Oriental Carbon and Chemicals Ltd

Stock Opportunities Untested - but worth a good look
234

Few points which I was not able to locate in annual report

  • No mention of current capacity and the size of new capacity which is being added.
  • No mention of the amount of insoluble sulfur sold in terms of MT, so cannot calculate realization per MT.

In earlier annual reports they used to mention both above points.

No major takeaways/ changes found from annual report. Few minor points

  • sales realization decreased being mentioned at many places.
  • company seems to have made process improvements in reducing the power usage and packaging costs keeping sales volume almost same.
  • Sluggish growth in international demand. Domestic demand decent.
  • Akshat Goenka (28Yrs) elevated to Joint managing director.
  • New capacities are being setup in India by Bridgestone, Michelin and Yokohama can increase demand.
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hi Sunil,

  • they dont mention volume because of competitive reason. have been saying the same in recent con-calls
  • their investor presentation given details of expansion. currently 23,000, adding 5,500 in 2017 and another 5,500 in 2018, taking capacity to 34,000 by 2018

additional point from annual report:

  • indicate progress in america and china and expect capacity utilisation in 2016-17 and also expect new capacity to be absorbed in these mkts
  • india being a growing mkt and increasing radialisation, expect double digit growth to continue.
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Coverage on cnbc-tv18 today -

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OCCL coverage:

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Hi, If Topline cannot grow until capacity expansion happens, stock price should consolidate but instead stock is going up continously. Anything cooking?

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Markets love certainty and here’s a company that’s reconfirmed during q1fy17 call about addition of new capacity to the tune of 25% by Q1 FY18. And being the no.3 in an oligopolistic business, valuation re-rating from 10x fy18 multiples can easily happen.

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240

AR 2007-08 as requested by @kmadiga

755-08.pdf (2.2 MB)

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Thank you very much @aashish2137

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There are certain aspects which hold me back from investing in this company.

Take a look at AR 2015. Following points are kind of red flags for me

  1. The JMD and MD will be paid 50% of their commission for meeting financial “forecasts” (Page 13-14) - I think more often than not, such terms and conditions lead to an increased probability of cooking up the statements for cashing those bonuses.

  2. The independent directors are getting a lot of commission ,apart from the sitting fee (page 32)- I think this is unfavourable to the independence of independent directors. Independent directors should get minimal to zero remuneration (apart from sitting fees).

Would like to have the opinion of others on this.

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This would have been relevant for a professionally managed company growing at a fast pace. Here the problem has been of slow growth :wink: Also, if you carefully look at the numbers, the company is reporting healthy cash flows and the same has been used to repay loans. The company has also been paying taxes and dividends and hence I don’t feel there is anything wrong in numbers.

Regards,
Ayush

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Annual reports from 2003-04 till 2010-11 as requested by @Krishna26

755-XX = Oriental Carbon-last two digits of the year end (11 is FY 2010-11)

755-11.pdf (417.4 KB)
755-08.pdf (2.2 MB)
755-04.pdf (1.6 MB)
755-10.pdf (2.4 MB)
755-07.pdf (2.0 MB)
755-06.pdf (2.4 MB)
755-09.pdf (2.5 MB)
755-05.pdf (2.8 MB)

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Thank you so much@aashish2137

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True. Your are right. The cash flows are healthy.

But I still have my reservations. For eg the AR states that dubey and tandon are independent directors. But it needs to be noted that they are the directors of Schrader duncan also, in which OCCL holds 51%. So they are independent only on paper.

I have two more queries:

The company had created a revaluation reserve. Upto 2014 it was charging depreciation (pertaining to increased value )against this reserve. In 2015 it reversed a part of this reserve and now it stopped charging the depreciation against this reserve. Why is that so? Why did it stop charging to revaluation reserve now? (Though ideally I think it shouldn’t have charged depreciation pertaining to increased fixed asset value to revaluation reserve in the first place itself, even though it is permitted under accounting rules. It should have charged it to earnings)

It is capitalising employee cost also (related to CWIP, AR 2016, P-80). Also, it is capitalising exchange loss on long term foreign currency borrowing( AR 2016, p-76) Is that ok?

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Capitalizing of employee cost and loss on foreign exchange borrowing should be for the expansion under progress. As per accounting standards its normal. Also, the amounts are not material (employee cost being capitalized about 1 Cr…when the overall profit is about 50 Cr and expansion proposed is of 125 Cr)

Other points which you have mentioned are relevant but I don’t have much idea. Will check

Regards,
Ayush

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Thanks Ayush.

The reason that I was worried with the capitalisation of loss on foreign exchange borrowing is that different companies are following different methods.

For example, like OCCL, greenply industries also capitalises this loss/cost. Please refer AR 2016, page 175, notes to fixed assets. Where as century ply is charging it directly to earnings statement under finance costs (AR 2016, page 187).

Both ways might be permitted under accounting rules. But I was wondering which method would portray a better and truer picture of financials from investor point of view.

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The accounting standards are quite detailed about the treatment of the same, please refer to them (I may not be updated with the recent changes). Its the norm to capitalize the foreign exchange gain/loss on the loan taken for the expansion, if the asset is under construction/capitalization. For other cases, it has to be provided in profit and loss.

Many often I like to think about these things from a layman and logical point of view rather than going by the rule. For eg - A couple of years back Balkrishna Ind had done a major expansion of about 2000 Cr and a majority of it was funded by way of foreign exchange borrowing. The company incurred heavy forex loss on the same and capitalized that amount. Though it was permitted by way of accounting standards but personally I didn’t like it (as the amount was about 15-20% of the total capex). While in this case, I think the amounts are pretty small (in relation to overall scheme of things) and hence can be treated as ignorable.
But yes, its important to take a note of such things. They reflect upon the attitude of the management. Are they conservative or aggressive on accounting.

Regards,
Ayush

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251

How can a loss already incurred, be it on anything, be capitalized, accounting standard or no accounting standard? I think, it’s not inline with the very ethos and principles of Accounting as it doesn’t reflect true picture of Business, eventhough modern AS may allow for it. If I recall it correctly, even ESOPs are allowed to be treated as Capitalization cost rather than expenses. Now, What a company pays to employees in lieu of their services, whether hard cash, ESOPs or any other benefits, What is it if not expenses?

This is why it’s very important to take reported numbers with a pinch of salt and one needs to look into it to see how different aspects of the businesses are treated to put a number on it and to adjust it accordingly.

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Precisely. Attitude of the management. That is what I am worried about. Since the amount is small, then why are they so keen on capitalising it. On this specific front, i found century ply to be conservative (neither invested in century, nor rooting for it).

The thing am concerned about is, if the management is capitalising it now, then it will capitalise it in future also irrespective of the scale/amount of cost involved.

This, in addition to the queries raise above, makes me feel that management is not transparent enough.

For eg, regarding the commision to MD and JMD point that I raised in one of the posts above, please note that this commission is not mentioned in remuneration section of MD and JMD on page 32 (AR 2015). Here the commission field is left blank.
After that, in AR 2016 this clause is completely taken out. Instead, on page 17 they have merely mentioned that MD, JMD and other independent directors are entitled to performance linked bonus/commission. However, as in the case of AR 2015, this commission field is left blank in remuneration section of MD and JMD on page 26 & 27.

I think there is a discrepancy in their statements about managerial remuneration.

These apprehensions might of-course be misplaced. We just need to dig in a bit deeper to be sure of that.

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@shunz (Sushil):

I have provided my response to your queries on my blog post. I appreciate you for bringing out some key pointers. Sharing my response here for benefit of all & larger discussion purpose.

  1. Regarding managerial remuneration:
    A)
    Page 32 mentions the commission for FY2015 while page 13-14 refers to salary to be paid for period June 2015 to May 2018. MD renumeration increased from Rs. 1.21 cr in FY2014 to Rs.1.43 cr in FY2015 - an increase of 18%.

The salary section on page 32 seems to be consolidated salary to the MD including wages, commissions, gratuity etc. Please refer to the definition of Salary in section 17 in The Income-Tax Act, 1995. While there is a separate header for commission, but it should be acceptable if the consolidated Salary is mentioned in AR.

Section 17 in The Income- Tax Act, 1995
17. " Salary"" perquisite" and" profits in lieu of salary" defined 3For the purposes of sections 15 and 16 and of this section,-
(1) " Salary" includes-
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance of salary;

Hope this also addresses your query for absence of commission field in AR.

The performance linked commission may impact the motivation of management to deliver. While it is important to align management’s salary with performance, it may also lead to management using inappropriate ways to achieve performance targets. I would look at the management’s pedigree, execution ability & past actions in addition to the salary structure. I have tried to capture the same in Management Analysis portion in my report.

B)
The commissions / sitting fee paid to independent directors is significantly lower than the executive management. One should be concerned if management is adversely influencing the independent directors by doling out large compensation. An in-depth study of management becomes all the more important.

C.
Schrader Duncan was a JV between Schrader Bridgeport, OCCL & Cosmopolitan Investments Limited. OCCL acquired ~50% stake in Schrader Duncan Limited from JV partner Schrader Bridgeport International Inc in 2012. Schrader Duncan is a small subsidiary (market cap of ~Rs. 27 cr) of OCCL.

I would feel uncomfortable if more than 50% independent directors have direct relationship with the management. There is always a possibility of common independent directors in related companies. This may happen due to limited availability of qualified people with understanding of specific business.

  1. Regarding capitalisation of costs:

Loss / gain on long term foreign currency borrowing may creep in due to reporting of exchange rate which is different from the rate at which the borrowing was initially recorded during the period.

Typically, long tenor foreign currency loan is taken in the form of buyers credit from banks. Buyers credit is used to settle the payment with supplier in foreign currency. If the procurement is for raw material which will get consumed in the same cycle, any loss / gain should be expensed. If company has raised buyers credit to procure a capital asset, it is reasonable of the company to capitalise the same in line with extant accounting principle.

Regarding capitalisation of employee expenses, my understanding is companies will expend the salary, gratuity, PF expenses but may capitalise the expenses arising out of technical / management training of employees. Such trainings may not help the company in short term but may accrue benefits in long term. I’m not sure if this is the case with OCCL; this could to be checked with the management.

When the asset is depreciated by ‘x’ amount; ‘x’ is transferred to expense account from asset account for the year. Revaluation of asset may increase / decrease the asset value (carried at cost value in balance sheet).

If there is upward revision in asset value, the increase is transferred to revaluation reserves. It’s normally not transferred to P&L as gain. Depreciation after revaluation is based on the revalued amount. If asset value is adjusted lower, the same is charged against the revaluation reserves to the extent that loss does not exceed the reserve amount.

OCCL has readjusted its revaluation reserves through depreciation till 2014. There is a large reversal of revaluation in 2015, possibly due to the downward revaluation of the asset value. There is no entry in 2016 for either depreciation and further lower readjustment. This is a valid question to be asked to the management.

You may have differing opinions on some of my responses. This difference in opinions is what makes up a market.

Regards

@ayushmit @cool_aksh

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Thanks for your elaborate reply Vikrant.

I am still not satisfied with 1A. Might not be a major issue but still speaks a bit about management transparency especially because of change in details provided in AR 2015 and AR 2016. I would agree though that the management is doing good and seems efficient looking at the past record.

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