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)
