ValuePickr Forum

Oriental Carbon and Chemicals Ltd

I think the overhang on the stock (more sellers than buyers on any given day) is because, there isbound to be EPS degrowthin FY12

1). The impact of full rate taxes (14% earlier years) is such that even with a 40% Sales growth for FY12 (increased capacity 5500 MT available from Q2 and sold out), and assuming OPM stays intact at 28% (or 1QFY12 levels), there is bound to EPS degrowth by 5-10% for FY12. This is the Optimistic scenario.

2). A 30% sales growth and OPM degrade to 23% will see a 25-30% EPS degrowth. This is the Pessimistic scenario.

Views invited.

-Donald

Hi Donald,

I think Mundra plant has some tax benefits.Do you have any source to indicate full tax rate(Q1 might be exp).Souring raw material impact will be nullified by depreciating rupee.Here my assumption is 30 per OPM.With increasing depreciation and interest burden i am assuming too that Eps might be in a range of +/- ten percentfor a year.

** isbound

degrowthin FY12

1).

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I wasn’t comfortable about the degrowth part here vis-a-vis other opportunities that have 40%-50% growth visibility.

1). But the valuations are very compelling. That was the primary attraction to investigate the stock too.

2). The closest parallel I can make is with Vinati Organics - similar oligopoly, probably similar small niche market size, similar margins & returns.

3). Vinati is valued at 6-7x earnings, P/S >1, and 2.5x BV - given the current visibility in Earnings growth, I see that as fairly valued with a slim chance of a 25%+ CAGR or doubling in 2-3 years, and thus made a complete exit

4). Oriental Carbon is currently valued at <3x earnings, < BV, and 0.7 P/Sales, and 4x 1yr forward

5). Yes Mundra SEZ might have MAT credit benefit for the incremental capacity of 5500 MTPA

Risk- Reward is skewed quite in favour of Oriental Carbon, I will have to agree with you guys. That is on the Valuation Rating

On the Conviction side, we still need to do lot of work. Enough data is already put up by us.

Time to go ahead and formulate questions for Management - to gain more understanding of the company, the opportunities and challenges before it.

-Donald

1 Like

10 Questions for Oriental Carbon & Chemicals

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So who wants to go and meet the Management? Anyone Delhi-based, and interested, please mail me, Asap!

-Donald

1.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 in the last 5 years. Has any of the market dynamics changed in the last few years? What have you done differently in the last few years?

2.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? What are the growth drivers â 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?

3.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?

How is Oriental Carbon placed today? Will it be able to sustain its competitive advantages? Why?

4.Customers. Revenue Contribution from top customers.

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?

5.Installed Capacity has gone upto 17500 MTPA and by FY12 end expected to go upto 22500 MTPA. Capacity utilization has usually been upwards of 90% in last few years.

Looks like, demand is far outstripping supply. Please tell us a little more on the demand situation. You have mentioned Capacity constraints as the main challenge. You have also mentioned additional 5500 MT capacity already sold out. If you had full 22500 MT capacity today, would you have any difficulty selling that?

What will be the total Capex in FY12 and how will it be funded? What is the total debt position currently? Will FY13 likely to see any major Capex?

6.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$?

Do you have higher margins from Export sales?

What kind of hedging policy is followed by the company?

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 orderbook in Q2? If Export demand sees a decline, what are the plans to counter this risk? Can domestic market absorb additional sales?

7.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?

8.Margins & Profitability. FY10 and FY11 has seen Operating Margins at 30% plus for the first time. Realisations has moved up from ~Rs 70/kgin FY07/08 to ~Rs 100 for the last 3 years.

Kindly share the factors responsible for the high margins in the last 2 years.

Would you say there is a direct linkage of to operating margins?

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). What is your view on this, kindly comment.

What contribution has been made by product Value-Adds in better price realizations for the last 2-3 years? What is the revenue mix in Insoluble Sulpher segment from AS & HS higher value-added grades?

At what levels do you see Operating margins sustaining for the next 2-3 years?

9.Chemicals Product Segments â Sulphuric Acid & Oleum

Kindly tell us a little more on these product segment markets, demand/supply and raw material linkages.

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?

Last 2 years have been benign for the Chemicals segment â with 14% plus EBIT margins? Even 1QFY12 saw 14% EBIT margins for this segment? Is this sustainable for the next 2 years?

10). 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?

Donald,

Why Delhi based? The company’s office is in Kolkata. Also, since I am beginner, would like to accompany anyone who is going to meet the management.

Hi Sandeep

Calcutta Office is the registered office address. I am told Delhi office is the Corporate Office. where are you based?

-Donald

More questions

11). 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?

12). 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.

I am based in Mumbai. But not heard anything about the corporate office in Delhi. Its not even mentioned in the AR. Their plant is in Rewari, Haryana which I presume is close from Delhi.

The Directors sit in the Delhi Office as informed by Company Secy.

The q2 results are out.

sales has increased to around 45 crores from 39 crores y-on-y.

NP has gone down to 4.5 crores from 9.5 crores which is more than 50% drop.

Stock tanked from 130 odd levels to 120 levels today having hit a low of 108 for the day.

I think with better bargains available it is better to stay away from this kind of stocks where nasty surprises may come about.

I had a look the OCCL Q2 results and given below and in the attachment are some of the key findings. These have to be looked in the context that the first phase of expansion was commissioned on 17th August, 2011.

Though sales have grown y-o-y, sequentially they have been flat. The company has been operating at 100% capacity and lack of capacity additions was the reason for absence of growth. The management has already indicated that the additional capacity has been already sold out. Hence, the sales from added capacity should start coming in from Q3. It is quite likely that the period from 17th Aug to 30th Sept was for trial production since there is no significant build up in inventory which would have suggested unsold stock.

Sequentially, EBIDTA margins have fallen from 30% to 20%. Now this is a significant drop and is necessary to examine the reasons for the same. Is the drop because of change in business environment or is it because of certain one time events.

a) RM% to sales has increased by about 1.8% which doesnât seem to be a cause for worry.

b) Power and fuel as % to sales has in recent history been in the range of 10-10.50%. However, in Q2 FY12 the same has jumped to 12.50%. It seems that the power cost of Mundhra Plant since 17th Aug has been expensed out. With no corresponding sales, the EBIDTA margins have been hit.

c) Employee cost has increased by 1% which is understandable in the context of expansion.

d) Other expenditure as % to sales has in recent history been in the range of 19%. However, in Q2 FY12 the same has jumped to 23.72%. The major reason for this is Forex loss to the tune of Rs. 2.11 crores. Export sales constitute 60% of total sales and RM imports constitute 13% of total RM consumption. In a scenario of depreciating rupee, this should have ideally resulted in a gain, But a loss indicates that the company has somehow failed to manage its forex risk.

PBT margins have fallen from 27% to 14%. This is due to additional depreciation and rise in interest cost, both related to Mundra Plant.

Tax as a % to PBT has remained close to 33%. But with tax benefits associated with Mundra plant, the same may moderate in the next two quarters.

Debt has increased from Rs. 56 crores in March 11 to Rs. 77 crores in Sept 11. The same may further increase due to Phase 2 of expansion.

Hence, to conclude Q2 results, have been little disappointing on the face of it, but it is more due to revenue â cost mismatch rather than any change in fundamental business environment. Q3 results may give us positive surprise due to absence of above adverse factors and also increased sales from additional sales. Those want to trade an play around Q3 results. However, as Donald has already pointed out, we may see some EPS degrowth in FY12 and it will provide long term investors with a good entry point.

Time to get really greedy with this stock while panic sets in for others.

OCCL.xls (19.5 KB)

1 Like

thanks sandeep for the insights into the results.

As you say I think one needs to be greedy here in light of relatively poor q2 results.

1 Like

Hi Sandeep,good analysis on Q2 results.

1.Tax as a % to PBT has remained close to 33%.But with tax benefits associated with Mundra plant, the same may moderate in the next two quarters.

They paid 3.17 cr tax on 7.12 PBT.I am not able to understand their tax structure.I think now SEZ also have to pay 20 per MAT.Could you please elaborate this.

2.Time to get really greedy with this stock while panic sets in for others.

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Unless and until operating environment get deteriorated there is no need to panic.I believe this is aberration and may continue for one or two Qy.It’s very common for the companies in expansion mode.

Also, if the stock falls to around 100 levels, we need to keep a close tab on the acquisition of shares from market by promoters. That will be real good pointer towards future prospects of the company.

A few questions to the management:

1). Your average pricing has increased from 77bucks per unit to around 100 bucks.How much of a pricing power do your products enjoy over traditional insoluble sulfur? And given the value additionyou deliver, is there a premium involved in the market?

2). Government has come up with anti dumping duty on rubber chemicals emanating from China. Is this a positive catalyst for you? (if mgmts believe its not applicable, then nothing, but if yes, then would love to raise this question- “Even with the value addition you do to your products?”)

I would like to add more questions, as and when I can think of. Last three days had been difficult for me, so couldnt give a proper look to it, but what I believe is, the cost of Napthenic Oil has increased YoY from 45bucks per litre to 53 bucks per litre this year. Sulphur costs have also gone up. Plus tax effects.

So this result is purely due to “shocks” external to the business internals - rupee depreciation driving the prices of RM higher plus hedge losses(I guess). Going ahead apart from the fact that business is very cheaply valued, I would love to have an idea, how the management would like to steer the company product linewith better and higher pricing power

Soham

I have similar opinion like Sandeep. This may be a one off qtr as a new plant takes a couple of months to stabilize and achieve full production.But still one should wait for more clarity to accumulate.

Good part was that the mgmt has maintained the interim dividend at 20%.

Regards,

Ayush

How has been the reputation of JP Goenka group of companies in terms of shareholder value creation? (I think this is the strongest bear case for this company)

Does anyone know how much stake does the management(not promoters) hold in this company?

Soham

p.s: I think, these are very important questions, and we should immediately look in them

Can you please explain how mgt is diff from promotors in this case ?On BSE site you can check the list of promotors along with their holding.

@Hemant,

Simple, take any PSU, “promoters” = government, “mgmt” = managers who are also common men.

Purely because mgmt doesnt have any stake in the company he doesnt have an incentive to maximize the shareholder value, classic incentive mismatch.

Here, JPG group might be the promoters but how much the real decision makers are incentivized to make shareholder value accretive decisions.

Soham

Donald,Sandeep

Can you shed some light on its increasing debtor days?