c8-8ca1-4841-bd36-d4fddf7a47ed

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