Hi Donaldji,
2 Questions from my side-
Why are raw material to sales ratio fluctuating rapidly? Are theyfollowing quarterly pricing model or any other? How much resistance they face while increasing their unit selling price?
What is the total capex for new plant at Mundra Port? (to calculate whether as an individual project it makes sense or not).
Can someone plot a small table with Sulpher (RM) & Insoluble Sulpher prices for the last 5-6 months - anyone having access to Chemicals Industry journals??
I believe Sulpher prices have again come down quite a bit, while Insoluble Sulpher prices are stable.
A regular track will help establish more confidence in the prospects of the company. On the back of good Q3, Q4 should also be good for the company??
-Donald
Attached is a chart on Sulpher Pricing trends from 2004 -2011, that a ValuePickr member sent me. Please have a look. It is interesting to note the volatility
2004-2007: 100
2007-2008: continuously rising trend till about Oct 2008 to 800 (8x times)
2008 Oct : crashes to ~100
2008 Oct - 2010 Feb: ~100
2010 Feb - 2011 Dec: rising trend till about 200
Readers please note there is big volatility risk involved in OCCL because Sulpher is the main RM.Have heard that in 2012, Sulpher prices have again corrected. Can someone throw light on Jan-Mar prices??
Insoluble Sulpher prices have remained stable, maintains OCCL. Can someone share some data on the same. It would be good to see a similar chart:)
As per update at my end, Sulphur prices started rising from Oct, 11 to Dec 11. They went up from $ 300 in Oct to $ 400 by Dec and have again fallen to $275 levels as of Feb, 12.
I have been analysing this stock for last few days and have already taken small position. Thisstock has been analysed to death on this forum so i don’t have to add much. However,I wonder if in the process we are missing forest for the tree. There has been multiple and detailed discussion on quarterly changes in RM / Sales, Employee Cost %, Tax % etc. The way I look at it no business operate in linear fashin specially the one in growth phase. There will always be lag in capacity expansion and associated cost and revenue. We need to look at 2-3 years average to get better picture than looking at quartely numbers.
Over last 15-20 years they have already exited out of 2-3 businesses that was not vaible and I won’t be surprised if they sold-off sulphuric acid and oleum business and focus only on IS.
The biggest puzzle is how they managed to improvefrom 12-14% to 30-32 %. There have been few explanation but I still trying to understand it fully. RM% is more or less similar expect for a year or twoso it has to do witheconomy of scale and efficiency which does tell about management.
Considering they are alternate supplier globallytheyhave significant headroom to growas most of the MNC will also set up a plant in India.
Overall, unless management screw it up they can easily grow the revenue / profit over 20-25% CAGR over next 4-5 years.
it will be much easier to make up the mind once we hear frommanagement and access their views better.
How one should look at their recent purchase of shares of Schrader Duncun at 14 cr ?
Hi Hemant,
I think the recent purchase is more of a strategic buy in nature and shouldn’t be a negative over a longer term. They were already the JV partner in Schrader Duncun with Schrader group (the bog MNC) holding the significant stake.
The co was doing great and used to break-even or post small profits in earlier years. Over last 2 years they started posting losses (due to clean up and VRS etc) and now the MNC co has exited. I think the valuation at which the exit has happened has to be cheap and OCCL being the JV partner would had the right to buy the same.
As per notes to acs, Schrader Duncun has already entered into an agreement to sell one of the land bank for 43 Cr of which 20 Cr has been received. Once the whole amount is received, the debt should come down and the co should be back to break-even.
I think this acquisition should be a neutral event for the co over the medium term.
Thanks for clearing my doubt.
Hi Donald,
Do you have a plan to meet Management to get the views on questions raised on this forum.
Regards,
Ved
Hi Ved,
Our efforts to meet senior management has not borne fruit - via the CS, and calling up directly. Some folks have met some officials, but no strategic insights.
If anyone has any contacts into the company, we will be happy to take this forward.
Rgds
Donald
Looked at Oriental Carbon results for FY12. Following are my observations/impressions:
1). Degrowth in Net Profits on account of higher taxation. 29% vs ~15% andlower operating margins 25% vs 31% in FY11. This was expected. Opertaing margin of 25% plus is very good for a Chemicals company
2). Sulphuric Acid/Oleum business still contributes 10% of Sales. Low EBIT margins (4.5%) dragged down overall EBIT margins by 136 bps
3). Sales grew a creditable 36% on expanded capacity.
Outlook for FY13E
1). 25-30% higher Sales can be expected for FY13, based on another 5500 MT becoming available from May 2012(?).
2). Exports are at 60% of Sales historically for OCCL. Insoluble Sulpher prices tracked over last 6 months have been seen to be stable. RM Imports constitute 14% of total RM. Some Rupee depreciation benefits may be available to the company in FY13. However this is unlikely to add up to much - considering FY12 track.
3). Sulpher (main RM) prices have cooled off after a spike in Q1, and in the current commodity situation may not see much of a spike. Operating Margins can be expected to be in the 23-25% range
4). Projections indicate a 15% EPS growth if 25% EBITDA margin is maintained. With 23% margins, there is marginal earnings growth!
Given that there is unlikely to be any significant earnings surprise, the market may continue to view OCCL…just as it is now…according it much lower valuations than probably a company with 20% OPM and 30% Sales growth deserves.
I am not too excited by OCCL loooking at FY13, and am in favour of paring my positions here. Switching to something that looks much more certain to spring an earnings surprise and is available at similar/cheaper valuations.
Views Invited!
Disc:OCCL does not fit the profile for my Long Term Portfolio.I am invested in OCCL with a small stake in the Short Term Portfolio. Considering paring positions/switching with other opportunities that have significant earnings upside within 12 months!
My conservative projections for OCCL. If margins slip from 25% to 23%, there will be hardly any earnings growth in FY13E.
| Oriental Carbon | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013E |
| Growth | 40.86% | 36.87% | 2.80% | 26.46% | 36.07% | 25.00% | |
| Net Sales | 64.46 | 90.79 | 124.27 | 127.75 | 161.54 | 219.82 | 274.77 |
| Equity Dividend | 0.92 | 0.49 | 1.54 | 4.12 | 4.12 | 4.12 | |
| EBITDA | 8.28 | 7.53 | 16.53 | 41.27 | 52.00 | 59.93 | 68.69 |
| EBITDA Margins | 16.66% | 14.13% | 13.30% | 32.31% | 32.19% | 27.26% | 25.00% |
| Depreciation | 2.43 | 3.45 | 4.47 | 4.69 | 5.02 | 7.12 | 8.90 |
| Depreciation/Sales | 3.76% | 3.80% | 3.60% | 3.67% | 3.11% | 3.24% | 3.24% |
| EBIT | 5.85 | 4.07 | 12.06 | 36.58 | 46.98 | 52.81 | 59.79 |
| Interest | 1.01 | 1.59 | 3.93 | 2.32 | 3.35 | 8.31 | 10.39 |
| Interest/Sales | 1.57% | 1.75% | 3.16% | 1.82% | 2.08% | 3.78% | 3.78% |
| PBT | 4.84 | 2.49 | 8.13 | 34.27 | 43.63 | 44.50 | 49.40 |
| Taxes | 0.72 | 0.87 | 0.51 | 4.81 | 6.25 | 13.04 | 14.48 |
| Tax rate | 14.85% | 35.01% | 6.22% | 14.04% | 14.32% | 29.31% | 29.31% |
| PAT | 4.12 | 1.62 | 7.63 | 29.45 | 37.38 | 31.46 | 34.92 |
| Net Margins | 6.40% | 1.78% | 6.14% | 23.06% | 23.14% | 14.31% | 12.71% |
| # of Shares | 1.03 | 1.03 | 1.03 | 1.03 | 1.03 | 1.03 | 1.03 |
| EPS | 4.00 | 1.57 | 7.40 | 28.57 | 36.25 | 30.51 | 33.87 |
| EPS growth | -60.81% | 371.87% | 286.20% | 26.90% | -15.84% | 11.02% | |
| P/E | 3.17 | 3.77 | 3.40 | ||||
| P/Sales | 0.73 | 0.54 | 0.43 | ||||
| P/Book | 0.95 | 0.79 | 0.66 | ||||
| EV/EBITDA | 3.06 | 3.86 | |||||
| Yield | 3.47% | 3.47% | |||||
Hey Donald,
Good to see some contra thoughts on this one. Personally, I feel OCCL is an excellent opportunity and the stock is mis-priced as of now.
I think while investing, our focus should be on the kind of bargain available rather than EPS expansion.
I think OCCL, has a good business model which is monopolistic in nature, has high margins, has good ROCE in excess of 25% and is growingcontinuouslyat 25%+ rates. Yet the stock is trading at just 3.5-4 PE, 0.80 times BV and giving a div yield of 4.25%+. M Cap is just 2-2.5 times EBIT.
For the coming year, the company should grow another 25% in topline and as the rupee has fallen another 10% since March, 12, they should be major beneficiary (as 60-70% is export and imports are hardly 15%).
Views Invited.
In my opinion is too early to call Oriental Carbon a good business, though there is promise. Buit hardly something that is really exciting - as in an increasing efficient profile...they have a long way to go before reaching there.
Consider OCCL Economic characteristic table below:
| Oriental Carbon | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 |
| Revenues | 219.82 | 159.04 | 126.87 | 122.49 | 90.79 | 64.47 |
| EBIDT | 59.93 | 51.46 | 41.28 | 15.84 | 9.73 | 11.52 |
| Depreciation | 7.12 | 5.02 | 4.69 | 4.47 | 4.39 | 4.37 |
| EBIT | 52.81 | 46.44 | 36.59 | 11.37 | 5.34 | 7.15 |
| EBIT Margin | 24.02% | 29.20% | 28.84% | 9.28% | 5.88% | 11.09% |
| Working Capital | 49.74 | 54.46 | 37.64 | 33.19 | 31.23 | 27.66 |
| Net Fixed Assets | 139.13 | 67.83 | 65 | 52.56 | 53.71 | 55.89 |
| Net Other Assets | ||||||
| Invested Capital | 188.87 | 122.29 | 102.64 | 85.75 | 84.94 | 83.55 |
| Capital Turnover | 1.16 | 1.30 | 1.24 | 1.43 | 1.07 | 0.77 |
| EBIT/Invested Capital | 27.96% | 37.98% | 35.65% | 13.26% | 6.29% | 8.56% |
| ROIC | 18.73% | 25.44% | 23.88% | 8.88% | 4.21% | 5.73% |
There is promise for sure. So my allocation will be there, but SMALL.
Hi Donald,
You mentioned that the ROIC has fallen and is below 20 now, i think its pretty normal for capital intensive businesses to witness such variations - reason - during 2012, they have invested almost 70 Cr in Fixed Assets - towards expansion. Of this, the first phase started only during Dec Qtr and the second phase started in May, 12. So its but obvious that these ratios won’t look great till full contribution happens.
Another point is that we all knew that 2010 & 2011 had abnormal margins and they had to soften so some ratios will see decline.
I also agree that there are some risks, but at the current valuations and possibilities ahead, I don’t find similar bargains. Do share if you see some better ideas (except your fav Mayur 
) There are not many business with 25%+ margins, ROCE of 30%+, good div yet trading at 3-4 PE.
Ayush
Dear Ayush,
My thoughts! Its always good to spar with you and refine my thinking to get more clarity.
Point is 1 year forward I see the ROIC deteriorating further because of continuous expansion …another 5500 MT in May 12…to be followed by another 11000 MT…with earnings not keeping pace.
I am not at all confident of the Earnings for FY13, the best scenario is an EPS of between Rs 30-35.(FY12 31) So we are really hoping for a re-rating to happen…else the stock remains at current levels which it has for FY12…
That’why my allocation will remain low…no reason to increase the allocation …just because it seems cheap. For sure Mayur is a much more certain bet in terms of growing earnings power and better economic characteristics…and still going cheap :)…and is taking more of my incremental allocations…time to update Mayur thread!
Even a Manjushree Technopack seems a better bet (to me) than Oriental Carbon for incremental allocation at this point …because a 40% growth is a certainty…the business seems much more predictable…and Management has shown they are able to manage the competitive environment well…and available 5x.
A Liberty Phosphate may pip Oriental Carbon for incremental allocation…for 1 year holding …because of the solid undervaluation (not sure about the promoter/management quality …which we still have to come to terms with).
I think we have to look at insoluble sulpher and sulphuric acid business separately. They are bleeding on sulphuric acid business but insoluble sulpher business is growing and they have shifted their focus on insoluble suppher. I won’t be surprised if they decide to get out of sulphuric acid business - they have exited multiple business in past. Performance of insoluble sulpher business is growing and demand ahead of supply. I would bet on they doubling their business in next 3 years.
Hi Donald
I don’t think that their ROIC will deteriorate further. As per my calculations, most of the capex for the current expansion (of 11,000 MT) has already been incurred and reported in FY 2012 balance sheet. Now the time is to reap the rewards for that investment.
Plus, I am not sure if they are going to expand further by 11,000 MT. Where did you get that info from?I think they are going to focus more on operations at the Mundra plant and start repaying the debt they have taken, or atleast I hope that’s what they will do. Another round of expansion means that their balance sheet gets furtherstretched. And I have always been wary of debt taken by OCCL, given the margins in this business can be volatile.
You may be right!.I hope there is a good consolidation phase, I am not sure of it!
The company has mentioned the next 11000 MT expansion several times. That they have enough co-located land. Next round of expansion has to come about sooner than later …
Let me be the devils advocate n lets discuss the cons of the co .The problem with this co is its sector IMHO.the sector pe is very low around 3.Why is the pe low cud it be due to ?
1.cyclical nature of business
2.product being a commoditised product
3.size of opportunity limited
4.lack of pricing power as supply is mainly to OEm?
5.chinese competition threat
6.whats stops flexes to enter the Indian market if required.
7.poor perception about promoter Jp goenka.he is the 3rdbrother of rp n gp goenka n has no track record.how good is the next generation of promoters
