Has any company in this chemical sector created good wealth for investors in India?
Hi Guys,
Meeting with Oriental Carbon Senior Management - tentatively scheduled in 2 weeks time.
Please fire away your questions and help us collate a complete set of questions - to make the most of the opportunity.
Rgds
Donald
Hi Guys,
Here is the latest compilation, based on all the inputs received so far.
Let us know asap, if anything else needs to be covered. Looks exhaustive to me. If we can do justice to this, we should have all the insights we need on OCCL:)
Cheers
Donald
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Questions for Oriental Carbon & Chemicals
- Oriental Carbon & Chemicals has taken some rapid strides over the last 5 years. Sales have grown at a 25% CAGR while Net Profits have grown at an amazing 73% CAGR. Also the company has been operating at a different level since FY 2010. Operating Margins have jumped from 14-16% levels to 30% plus levels in last 2 years.
Kindly share the journey. The business started picking some momentum around 2005-6. What were the catalysts?
The company entered a different trajectory from 2010, as margins moved dramatically upwards. What changed in the market dynamics? What have you done differently in the last few years?
- Insoluble Sulpher is today the main product segment and Tyre majors are the main customers. Flexisys (USA) is reputed to be the dominant supplier worldwide. Apart from Oriental Carbon, other players known Shikoku (Japan) & Sinorgchem (China).
Kindly tell us more on the market Opportunity. What is the total size of the market- Domestic & Exports? What are the growth drivers Ć¢ both in India & in Export markets.
What is Flexisys market share and what is yours? How big are the Chinese & Japanese competitors. Do you enjoy any competitive advantages over the other Asian players?
- Entry Barriers. Competitive Advantages.
Kinldly tell us more about the nature of this market? Why is one company Flexysis having such a dominant market share? Why has it not attracted more investment and more players? What are the entry barriers?
Oriental Carbon has been in Insoluble Sulpher business since 1994! But Business Performance has become noticeable only since last 2 years, Why?
Solutia has reportedly announced plans of 50000 MTPA expansion in Malyasia. How does this development impact OCCL? When will this new capacity likely to come on-stream?
How is Oriental Carbon placed today? Will it be able to sustain its competitive advantages? Why?
- Customers. Revenue Contribution from top customers.
You have been mentioning OCCL getting preferred supplier status. Can you elaborate on that.
Do you have long term contracts with any of the majors? What is the normal contract duration?
Kindly share recent customer successes and or deeper penetration into existing accounts. Have more marquee names been added to the list?
How much does your top 3 customers contribute to Sales? Does any one customer contribute more than 10% of Sales?
What kind of approval process do you have to go through with your major customers? Do you have to take plant-specific approvals? Is the new Mundra Facility approved for all your customers?
Are there any majors that you are persuing currently that may lead to increased sales?
- Capex. Installed Capacity has gone upto 22500 MTPA. You have been mentioning capacity being pre-sold. You had also been mentioning land availability for the next 11000 MTPA expansion.
Looks like, demand was far outstripping supply. Please tell us a little more on the demand situation you saw in FY11 and FY12. How is the demand outlook looking now with double the capacity?
What is the total Capex cost for the 11000 MTPA incurred in Mundra Phase I & II expansions? And how much will be needed for the next 11000 MTPA expansion?
The latest AR mentions slowing growth possibility in Euro Zone. Have any major customers cut back on plans? What are the plans for the next expansion?
- Exports. Exports today constitute ~60+% of total sales up from 40% levels in FY 2001. Export Geographies & contributions.
Kindly provide the Geographical spread - how much from Europe, US and other markets. How much of export sales is booked in Euros and how much in US$? Any other currencies
Do you have higher margins from Export sales?
What kind of hedging policy is followed by the company? US $ Hedges seemed to be order of 50 lakhs only and same for Euros. Loan positions are left unhedged. Do we see changes coming in due to increased volatility, or will this policy remain largely unchanged?
What is the sense that you have got from your Export customers? What is your order book size at the moment? Have you noticed any slowdown in order book already?
If Export demand sees a decline, what are the plans to counter this risk? Can domestic market absorb additional sales? Can you penetrate deeper into customer accounts from the US, if say Euro Zone slows down?
Are there middle-east markets,etc that can absorb higher supplies from OCCL?
- Raw Materials. Sulpher and Napathanic Oil are the major raw materials. RM/Sales usually is in the 30-35% range. But had shot upto 45% in FY09. Last 2 years have been benign with RM at 26-28% of Sales. 1QFY12 has seen RM shoot up significantly to 35% of Sales
Kindly explain the overall raw material linkages and demand supply situation. If crude prices soften, will that see prices of Napathanic Oil & Sulpher both easing off?
What is the situation currently and outlook for the year?
Kindly explain the nature of RM procurement. Do you have agreements with leading suppliers, how does it work? In most years we see a mix of local purchase and imports. Some years we have seen no imports? Imported RM in FY12 is ~19% compared to ~14% in FY11. Kindly comment.
Would you say there is a direct linkage of raw material prices to operating margins?
- Power & Fuel costs. Power is the second biggest cost component for the company.
Power costs have gone up to ~13% of Sales from ~10% levels a year or two back. Kindly explain.
Do we have long-term agreements with power producers or we purchase ad-hoc?
- Working Capital. FY11 has seen Working Capital/Sales climbing up to ~40%. Mostly because of debtor days going up by a significant 20% in FY11 (over the 40% increase in FY10 over FY09). In FY12 Working Cap/Sales is back to about 34% of Sales.
Kindly explain the sales cycle Ć¢ What kind of debtor days do you have for International & domestic sales? What kind of Inventories do you normally need to hold on the RM front, especially Sulpher?
Why have we seen big jumps in FY10 & FY11, followed by some cooling off in FY12? What according to you is a sustainable level for the next 2-3 years? And Why? Please comment.
- Margins & Profitability. FY10 and FY11 has seen Operating Margins at 30% plus for the first time. Realisations has moved up from ~Rs 70/kg in FY07/08 to ~Rs 95/kg in FY09 and Rs 100/kg for FY11 & FY12. In FY12 Realisations have climbed to Rs. 116/Kg.
Is it correct to say that because of Sulpher prices going through the roof ion 2008-09, operating margins in FY09 were subdued. Otherwise OCCL had started getting higher realisations from FY09, and margins were actually on an upswing since then, not FY10.
Is it correct to say that FY12 higher realisations are entirely due to the Rupee depreciation effect?
Export Realisation came in at Rs 113/kg, while overall realisation is at ~Rs 116/kg. It also looks like you had better realisations in the domestic market in FY12 than in exports? Is that correct? Does the domestic market work on Import-Parity basis?
International prices of Insoluble Sulpher are quoted at $2200-2600 per Tonne? OCCL seems to be billing at ~5-10% discount to the lower range. Are there any chances of improving $-realisations? Why?
The Rupee has depreciated by ~22% against US$ and some 10% against the Euro in FY12, but OCCL has not really been able to ride the benefits all the way. What are the main reasons for this? Were there any losses on Forex account due to hedging?
What kind of realization levels are possible in FY13 & FY14? If rupee remains at current levels, do we see margins reverting to 30%+ levels? At what levels do you see Operating margins sustaining for the next 2-3 years?
- Value-Added products. Insoluble Sulpher High Stable and High Dispersion grades. Supplies of High Stable grade started in FY 2009 on a regular basis. High Dispersion Grades have been approved by some tyre majors.
Please tell us a little more on higher grade Insoluble Sulpher market and the demand for it. What are the advantages? Are margins superior and by how much? Is the demand shift trend more in export markets?
May 2011, Sinorgchem has announced setting up a 15000 MTPA High content, High stable, High dispersion Insoluble Sulpher plant in china? How does this affect your plans?
What is the contribution of High Stable, High Dispersion grades in better price realizations for the last 1-2 years? What is the revenue mix currently in Insoluble Sulpher segment from High Stable grades?
2011 & 12 Annual reports mention Company is currently working on development of pre-dispersed Insoluble Sulphur. Is this another value-added grade? Any other new products/grades in the R&D pipeline.
What kind of R&D Set-up do you need to maintain? Is this sufficient for the current needs, or will it need sustained higher investment?
- Chemicals Product Segments Ć¢ Sulphuric Acid & Oleum
Kindly tell us a little more on these product segment markets, demand/supply and raw material linkages. Is it true that the domestic market moves with the whims of the main supplier Ć¢ Hindustan Zinc?
Chemicals segment contributes just 10-12% in Revenues but in bad years have the potential to drag down margins drastically? Why would you continue with such volatile segments? How much is the cost saving from Steam, generated from the Sulphuric Acid plant, in percentage terms?
FY11 & 12 were benign for the Chemicals segment Ć¢ with 14% plus EBIT margins? But FY12 EBIT levels were down to 5%. What is the outlook for FY13?
Any plans of divesting this segment altogether?
- Medium term Outlook
Given the 22500 MTPA capacity, what is the capacity utilisation and Volume targets in the medium Term?
How is the overall market growing in the medium term?
What rates do you see the domestic market growing? Will it be able to absorb higher levels of supply in the medium term?
- Tax Impact for FY12 onwards
Please indicate the applicable tax rate for FY12? Will Mundra SEZ facility get any MAT credit? Does that mean in FY13 11000 MTPA production/sales will get MAT credit at 18% rates while the rest will be taxed at full rate?
Where do you see Net Margins stabilizing at for the next 2-3 years?
- Schrader Duncan acquisition.Oriental Carbon holds 12.58% in Schrader Duncan, a listed entity.
Kindly explain the rationale-Why was the stake in Schrader bought in Oriental Carbon?. It looks like an unrelated business with poor return ratios and was earlier making losses? What is the situation now? Since OCCL has divested businesses in the past, what are the plans for the Schrader now?
- Dividend Policy
Please indicate the dividend policy followed by the company. While dividend amounts have increased over the years, it has not kept pace with the increase in earnings. Payouts have fallen from ~47% in FY03 to 11% in FY11.
- Pledging of shares. 254514 shares pledged
Although this is under 5% of promoter shareholding in the company, this has been continuing for a number of years. Please explain the circumstances for the same and why is this not being paid off & revoked.
- Major opportunities & Challenges
Where does Oriental Carbon see itself in the next 5 years? Can we see Oriental Carbon reach 500 Cr Sales, by when? What are the major challenges before the company and where are the big opportunities?
1 Like
Hi Donald, very exhaustive set of ques,almost covers everything
Still, i will add few ques which come to my mind about Solutia:
1). Solutia proclaims to have a superior product(lower dispersion and higher heat stability) and due to that nature , the cost incurred by manufacturer on inoluble Sulphur is about 40% less.
2.Solutia is doubling its capacity in Kuantan and identifies India,China as key markets in Asia-pacific region
3). Solutia is the most preffered supplier world over of IS.
Will this hinder growth for OCCL ltd?
has Solutia started supplying IS to manufacturing plants in INDIA, or what are its upcoming plans ?
One thing surprising to me is the amount of investment in mutual funds by this company. It amounts to the tune of around 14 crores. Why not use the amount to reduce debt rather than take market risk?
The co belongs to 3rd brother of RPG n GP goenka the reclusive JP Goenka who did not had FIB.
Has 2nd generation or 3rd generation taken over which is making the difference.It will be betetr if a son in law (not through Love marriage) but a prefrably a professionally qualified with FIB has taken over ??
DLF.Jubilant & Sona Steering are examples which come straight to mind where a dynamic son in law took the group to great heights.
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Oriental carbon has come out with q1 fy 13 results.
qtr q1 fy 13 q1 fy 12 q4 fy 12 fy 12 (12M)
sales 55.73 46.6 61.5 216.3
np 8.76 9.46 7.8 31.45
cmp 122, market cap of around 124 crores.
book value 153.
Based on results and valuations, it seems not much is expected out of oriental carbon.
any positive surprises should bring about interesting stock price movement.
Hi Hitesh,
Its good to see that co has been able to better the operating margins to 30%! The sales are lower than my expectations and I was expecting a turnover of 65Cr for this qtr. If one looks at the nos in detail, there is an increase in inventory/finished goods worth close to 10 Crā¦may be the co didnāt book the sale due to some delay or some other reason.
For FY 13, I think the co can do a sale of 260-275 Cr and post an EPS of about 40. It seems one of the cheapest stock with high quality fundamentals.
The investment the co has made are into liquid fundsā¦i expect the investment must be to ready the cash for acquisition of the stake of Shrader Duncanā¦the acquisition was completed by March end or April mid.
Ayush
If you remove the effect of increase in inventory of 10 cr, the profitability would be worse than last year.
Also, the fact that the tax paid in the first quarter is 77% of last year though the profits are higher is indicative that the current year is not expected to be better than last year. Any reasons for the lower taxes?
Hi Guys,
Can we do a comparison study with Philips carbon as both of them are in similar business. Philips carbon is trading close to its 52 week low while OCCL is 46% above its lows.
Views invitedā¦
Hi Akbar,
As per accounting, inventory and finished goods are always shown at cost so the inc in inventory has no affect on profitability. While on the other hand the positive side is (my guess is that the inc in inventory would be majorly finished good) that it seems that the co faced some temporary issue and couldnāt sell the inc in finished good. Had the same been done the sales would have been close to 65 Cr and profitability would also had been higher. Most probably the Q2 should be better.
Though we need to check about the increase in inventory/finished goods.
Swapnil, No, OCCL is making an entirely different product from Phillips Carbon. The ratios and margins etc are much much better for OCCL.
Ayush
philips carbon black makes carbon black where there are many players in india itself. i think a subsidiary of ab nuvo is one of the bigger players.
pcbl also has power generation capacity but these power producers are a sorry lot these days with low merchant rates.
OCCL manufactures insoluble sulphur and is second only to the larger global player. In india it happens to be the biggest player in insoluble sulphur.
as mentioned by ayush, you can compare the margins, ratios, debt profile of the companies in question and get a better picture.
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Hi Guys,
Can we do a comparison study with Philips carbon as both of them are in similar business. Philips carbon is trading close to its 52 week low while OCCL is 46% above its lows.
Views invitedā¦
philips
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** sulphur.as **
picture.
Thanks for the clarification Ayush & Hiteshā¦
Waiting for some price correction to re-enter this gemā¦Currently broader market seems to be in a correction modeā¦so I believe that in the near term we might see more pressure on midcap/smallcap stocksā¦Want to ābuy right stock at the right priceā
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Hi Guys,
Finally theOriental Carbon Stock Story.
Even better, theOriental Carbon Management Q&Aupdated for your perusal.
While growth has slowed down as evidenced by Q1 results (and we will check on this), the picture for the year may not be bad. As per some senior investors, OCCL is still one of the most mis-priced bets going around - the mis-pricing increasing by the quarter:)
Have a look at the stock story and the Management Q&A, why we think OCCL competitive advantages are sustainable!
Please carry forward the discussion!
Rgds
Donald
OCCL looks like a big (second big) fish in a small pond.
going by management talk fy 13 should be a great year unless demand shrinks alarmingly.
there seems to be a good calibrated expansion by the company looking at the demand scenario.
But at the end of the day this will always be perceived as a chemical company and will be accorded valuations in line with the sector. That is unless company starts giving out big fat dividends which I dont see coming due to the capex lined up.
Looks like a company with limited downside, and at most moderate upside.
1 Like
Hi,
At 2 places in the management Q&A there is discussion about forex fluctuation-hedging and the lag effect. Is the impact of the lag-effect positive or negative?
Cheers
Vinod
Positive as far as i can make out.
Hi,
Thanks Donald for the excellent Q&A.
One thing that comes from being a follower is that you have to accept prices set by the leader. Since the management is saying that because the market is small, there is limited competition, does this not imply that sales do not have much headroom to grow.
Also is there scope for the company to target the Reliance rubber JV with Sibur:
This is because talks and negotiations take quite some time to materialize into being finally considered a supplier.
Also is there a likely chance of the company being an M&A target where a major Tyre company can acquire it to meet captive demand as well as to have a second line of revenues because Big tyre companies would like to be present throughout the value chain right from rubber plantations to something like IS
Sorry for the multiple questions but was curious to know more since the company is available at a very reasonable valuation.
Regards,
Nelson
Hitesh jee,
is it worth to nibble in to OCCl at cmp of 120 ??
reg
Paturi
Hi Nelson.
Thanks for your words of encouragement. We consider it our job to keep the small-investor community better-informed:).
Coming to your queries:
1). Being the 2nd supplier, the company is in a position to increase its penetration with existing customers and new markets. With expanded capacities they were looking at easily targeting 25-30% CAGR for next 2-3 years. There is enough headroom ton grow.
2). However, going by Q1 results there does seem to be a drag on growth/cutback by customers. The Management has deferred the next expansion plan till they see growth picking up. FY13 may see slower growth.
3). Itās customers are tyre majors. Any new tyre manufacturer will likely buy from Oriental Carbon than import. Not sure of Reliance rubber-Sivur - they will probably be suppliers to tyre companies
4). Insoluble sulpher forma a very small portion of RM for radial tyres. Unlikely that this is seen critial for backward integration.
The stock has to overcome some soft issues like perceptions on being a carbon black company, the seemingly de-worsification in Shrader Duncan, and some others.The upsides in this stock will come from continued good-performance. If growth tapers down it may well consolidate in the range it has so far.