Oriental Carbon and Chemicals Ltd


(Krishnakumar M) #246

Thank you so [email protected]


(shunz) #247

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?


(Ayush Mittal) #248

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


(shunz) #249

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.


(Ayush Mittal) #250

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


(Aksh) #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.


(shunz) #252

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.


(Vikrant Yadav) #253

@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


(shunz) #254

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.


(Tarun_1984) #256

HDFC MF buys 1.85 Lac [email protected] 685, has been recommended by Daljit Kohli at India Nivesh. He is a pretty good and conservative analyst. Chemical share are in favor now and this one can be considered below 650. Share has been steadily increasing in EPS and is 40% discount to Industry PE (though i am never conformable with Industry PE as a BM)

Disc: Invested at 650 and plan to add.


(kris2727) #257

OCCL would reward investors handsomely if you have patience to wait for 4-5 years. Radialisation will be a game changer
for the company. Any disruption will not effect this company as Tyres are needed for any vehicle. It doesnt have a severe competition in India and Oligopoly companies have done well in India.

Disc: Invested at 450 and may be biased.


(Varadharajan Ragunathan) #258

Agree - its a big position for me. I heard that they are trying for a break through in the US market and if done, it will help improve cap util and realizations in its new capacity. improvements in volumes in domestic market, pick up in luxury buses and high end CVs (given improvement in roads) will help improve its performance in domestic market. its a low volatility, decent div yield stock - i only wish the growth in topline was a little faster though. the fly in the ointment is the demand situation in europe - which is quite lukewarm at the moment although for such a small player, market growth is not necessarily a driving force - its more about taking market share away from existing players.


(chintri) #259

what do you think of valuations at cmp? I am also invested in this and planning to add more but some how every time I think, the stock price goes up. Even on muhurt trading session, I thought but couldn’t do. What do you make of valuations


(kris2727) #260

Chintri, One thing i have learnt which is most common but very hard to accomplish, is to buy cheap. OCCL valuations are bit high and please buy on any corrections. If Trump wins US elections , then Market will fall and that could be an opportunity.


(chintri) #261

occl q2.pdf (2.5 MB)


(kris2727) #262

OCCL Q2 results are as expected and nothing great. I am not really happy with Interim dividend, instead they could have used it to reduce the debt.


(Vivek Gautam) #263

Didn’t you notice the big positive news? Co has completed the expansion 3 months ahead of schedule and will be shipping its product to the biggest market US which was so far the monopoly of Eastman Chemicals?

US customers are eagerly awaiting the advent of a quality competitor. It nicely increases the opp size and co execution is happening.

discl-invested since 2014 n 2015.no activities in last 3 months


(Vivek Gautam) #264

one more coverage of Occl n Premco Global,


(chintri) #265

OCCL_Investor_Presentation_Q2FY17.pdf (1.4 MB)


(kiran) #266

In the presentation it says the capex till 2018 will be funded by a debt to equity of 2:1
Will that be a cause for concern?