Oriental Carbon and Chemicals Ltd


(SANDEEP SOMANI) #1
  • Bse Code: 506579
    • CMP:114
    • M/cap:116 crs
    • B/v: Rs 112 as on 31/03/2011
    • EPS:Rs. 36.30 as on 31/03/2011
    • P/E:3.14
    • OPM(%):32
    • NPM(%):25
    • Promoter Share holding(%):56.13

JUNE 11 RESULTS ATTACHED
The Company:

  • OCCL a company belonging to the Duncan JP Goenka group of companies, traces its origin to 1978 when it was incorporated as Dharuhera Chemicals Limited (DCL). In 1994 OCCL set up a unit for manufacturing of Insoluble sulfur which later emerged as the star product of the group.
  • Products:
    • INSOLUBLE SULFUR:
      • Insoluble sulfur units is situated at Dharuhera (Haryana).
      • Insoluble sulfur is marketed as “Diamond Sulf” in India and around the world.
      • It adheres to total Quality norms and is ISO 9001-2000 & EMS14001-2004 Certified.
      • OCCL produces wide range of insoluble sulfur grades (Including Pre-dispersed &
        Master batches).
      • It has installed capacity of 14,400 tonnes and Plant is running at full capacity.
      • It is being widely exported to leading tyre companies around the world.
      • OCCL’s efforts in exports have earned Government of India’s recognition as certified “Star Export House”.
      • One of OCCL’s unit in Dharuhera as a designated Export Oriented Unit.
      • More than 80 % of the company s turnover is derived from insoluble sulpher.
    • SULFURIC ACID:
      • The Company manufactures both Commercial Grade and Battery Grade Sulphuric Acid and Oleums.
      • Sulphuric Acid finds application as a dehydrating agent,catalyst,active reactant in chemical processes,solvent and absorbent.
      • It is used in the Petroleum,Paint,Rayon,Textile,Dyes,Fertilizers,detergent powder and cake.
      • H2SO4 is produced by the steam generation process used in insoluble sulphur. So it is essentially a by product that is sold in the market.

Operational Highlight:
The de-bottlenecking exercise was done by the company there by increasing the insoluble sulphur from 10703 tonnes to 14400 tonnes.

Future Plan:
The company has started work on a 11000 tonnes Insoluble Sulpher Plant in a SEZ at Mundra,Kutch,Gujarat in two phases.

The first Phase of 5500 MT has been commissioned in August, 2011

SWOT analysis

  • Strength:
    • Largest producer of insoluble sulphur domestically and second largest internationally.
    • The margins are improving on a YOY basis
    • 100% expansion in production
    • Commands pricing.
    • 80 % of the company sale comes from insoluble sulphur.
    • Exports constituted 70% of the total insoluble sulphur (by value) sales in 2010
  • Weakness:
    • The low dividend payout ratio.
  • Opportunity
    • Growth in radial tyre industry will result to a growth in insoluble sulphur industry.
    • If the economy revives fully than there will a shortage in insoluble sulphur supply domestically and internationally so this gives further opportunity to expand its production.
    • Insoluble sulphur is a seller market.
    • The trend in value added insoluble sulphur like HS and HD continues so through Continuous R&D the company will be able to keep the quality edge and gain more acceptance from the global tyre company and compete better with China.
    • Planning expansion to new markets.
  • Threat:
    • Global recession can be painful for the company
    • Any fluctuation in the Petrol prices will impact the raw material prices as most of its raw material are petroleum based.
    • Addition of capacities by Chinese producer.
    • Increase in usage of reclaimed rubber could hamper the growth of the industry.
    • Risk of adverse exchange rate.
    • The prices of the sulfuric acid is decided by the one dominant supplier for whom the sulfuric acid is a by product so will be a threat and the demand for Sulfuric acid will be subdued for some years.
    • The concept of reclaimed rubber will reduce the demand in the replacement market

Conclusion: At current price the stock looks cheap

Oriental_Carbon_-_Chemicals_Ltd_260711_Rst.pdf (26.5 KB)


(Ayush Mittal) #2

Hi Sandeep,

Yes, this is another co which has been doing very well and looks interesting. I’m invested in it from much lower levels.

The only negative to my mind - historically the margins have been very volatile. Current margins seem too good to be sustainable. Need more understanding on the margin picture.

Regards,

Ayush


(OMPRAKASH) #3

I think it is a reasonably good company to invest in.Margins are improving due to adoption of quarterly pricing mechanism.Due to closely guarded technology and handful companies worldwide its having OPM of 32 per.As per the management statements in AR-11 almost all the new capacities aresold out.That’s showing the demand for this product.


(Donald Francis) #4

I had been searching for clues why margins have seen an uptrend since 2009. What did the company do differently 2009 onwards, since Insoluble Sulpher has been a product since 1994!

Some answers I found as below in this fairly detailed document from ICRA. Also concerns on Sulpher price volatility, which is a key raw material. To be on top of the investment in this company, we need to be clued in on both Sulpher pricing and Insoluble Sulpher pricing. Please add to this from your understanding.

http://www.icra.in/Files/Reports/Rationale/2009-December-OCCL.pdf

OCCL enjoys a dominant market position in the domestic market by virtue of being the only local manufacturer of Insoluble Sulphur in the country. It also enjoys a favourable market position as the aSecond Alternate Suppliera in the global industry, which is dominated by Flexsys of USA, with strong customer base comprising major tyre companies in the world like Continental AG, Goodyear, Bridgestone, Kumho Tyres etc. for exports and Apollo Tyres, Bridgestone, J K Tyres, MRF Tyres, Ceat Tyres, Goodyear India, Birla Tyres etc in the domestic market.

The company is expected to benefit from the favourable prospects for the domestic tyre industry driven by radialisation of tyres, wherein more Insoluble Sulphur is consumed as compared to conventional cross ply tyres, being a key ingredient for vulcanisation of rubber. In order to move away from the commoditized nature of the product, OCCL has ventured into manufacturing of tailor made grades of Insoluble Sulphur, which command a premium over conventional grades of Insoluble Sulphur as the European markets are witnessing a shift from conventional grades to value-added grades of Insoluble Sulphur. Closely guarded technology, capital intensive nature of the business and long time required for getting approvals from the tyre companies act as the entry barriers for competition.

In spite of its dominant position, OCCL continues to be exposed to the cyclical nature of the business. The demand of IS being derived demand for tyres in passenger cars remains cyclical and depend heavily on economic conditions. The prices of IS have remained quite volatile in the last two years in line with volatility in the prices of Sulphur, which is the major raw material for manufacturing IS. The volatility in the prices of Sulphur had negatively impacted the performance of OCCL in 2007-08 due to its inability to pass raw material price rise to the customers in a timely manner. Since 2008-09 the company started entering into quarterlycontracts instead of annual contracts with customers to provide itself the flexibility to pass on the raw material price increase. This has resulted in significant improvement in the profitability of the company in the last one and half years.

OCCL is also engaged in the production of Sulphuric Acid & Oleum which constitutes about 20% of the total sales of the company. Since these products are sold to selective customers locally, the company doesnat compete with larger players in the industry and the proportion of profits from these chemicals is small in comparison to overall profits of the company.


(Donald Francis) #5

Increased radialisationof tyres in emerging markets - seems to be akey driver of demandfor Insoluble Sulpher. (as per ICRA report and company)

This is also mentioned in the Solutia Investor presentation (Flexysys parent).

Interestingly OCCL is mentioned in the Presentation…Hmm…These guys can be big with the increased production capacity!


(Donald Francis) #6

Based on first impressions.

Positives:

1). Looks to be a decent company, high margins, low debt, good dividend yield, available cheap.

2). Increased Production capacity (1st phase) is already sold out as per the company. Management mentions capacity as a constraint against higher Sales

3). Global & Domestic demand situation looks positive - needs more investigation

Concerns:

1). ~60% is Exports Sales; looks to be mostly Europe

2). Commodity price cycles -where are we now?

3). Slowing profitability - Q1 had 36% sales growth but only a 6% PAT growth - we should pinpoint the reasons if we can. What are sustainable OPM levels, and why?

4). Despite better business performance - the stock has kept sliding in the last 1 year Aug/Sep 2010 high/low is 154/132 …we should understand why?


(Donald Francis) #7

Global competitors: Flexisys (USA), Shikoku (Japan), Sinorgchem (China). It does seem like a oligopoly market cornered by a few players.ICRA mentions OCCL as the Second Alternate supplier to Flexisys for most tyre majors.

Solutia presentation mentions following as entry barriers in this Global Niche market, (somewhat echoed by the ICRA report too):

âTechnical know-how

âTechnical service

âQualification time

â Capital intensive

âIndustry risk adverse

Lets dig a little more on Insoluble Sulpher market, the players, etc. Establishing why margins will be sustainable and at what levels, may be key. RM price volatility is also key to this business…


(TCX) #8

Solutia Announces Expansion of Crystex? Insoluble Sulfur Manufacturing Capacity in Asia

Tuesday, January 25, 2011 4:31 PM

http://www.istockanalyst.com/article/viewiStockNews/articleid/4834929

Expansion will double capacity at Kuantan, Malaysia facility

“Tire manufacturing has seen a tremendous migration intoAsianull, as our strategic partners and customers continue to add resources and capacity in this growing world region,” said Greta Senn, president and general manager of Solutia’s Technical Specialties division. “As the long-term global leader in insoluble sulfur innovation and technology, we remain committed to providing products with demonstrable performance advantage and serving our customers worldwide.”

Solutia currently produces Crystex insoluble sulfur at seven locations around the world, including facilities in Kuantan, Malaysia and Kashima, Japan. “This expansion will allow us to build on the proven success of the Kuantan facility and further strengthen Solutia’s reliability of supply in the broader Asia-Pacific region,” added Senn.


(TCX) #9

Sunidhi Report on Oriental Carbon March 2011


(TCX) #10

Sinorgchem begins work on insoluble sulfur & acceleratorunits

Filed under:insoluble sulfura Notch @ 5:32 pm

http://notchconsulting.wordpress.com/2011/06/12/sinorgchem-begins-work-on-insoluble-sulfur-unit/

On May 27, Taizhou Sinorgchem Technology Co., Ltd., a subsidiary of Jiangsu Sinorgchem Technology Co., Ltd.,broke ground on a new RMB 1 billion($154 million) project in the Binjiang Industrial Park of the Taizhou Pharmaceutical High-Tech Zone. The first phase of the project will be a 5,000-ton production line for insoluble sulfur with high content, high thermal stability and high dispersion. The first phase is expected to be completed in the third quarter of 2012. Eventually, the site is expected to have 15,000 tons of capacity for insoluble sulfur. The site will also include two units for rubber accelerators: a 30,000 ton unit for accelerator M (MBT) and a 30,000 ton unit for accelerator NS (MBTS).


(OMPRAKASH) #11

Hi Donald,

Actually Q1 Fy12 results are good.Sales up by 36 per and operating profit up by 23 per.As result of Higher tax provision net profits grew by 6 per.Raw material cost to total sales is 34 per and depends on crude.The reason for price fall is during the last quarter LIC dumped almost 1.75 lakh shares and it is absorbed by JNJ holdings and some others.

Although it is commodity type of business,due to its product demand,increasing capacitiesandgood balance sheet i hope stock will get rerated .

http://ventura1.acesphere.com/Pdf/Equity/StockIdeas/OCCL%20Report.pdf Link: http://ventura1.acesphere.com/Pdf/Equity/StockIdeas/OCCL%20Report.pdf

http://ventura1.acesphere.com/Pdf/Equity/StockIdeas/OCCL%20Q1FY12.pdf Link: http://ventura1.acesphere.com/Pdf/Equity/StockIdeas/OCCL%20Q1FY12.pdf

3).


(SANDEEP SOMANI) #12

Historically, RM as a % of sales has been in the range of 33-35%. However, in FY 2008-2009, the same shot up to 47%. This was the period when oil prices was at its peak at around $140. If i recollect correctly, all were caught unawares with the global crisis and subsequent events. So was the management of OCCL which couldn’t take necessary action in time to pass on the price increase. Post that, RM% to sales have again stabilized to its historical levels of 30% with a point here and there. So I still believe that unless we see a sudden spurt in Oil prices, the current margins are sustainable in the medium term. Also, from the 2008-2009 experience the management has become wiser and now prefers quarterly contracts to deal with pricing issues. However, one key risk i.e Europe Market still remains.

Since tyre companies are its consumers, we also need to find out what % of sales of tyre companies arise from OEM’s and replacement market, because though OEM market may suffer from any sort of global economic conditions, replacement market may not.

Also, it is inevitable that we may find many problems within a company. However, what matters is the management’s response to it and I think OCCL scores well on that count.

Lastly, this is one stock I feel can given more than decent returns even without any serious PE Rerating.


(Donald Francis) #13

Thanks for the details Omprakash and the links. Useful!

Some observations:

1). OPM has been sliding for last 3 quarters from 32.35% to 31.46% to 28.61% in Q1 FY12

This does not go very well with the claims of quarterly pricing being able to pass on RM hikes, unless RM Sulpher has been on a boil for past 3 quarters

2). If Sulpher prices have indeed been rising, we need to track and understand that trend more carefully. Despite all the positives in the stock, that might be the real overhang on the stock?

Can someone dig Sulpher pricing trends?

Also would be interesting to check the correlation of Sulpher pricing and OPMs for the company 2007 onwards.


(Donald Francis) #14

Hi,

Some more observations/concerns:
First look at these data points.

FY09

FY10

FY11

Q1FY12

Sales

124.27

127.75

161.54

47.34

Operating Margin

12.25%

31.24%

31.57%

28.17%

RM/Sales

45.77%

26.80%

28.87%

35.09%

Sales Mix

Chemicals

19.49%

8.29%

12.03%

12.34%

Insoluble Sulphur

80.51%

91.71%

87.97%

87.66%

EBIT margin mix

Chemicals

-6.16%

14.27%

19.48%

14.47%

Insoluble Sulphur

17.77%

30.15%

29.16%

26.21%

What does this tell me:
1. There is a high correlation between RM and Operating margins
2. Product Mix has changed from 20:80 to ~12:88
3. Insoluble Sulphur is also prone to RM/margin pressures
4. A better product mix is not enough to mitigate RM pressures
5. RM pressures are beginning to show up (1QFY12) and Margins are impacted straightaway, although to a lesser extent than before
A profitable Investment into the company is closely linked with the RM cycles. (mainly Sulpher?)
Can someone investigate and throw light on the Sulpher price trends??
- Donald


(Donald Francis) #15

Sandeep,

I somehow missed your earlier reply. Thanks for the inputs.

Do you have RM/Sales computed for earlier years? Its not that OPM suddenly suffered in FY09. It was worse in FY08, and a little better at 17% in FY07. My sense is the link again would be RM price volatility.

Any data from your for earlier years would be helpful.

-Donald


(TCX) #16

RM composition in last 2 years

RM

FY11

FY10

Sulphur

20.67

44.39%

10.59

35.91%

Napthanic Oil

19.35

41.57%

13.79

46.79%

Others

6.54

14.04%

5.10

17.29%

46.56

29.48


(TCX) #17

Sulpher Demand/Supply Balance:outlook to 2015

Pretty useful as a backgrounder. We need to find latest data though.


(Donald Francis) #18

Thanks TCX, pretty useful backgrounder to understand Sulpher production & constraints.

ICIS London seems to be a good place to track Sulphur. Sulphuric Acid supply/demand situation.

http://www.icis.com/staticpages/sulphur_sulphuric_acid_lp.htm

Current situation/ trade flows

  • Global prices of sulphur and sulphuric acid reached unprecedented levels beginning in late 2007 and throughout the first half of 2008 driven by high demand in end use sectors, particularly the phosphate fertilizer industry. High prices in that industry allowed for high sulphur costs to be absorbed essentially causing the run up in prices. At the same time, demand in other sectors such as base metals was healthy as well leading to increased trade and prices in the traded sulphuric acid. Prices began to decline in the second half of 2008 in-line with the global economic crisis and in 2009, both markets were in asurvival modea with the main focus on moving product at a time when demand was depressed.

  • In late 2009, demand in end use sectors improved causing prices to rebound continuing into 2010. Compared to historical levels prior to the spike in 2007/2008, prices are currently at healthy levels and are anticipated to remain that way through 2020 based on supply/demand fundamentals.

  • Major exporters of sulphur include the Middle East, Canada, and the Former Soviet Union (FSU).

  • Major importers of sulphur include China, which accounts for approximately 25% of global consumption, North Africa, India, and the United States.

  • As previously indicated, sulphuric acid is primarily produced from sulphur, but the main source of traded sulphuric acid is smelters located within the Far East and Europe.
    Growth/Forecast

  • Moving forward, the global sulphur market is expected to grow with demand keeping pace representing a balanced market. By 2020, production is forecast to reach approximately 82 million tonnes with demand of approximately 80 million tonnes.

  • Sulphuric acid production will also increase to approximately 285 million tonnes by 2020 with consumption to reach 280 million tonnes.


(Donald Francis) #19

Hi Guys,

I could not help myself from collecting more data points in order to understand the margin picture & sustainability.
First, the data points:

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Q1FY12

Sales

31.99

38.37

40.92

45.83

53.91

64.46

90.79

124.27

127.75

161.54

47.34

Operating Margin

16.44%

14.91%

13.47%

12.35%

18.42%

16.66%

14.13%

12.25%

31.24%

31.57%

28.17%

RM/Sales

29.73%

29.66%

32.94%

35.28%

36.81%

34.50%

37.53%

45.77%

26.80%

28.87%

35.09%

Sales Mix

Chemicals

18.19%

16.60%

19.40%

20.21%

19.19%

11.94%

19.83%

19.49%

8.29%

12.03%

12.34%

Insoluble Sulphur

81.81%

83.40%

80.60%

79.79%

80.81%

88.06%

80.17%

80.51%

91.71%

87.97%

87.66%

EBIT margin mix

Chemicals

-4.12%

-15.35%

-5.73%

1.42%

11.49%

-0.50%

22.01%

-6.16%

14.27%

19.48%

14.47%

Insoluble Sulphur

12.15%

13.07%

10.33%

9.67%

11.88%

12.54%

2.08%

17.77%

30.15%

29.16%

26.21%

What this set of data points tell me
1. RM/Sales FY 2009 45% was an extreme year (global recession). Usually have remained in the 30-35% range, 35-38% range a couple of times
2.Chemicals segment (Sulphuric Acid, Oleum) is extremely volatile going weak every 2-3 years. But is sustaining at record high levels for the first time for the 3rd year in a row. Demand curve must have shot up in the country,as prices are set by one dominant supplier (see notes below).
3.Sulphuric Acid demand is closely linked to Economic activity. The EU crisis runs the risk of lower global economic activity and therefore demand.
4. Even in the worst years for Sulphuric Acid, Insoluble Sulpher managed to hold its own.Sales mix moving in favour of Insoluble sulpher is a plus.
5. Insoluble Sulpher EOU unit of 5000 MTPA was set up in 2005. in FY2006, for the first time Operating margins climbed to higher levels of 18% plus despite significantly higher RM/Sales
6. Insoluble Sulpher margins have jumped up significantly from FY10. Probably the result of high stable grades regular supply starting in FY2009 and the share of the higher stable grades moving up. (See Notes below)
7. Lower Sulphuric Acid and Oleum offtakes, and consequent margin pressures for FY11-12 forecasted by the company.
Notes from AR FY2009 MDA
1. The Insoluble Sulphur market in America, Europe and Africa remain dominated by asingle supplier thus we are able to maintain our advantage as second supplier. This has helped your Company to tide over thedifficult period inspite of disruption in the demand and supply balance. There are no new capacities in the pipeline other than onecompany in China, which has announced its intention to increase its production capacity. The demand in China should, however,absorb significant portion of the additional capacity.
2.Supplies of High Stable Grades of Insoluble Sulphur to tyre companies have started on regular basis. The High Dispersion grades
have been approved in some tyre companies.
3.The trend of shift in demand to value added Insoluble Sulphur grades such as HS, HD grades continues. This is happening as thesevalue added grades offer ease of handling and more production flexibility to the consumer. Your Company, through continuousResearch and Development efforts, has developed new value added grades many of which are now approved by internationaltyre companies. This gives an edge to your company against competitors from China in the international market besides helpingto sustain realisation levels.
4.The demand for Sulphuric Acid continues to be low. With prices being decided on the basis of one dominant supplier, for whomSulphuric Acid is a by-product. The situation is expected to continue until there is an economic revival leading to increase inconsumption of Sulphuric Acid. Therefore, the production and sales of Sulphuric Acid is expected to remain subdued in thecoming year.
Notes from AR FY2010 MDA
5. The share of value added grades such as AS, HD grades in total sales has been on increase. As the current capacities are sold
out the focus is on the new project for total capacity of 11000 mtpa coming up in SEZ Mundra. The work on the first phase is
in full swing and production is expected in second quarter of 2011.
Notes from AR FY2011 MDA
6. Sale of Sulphuric Acid in 2011-12 is being affected by low off take inthe first quarter, which is traditionally considered a good period for it. Therefore, margins are expected to be under pressure in2011-12. Off take of Oleum has decreased due to addition of capacities in the region without increase in demand.


(Donald Francis) #20

My Bottomline on Margins sustainability:

1). Increased demand domestically (from more radial tyre facilities) and sustained demand from Exports (Second Alternate supplier) to Tyre majors as company maintains new capacity sold out subject to tech approvals.

2). Do not see the demand picture changing drastically for the year. Company expects robust FY13 demand too based on the advancement of Phase 2 5500 MTPA to come on stream by 4QFY12 (machinery orders placed, civil works started)

3). Margins will be effected as forecasted by Management too. RM/Sales has also gone up significantly.

4). Do not see Operating Margins degrading by more than 500 basis points. Worst case OPM 23%

5). Full tax rate will impact Net Margins further. EPS projections to be worked out accordingly.