Oriental Carbon and Chemicals Ltd

Stock Opportunities Untested - but worth a good look
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Thanks.

However the question still remain unanswered. Does there could be a potential disruption due to AIRLESS TYRES which may have an impact on replacement market or the chemical mix required to produce it ?

We should atleast have an answer handy as market is a discounting machine. Due to EV which is also distance away have de-rated/changed the entire auto/auto anc segment where the first question everyone ask “Is this auto anc. etc susceptible to EV ?” That’s how it goes…

Ideally we should have our options handy so that we are not caught off guard when the reality hit.

That’s how I am thinking and I am working for an answer.

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For EV , I don’t have the doubt. This shall not negativity impact OCCL.
My son has used Tesla while in US. There is no noise , only noise is that of tyres’s friction with road. Hence replacement market should boom.
Key question , as you said is of airless tyres.
We can imagine that in first go airless tyres would be used upto cars. But, another disruptive technology would be 3D printed tyres. 3D printed tyres can be used for any application. This shall change the game.
Disc. : Invested in OCCL. 15% of portfolio at avg price of 930. Confused whether to hold for long or exit at break even.

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Sir, Even if 3D printing comes up - this co. is a material supplier that will be required in input to 3-D printer as well.

Also, 3-D printing adaptation will be more gradual than, say EV. The concept has been around last 3 decades, but not as widespread because for some critical B2B components, customers insist that they are supplied by vendors only.

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Hi,
i have googled about EV’s found this article,

Electric cars are often heavier (up to 20 – 30%) than their non-electric counterparts, and this extra weight stems from the heavy batteries located within the car. These batteries are a blessing for the planet, but not for your tyres which will experience greater pressure and load, consequently burning out faster.

so as per this it would be welcoming of EV for OCCL.

Coming to 3D it has to evolve so much, it is expensive to buy 3d printing machine and print simple plastic toy it takes hours.

i personally feel it will not effect, and if self printing there will safety concern.

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Dear fellow boarders,
I have few doubts, please clarifiy if you have data/resources for the benefit of all,

  1. I was trying to understand why NFAT is reducing consistently over the years,

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  1. Auditors remuneration is high at 40 lakhs, comparable to Time Technoplast who have turnover of more than 10 times OCCL and also has subsidiaries/ manufacturing plants outside India - anything fishy here?

  2. Is this the case of Promotors/directors using expensive car’s from the benefit of shareholders money? Do anyone know promotor family and their lifestyle?

Disclosure : Tracking, not invested

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OCCL’s Second Quarter Results

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Dear Kalpesh,

  1. Regarding Asset turnover, new asset is not utilised at optimal level. This is asset heavy business.

  2. I don’t know about the salary of auditors, any other have experience can comment.

  3. May be they added employees transport .

Need to check.

Promoter are shareholders friendly efficient in asset allocation.

No cases on them as well.

This is my opinion,

Invested

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The promoters have made investment via AIF and that did not go well with the investors in the concall and understandingly so.

Focussing on the business and having at the back of the mind that “Profit is not a promoter profit but meant for all shareholders” is extremely important.

If any one has a chance to look and could point out any logical reason of doing so is appreciated.

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OCCL: Con-call updates H1 - FY21

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Revenue decline - 1)Volume decline in h2so4(shutdown of 20 days as work happening due to expansion)
2)lower realizations due to lower price of sulphur and more skewed towards domestic sales.
3)Volumes in IS have been in the same range YoY Q2. Lag between dispatch and goods delivered and hence Q2 had more of domestic booking.

In Q3 domestic and international share should be back to normal.

Gross Margins: 1)decline in raw material(sulphur) and holding inventory from lower cost.
2) fixed cost savings, most of it will be recurring.
3)Interest saving → repayment of term loans.

Market Demand: North America/Europe seeing traction now.

IS realizations: In INR have been the same as YoY Q2.

Volume growth: Expecting in next quarter from both domestic & International markets.

Pricing pressure: 1)Customers are asking for price revision.
2)Some customers have variable components with exchange rate.
3)Overall they are asking for decrease and we are looking at margins and responding to the same.
4) Contracts are long-term, variable formula.

Capex: 75 cr completed. 75 cr pending. No cost overrun. Big captive solar scheme in dharuhera has fallen as the developer was not granted permission.
Rationale behind capex and how would capacities ramp up?
Situations are dynamic and when capex was committed the situation was robust. But 2019 was a downturn in the auto industry and due to covid it looked different. Today the situation looks robust and we feel confident that phase 1 could be ramped up.
This will be the last brownfield expansion.

Additional capacity: other than OCCL a chinese company has announced around 30000T.

Some competitors are reducing capacity by shutting down plants. New capacity of competitor and OCCL(41000T) ~ 10-15% of 2019 global demand.
Additional capacity to put pressure on pricing? Additional capacity would be directed to areas with little presence. EBITDA/MT - long term commitment is 30%.
Quality of our product is of the same grade of chinese company. It could create some over capacity in chinese market and can spill over into other markets.

Cost of capex competitive globally?
Cost of capex alone does not count as few players have higher engineering costs, higher technical costs and land costs. Overall our cost of capex is competitive enough.

Customer addition/reduction: Nothing specific. Q2 was the status quo.

Non-Current Investments: Rationale behind investments?
Amount invested is insignificant and committed amounts are 40 cr. and to be paid in 3-4 years. Inv committee taking judicious calls based on risk weighted-return in company’s favor. Last 6-7 months have provided unprecedented opportunity and some special situations. Company NW is around 500 crores and 40 crores being small in relation now.

Bigger investments in funds and small investments less than crore would be in companies.

disc: Invested.

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@kalpesh4430 I checked their annual report for FY20 and the cost auditor remuneration is 1.4 lacs. From where did you get 40 lacs number? Am I missing something?

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Hi Kalpesh,

Reg NFAT, will more data like volume and realizations/MT might provide better insights about efficiency?
As they operate on cost of RM + fixed margin.

Thanks,
Rohil

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More data is always welcome. They do have great business, great technology, great entry barrier but I personally think they also have overspending habits. That seems to be reason NFAT is reducing consistently.

NFAT is very important and cannot be ignored.

Knowing the reason is mandatory before investing.

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Thanks for sharing this. I checked with one my friends who’s a CA. The auditors are reputed ones and as per his observation, he didn’t feel anything fishy in this.

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Could you please give breakup of amount or source for AIF investment.
thanks in advance

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Q3 Results : https://www.bseindia.com/xml-data/corpfiling/AttachLive/4b577712-903d-401d-965c-72180b684860.pdf

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Hi Kalpesh, NFAT is falling probably because a new investment takes time to stabilise. Once the company completes the current cycle of investments they should be able to focus on increasing efficiencies so that NFAT will improve again. I don’t know about your overspending comment. Maybe you say it because of constant capex but with a low NFAT company thats the prerequisite. I think a more important point is the high NPM but a low increase in sales @6%. Is the company losing growth runway or can we expect the company to simply grow with the industry growth rate, which incidentally is also approx. 6% as per latest AR. Is it a typical cash cow??

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Q3FY21 Results Concall excerpts

• Industry related - Insoluble Sulphur: Demand – Supply mismatch currently - demand needs to increase.

Supply: Net supply addition globally is 20,000 MT in the next 2-3 years. This includes Oriental Carbon capacity (11,000MT), China – Sunsine (30,000 MT) has announced an expansion and closures of Japanese plants; Eastman Chemicals and Shikoku Chemicals are not adding capacities.

Demand: Global tyre output and tyre rubber consumption is expected to increase by 3.1 – 3.2% as compared to historical growth trends of 2.2-2.3%. Insoluble sulphur demand is expected to grow faster at 3.8% in 2021E to 3,11,000 tonnes. Due to radialisation trends, insoluble sulphur to tyre rubber ratio is estimated at 1.4 in 2021E vs 1.27 in 2006.

• Revenue break-up in Q3FY21: 33% domestic and 67% exports. Productwise: 93% is insoluble sulphur and rest is sulphuric acid/oleums. No product re-pricing expected in the short term. Continue to target market share of 10% in North America in next 2-3 years. Currently at sub 5% levels

• OPMs in Q3FY21 improved significantly with benign RM costs and optimum capacity utilisation (90% plus) – they will stabilise at lower levels going forward. OPMs will improve to 28-32% (earlier guidance given was 25-30%) due to higher operating leverage (from both existing capacities and expanded capacities). RM costs to increase in Q4FY21 by 10-14% sequentially, and to an extent in Q1FY22 and, thereafter hopefully stabilise. Sulphuric acid prices are dynamic and dependent on sulphur prices (sulphuric acid is currently 6-8% of revenues.)

• Capex plans (peak annual revenues targeted is Rs 135 cr from the capex)
Total capex of Rs 216 cr towards Insoluble Sulphur (11000 MT in 2 phases – Rs 180cr) and expansion of sulphuric acid (42000 MT – ~ Rs 36cr). Capex will be funded through a D:E of 2:1. This is a brownfield capex.

o Ph 1: ~ Rs 150 cr capex – will be commissioned by July 2021. This includes 5500 MT of insoluble sulphur (Mundra) and sulphuric acid expansion of 42,000 MT (Dharuhera). Expected peak revenues of Rs 70cr (EBITDA margin will be close to gross profit margins ie operating leverage benefits will flow, subject to offtake)
o Ph 2: ~ Rs 65 cr capex – will be commissioned earliest by Dec 2022 (will decide on undergoing this capex in July 2021). Expected peak revenues are Rs 65cr.

Capex is driven by following factors
o Large tyre manufacturers are expanding capacities in Asia
o Continued focus on radialisation of tyres
o Thrust to increase market share in domestic, Asian (high growth market) and North American (largest market for Insoluble sulphur at 40,000 tonnes) markets

• Will pay MAT for this year and next year - SEZ location of Mundra Plant enjoys Income
Tax Exemption benefits

• Gross debt - Rs 163cr (31,Dec 2020) with cash and investments of Rs 150cr (31,Dec 2020)

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L&T mutual fund has decreased 2% stake in the company. It is having 5.41% which is aquired through voting rights came down to 3.41%.
Mode of sale is open market.

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