For those of you who have met the management, how would you rate them in terms of:
Confidence and self motivation;
Energy level;
Ethics and integrity;
Sharing wealth with shareholders;
Determination/drive to grow the company, especially to develop products that will continue to drive the sales when the potential of current products are fully realized
|
INR/ kg |
1995-2001 |
2002-2007 |
2008-11 |
1995-2011 |
|
IS ASP (per AR) |
-3.6% |
0.2% |
15% |
1.8% |
|
IS sales volumes |
22.6% |
16.5% |
9% |
16.4% |
|
Sulphur cost (per AR) |
0.7% |
9.7% |
-6% |
5.9% |
|
IS % of net sales (Avg) |
24% |
84% |
86% |
|
|
ROIC %(Avg) |
NR |
6.6 |
23.0 |
NR |
|
Source: Capitaline database |
||||
|
NR = Not relavant |
||||
|
AR = Annual report |
||||
Now from the above chart I have following observations or questions:
1. Carbon black business disposed off in 2001 and from between 2002- 2008, on average insoluble sulphur contributed around 83% to net sales and ROCE was on average between 6-7% with max ROCE of 9% in 2007. ROCE improved drastically from 2009 onwards once there is surge in ASP (around 40% from average of INR 70 to more than INR 100/kg).
2. No clear trend emerge from the above table for any relationship between cost of sulphur and prices of Insluble sulphur (IS).
Question: So from above, the key question which emerges is what has changed after 2008 and why the company has not earned decent ROCE during 2002-07 period. Volume growth was never a problem for company. But post 2007, volumes have grown only at CAGR of 9% for 2008-11 and price by 15% and driven by price increase ROIC increased to double digit. With asset turnover around 1, ROIC is entirely driven by leverage (1.5x) and EBITA margins. So what makes us to believe margins will not fall to its historical levels.
I have gone through some presentation from Solutia website
3. Need to grow much faster from market leader: Solutia has projected that its Technical Specialities division (which sells Insoluble sulphur and some other products) will grow at 5% CAGR between 2011-15. World tire production is expected to grow at a CAGR of 6% (China 12%) between 2011-15 (Source: Solutia pres). So if OCCL has to grow at double digits (20%+), it means either consumption in India has to increase drastically (50% +) or Solutia market share need to decrease. Both looks quite unlikely.
4. Risk from slowdown from China: China contributes around 18% to the sales of Solutia technical Specialities division (and even for other division China accounts for around 10%). Now with Solutia commanding more than 70% market share, any slow down in China will impact OCCL quite adversely (may be in terms of pricing pressure because of dumping from Solutia)
Hi Anil,
Good questions. Some have been tackled before. And more answers are there from our Oriental Carbon Management Q&A. Judging by your questions, I am assuming you may not have referred to the extensive Q&A that throws good light on these.
I am sorry I have a backlog of 4-5 Q&As to update. while in Bangalore my B/W gets taken up completely by a new venture we have started:(I plain forgot to update this on the Home Page (though I did update earlier in this thread)
I was waiting for answers to some TBD questions, when I find the B/W I will quiz Management again and update for the 2-3 TBD questions, left over.
-Donald
Thanks Donald,
I did read the entire thread and Q&A too but was not fully satisfied. Itâs quite possible that I may have missed some important points, will go through again later. Thanks again.
Hi Anil,
Yes, the change in the performance of the co has been startling. And yet the stock remains un-noticed 
I think the co started getting meaningful size and operations only from 2007, when the crossed the 50 Cr turnover and as the balance sheet size was already large at 80+ Cr.
I think the OPM were at about 18% earlier (if we ignore the unusual 2008), and the same has improved to 30% now. The reason would be the price increases done during 2008-09 to compensate for the increase in sulphur prices. Since then the sulphur prices went down but the Insoluble sulphur prices have been maintained.
As IS forms a very small cost to the tyre manufacturer and with a oligopoly sort of market, Solutia seems to be able to maintain the prices and hence good margins for everyone.
If Solutia decreases prices it will hurt them much much more than the competitor. It should be in their interest to maintain margins than protect market share by few % points.
But still if IS prices fall, it would be a risk for this co.
On growth - I think Solutia has been more keen on maintain its position and hasnât been expanding. This is why OCCL has been growing at 25+CAGR for last 5 years+. I think OCCL being a small player, they can grow faster than Solutia even in case of a slowdown.
Thanks & Regards,
Ayush
PS: My views may bebiased as Iâm already invested.
Whatâs happened on this counter. OCCL managed a huge jump yesterday Oct 3rd - to 161 from 136 or so with big jump in volumes.
http://www.moneycontrol.com/deliverable-volumes/orientalcarbonchemicals/OCC
Any new developments?
ICRA in itâs April-12 report placed occl ratings underwatch and with negative implications.
âThe rating watch follows the recent announcement of acquisition of 50% stakes in Schrader DuncanLimited (SDL) by OCCL. The acquisition of relatively weaker entity SDL, which may become asubsidiary of OCCL, could adversely impact the consolidated financials of the company. However, thetransaction is yet to be executed and ICRA will review the ratings once there is clarity on the quantumof stakes to be held by OCCL and the completion of proposed land sale deal of SDL.â
On sep 25, icra released another report which restores itâs previous rating.
ICRA had placed the ratings of OCCL on watch with negative implications in March-2012 following theannouncement of acquisition of majority control (from around 12.6% earlier to 62.6%) in SchraderDuncan Limited (SDL). Post acquisition, OCCL has also provided guarantees for the bank limits ofSDL, which ICRA has factored in while reaffirming the ratings. ICRA notes that, while the acquisition ofSDL, a financially weaker entity, would modestly impact the consolidated financials of the company, itsconsolidated credit profile will not be materially impacted because of the anticipated comfortable cash
generation from its own operations, which will render its key coverage metrics well within the currentrating category.
Going forward,** the ability of OCCL to achieve optimal capacity utilisation for Mundra plant in view ofmodest demand prospects and efficiently managing the higher working capital requirements along withthe improvement in operational performance **of SDL would be key rating sensitivities.
http://www.icra.in/Files/Reports/Rationale/Oriental_Carbon&Chem-r-05042012.pdf
http://www.icra.in/Files/Reports/Rationale/Oriental%20Carbon%20_r_25092012%20.pdf
Congrats Ayush! OCCL going great guns! I remember you words filled with conviction when we met in GujaratâŚgreat stuff.
Cheers
Vinod
Ayush,
Congrats! Conviction always pays. And super conviction, backed by homework (unlike your general wont, this time you had put in great effort in OCCL, collecting all kinds of small small details to zero in on real strengths), bumper pay days:))
Vinod - had you heeded Ayushâs advise?
Guys donât get get carried away and start buying in a frenzy at these levels. For those not invested, small initial buying is okay.My sense is, Q2 will be same like Q1, as the demand situation - under utilisation of capacities has not changed. There may be corrections from these highs. Things might improve only form Q4. Company will decide for new phase of expansion in Dec-Jan, seeing the action on the ground as stated before in Mgmt Q&A.
Anyone can find out details of the bulk deal a few days back? It seems now fresh (loose) supplies are finally running out in this stockâŚfinally the stock is getting into stronger hands:)
Ayush - what are your deductions? and way forward from here for those already invested. And jumpy price-action guys for fresh buys:))?
-Donald
Hi Donald,
The effort was more as I was seeing a severe mis-pricing in the stock while others were not getting excited. And the stock never used to budgeâŚlolâŚso had to keep re-thinking if Iâm missing something.
I agree, that though the fair value would be still higher at say Rs 250-300 but the unlocking would happen probably when the capacity utilization would start improving.
If the co continues to perform like Q1 (in terms of turnover) I think the upsides might remain capped to 200 levels or something. Markets like to pay for growth.
But for a 1 yr perspective, it may be a good idea to accumulate the stock on any sharp declines. 140-150 would be a good level to accumulate.
Ayush
As expected not so great results from company on account of slower off take. Also, there has been a delay in approvals for products of company. They have also done some tax adjustment which has reduced PAT.
I think long term story remains intact and as Ayush had said in previous message that stock might correct to 140-150.
Views invited.
Regards,
PS-Invested in stock, hence biased.
Have seen some noises about buying OCCL at current levels being made elsewhere. This is not the time to buy OCCL. Just thought to share my reasons - why.
In view of demand slowdown (they have mentioned it alongwith the Q2 results as well), Capacity utilisations are unlikely to improve. Sales will be stagnating at current levels till atleast Q4 when there might be slight improvement due to a few new approvals for new customers expected to kick in.
The situation does not look alarming of seen on a qr on qr FY12 basis. thereâs a good enough 20%+ Sales growth in Q2. See it sequentially, then Sales are stagnant compared to Q3 & Q4. The situation is compounded by much higher Interest outgo higher by 50% and 40% higher depreciation.
If invested in form 90+ levels great to hold on. Hopefully situation may change in 3-6 months. But certainly not the time to add exposure at these levels (though it may seem cheap enough to some at 5x). Because things may turn worse if demand situation does not improve. In any case there is a degrowth in earnings for 2 straight years for OCCL from 36 Eps, to 30 EPs, to 26 Rs expected FY13 by my calculations.
A much better time to buy would be - when we get to know the demand situation has changed/started changing for the better. The company has started adding a couple of lines on demand situation/and capacity utilisation on request from the larger investor community like us (in the Qtrly Results sheet).
That would be the time to Load up!!
-Donald
Thanks a lot Donald. Much appreciated.
OCCL will always have very low portfolio allocation. That is not because of pricing or demand slump or lower utilization. That is because oflimited size of opportunity.
With around ~250,000 MTPA of estimated market size, with Solutia (Flexisys) controlling 80% and playing second fiddle with current capacity of 22,000 MTPA and 7-8% market share.
Under the assumption of Shikoku catering to Japanese market
with 20,000 MTPA capacity and
Sinorgchem catering to Chinese domestic demands of 35,000 MTPA we have a virtual duopoly market.
So OCCL catering to domestic demand and exporting to Europe still has a very limited market to cater to. Hence, we can never envisage a broad based growth from this low market cap of 140 Cr. Hence, OCCL would be value buy with max 3 - 4% portfolio allocation.
Coming to the medium term scenario OCCL looks good; a big trigger being any conversion from US markets, hitherto unpenetrated. The entry barriers ( closely guarded technology, high capital intensiveness, relationships with tyre majors) are good. Also valuation and downside support (through high dividend yield) is favorable.
Also looking at growing domestic demand led by increased radialization, the demand slump scenario should not be that drastic. Anyways the management has decided to only expand the third 11,000 MTPA based on demand scenario only.
Another aspect is the turnaround in subsidiary Schrader Duncan ( OCCL holds 62.60%, OCCL Promoters hold 11.91%) which has turned around post land sale and debt payoff. The interest costs have significantly came off in Sep-12 quarter and company is back in green. At CMP the Schrader Duncan stake relates to around 13% of OCCLâs current market cap of 140 Cr.
With increase in share of production in Mundra facility, both power costs and effective tax rate will come down mitigating the higher expenses to some extent.
Many Thanks, Donald, Rudra. I had been thinking of getting into this but now I know better. There should be a button somewhere on each post where one could at least express thanks for all the free advice being doled out by so many seniors and knowledgeable investors! Look at the traffic on Hiteshâs threads!
Yes. Thatâs definitely in the plans for next version. We must record appreciation for guys like Hitesh who put in so much efforts to help/guide. becuase thats builds the culture of the community - encourage others to share & learn!
Customising these things isnât easy without a back-up team. next 3-6 months should see changes as indicated by Admin, if we can pull through a regular team. Aspirations can always be greater than resources:)!
-Donald
resources
!
-Donald
I do technical analysis on Point and Figure Charting. From the chart i see that the stock has broken the double bottom it had created around 136. Now the next support comes only at 124. If the stock breaks this support then the next support is only at 112. The stock is currently in the sell mode.
http://www.equitybulls.com/admin/news2006/news_det.asp?id=115486
as it was known-the eps is half of the previous quarter, profits down by 49%
http://www.financialexpress.com/news/sc-stops-construction-work-at-mundra-port/1076112/0
The Supreme Court on Friday stopped construction and development work of industrial units at the Adani group-owned Adani Port special economic zone (APSEZ) at Mundra in Kutch pending clearances from the Union ministry of environment and forests (MoEF). However, it allowed already functional units to continue business operations within APSEZ (formerly Mundra Port and SEZ).
A bench headed by Chief Justice Altamas Kabir, while disposing of the four petitions filed by Skaps industries, Ahistrom Fiber Composites (I), Oriental Carbon Chemicals and Dorf Ketal Speciality Catalyst, set aside the Gujarat High Courts exparte order that halted commercial production of all 12 industrial units within the SEZ till environment clearance was granted by the MoEF in favour of APSEZ.
It also asked the Gujarat High Court to hear all parties on February 28 and pass a fresh order on the public interest litigation (PIL) that had questioned functioning of the SEZ and the units which had only clearance from the state authorities, and not the environment ministry.
It also observed that the HC should not have passed the drastic order for shutting down the operating units at the initial stage of the case without even hearing all the affected parties.
The companies argued that they have been operational since two years and exports worth billions of rupees and the livelihoods of hundreds of workers would be affected by the closure of units. Besides, the HC has no jurisdiction to try and entertain such pleas in view of the National Green Tribunal, which alone has jurisdiction to decide cases where a substantial question relating to environment is involved, senior counsel Mukul Rohtagi argued. The SEZ promoter counsel argued that it had sought the environment ministrys clearance but got no response, and as per norms the SEZ was deemed to have been granted after 45 days of applying.
The apex court had last week stayed the HC order and had issued notice to the Centre through MoEF, APSEZ, Gujarat Pollution Control Board (GPCB) and other 21 parties including the 11 other companies.
The stay order had come on a petition filed by Dorf Ketal, a chemicals manufacturer, challenging the HCs exparte order. The HC had passed the interim order on a PIL filed by villagers of Navinal village who alleged that the 12 units of the Adani Group have gone ahead with the production as well as import and export activities without any environment clearance.
)- See more at: http://www.financialexpress.com/news/sc-stops-construction-work-at-mundra-port/1076112/0#sthash.zfACkMK8.dpuf
My comments :
-> As of today it is business as usual for OCCL, and i am expecting that at tomorrowâs hearing, functional units in the SEZ such as OCCL will be allowed to continue work as usual. And it very possible that even while the case continues, approvals may come through & all will be normal again. However just as a matter of abundant caution, we need to keep close watch.
-> Global & local slowdown has impacted OCCL - but are the current valuations already reflecting the worst ? Views solicited.
Thanks Bosco for bringing this up.We can check again with the company on this in say a weeks time.
I donât think we should be factoring in that valuations capture the worst alreaday
a) There is continuous erosion in EPS for 3 straight years
b) Till the time Demand situation doesnât revive (tyre majors) margin pressures will be big. So I anticipate a few more quarters of pain, and with that lower valuations
But please keep tracking/helping us keep track. OCCL will offer a good ride once demand revival signs are first in.
You could be right, Donald, however things have already been bad for last few quarters & the company still churns out decent numbers (though not comparable with couple of years ago).
So downside may be limited, subject to the there not being an adverse court verdict.
up.We
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