Dad spotted OCCL (Oriental Carbon & Chemical) early – a couple of years back but all this time, I was not sure of sustainability of good profits. Over last 5 years, Net Profit of OCCL has grown @ CAGR of 74%. I used to think that this might be cyclical like other chemical companies but it does not seems so.
OCCL’s core business is manufacturing of Insoluble Sulphur, a vulcanizing agent used in the Rubber Industry. It is an important raw material for tyre manufacturing. Manufacturing of insoluble sulphur is limited to only a few companies globally due to restricted access to technology. OCCL is the only Indian company into manufacturing of Insoluble Sulphur. Company is now a preferred supplier, exporting about 70% of its production to leading tyre companies.
Earlier, the company was exposed to huge volatility in prices of its raw material – Sulphur. But now the company is better placed to protect its margins by adopting quarterly pricing.
- Company undertook an expansion to double its capacity by 11,000 MT at SEZ Mundra. Phase 1 – 5500 MT, of the expansion has been commissioned during Aug, 11 and the second phase should get completed by end of this year.
- Production from this phase is already sold out.
- The land acquired at Mundra SEZ is sufficient for putting up another plant of 11,000 MT capacity.
Attractive Valuations at Current Price of Rs.118:
- OCCL’s turnover has grown at a CAGR of 25% for last 5 years, while Net Profit has grown at a CAGR of 73%.
- Stock is trading at just 3.5 times the earnings-per-share (Rs.36) of financial year 2011.
- Stock is available at its book value (Rs.120).
- Company has been giving 40% dividend for last 2 years. At current price of Rs.120, dividend yield is about 3.35%.
It would be tough to find manufacturing companies having 30%+ operating margins. Based on the data available, it seems the margins are high due to entry barrier to technology. The largest player in this field is Flexsys with dominant market share, OCCL has gradually become a preferred supplier and is now able to command similar selling prices. If OCCL, can maintain OPM levels even at 25%+ and grow from here, then current valuations seem to be a bargain.