Oriental Carbon & Chemicals: Management meet

We discussed Oriental Carbon & Chemicals Ltd. (OCCL) almost a year back. The stock has remained at the same levels while the company has grown and the fundamentals have got even better. To get a more understanding on the company and the future prospects, we met with the senior management of the company. Here are the extracts from the management meet:

Insoluble Sulphur is a niche market and as per our data total market is about 2,25,000 MT. Solutia controls 70-75% of the market. OCCL is the second largest with 7-8% market share.

Insoluble Sulpher is mostly used by the Tyre Industry. Increased Radialisation is the main demand driver.

Entry Barriers: The technology is closely guarded. No tyre major is interested in shifting vendors or entertaining new vendors unless you can supply in sizeable quantity and the approval process is lengthy and costly.

Continental AG, Goodyear, Bridgestone, Pirelli are some of our big customers. In the domestic market we have MRF, Apollo, JK tyres and some more.

Demand situation warranted that we expand quickly. Yes capacities were pre-sold as per arrangements with our customers. We are working at something like 75% capacity utilisation at the moment.

We should continue to grow at current levels. The volume growth may be limited to 10-15% if the demand slack continues.

Effective tax rate will be lower at 20-22%.

If you see the last 5 years, we have generally been increasing dividends. In FY12 again we have increased dividends.

Yes 500 Cr is possible and should happen after the expansion of the next 11000 MT capacity.

Please check out the complete management interview (requires free login)

Our view:

We feel the stock is quite undervalued as the company has its niche area and has been enjoying very good margins in the range of 25-30% (which are rare in manufacturing). The business is sort of a oligopoly wherein the competition is limited and hence a good profitability. The company has a moderate working capital requirement and thus converting most of profits into free cash flows.

At CMP of 120, the stock is trading at a PE of just 4, Price to BV of 0.80. The company has good ROCE of 25-30% and has been paying out decent dividends. Dividend yield works out to be 4%+.

The growth might be slow over the next 3-6 months due to a demand slowdown in Europe, but as the things pick up the company should do even better as the capacities already exist and the fixed costs get spread over. The company should also benefit from lower taxation going forward (as the new plant at Mundra is a SEZ).

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  • TT

    Great post. What is your on the debt that OCCL currently holds?

    • TT

      I meant to ask what is your take on the debt that OCCL currently holds?

      • Ayush

        Debt seems to be under control as the debt:equity ratios is less than 1:1

  • Niren

    Why shoudnt Solutia with 80% market share drive out small players by chopping pricing by lets say 50% for a year or two … Isnt this a big structural risk … What probability do you assign to this kinda event happening

    • Ayush

      Reducing prices will hurt Solutia more than OCCL. If OCCL will loose say Rs 10,000 then, Solutia will loose more than 10 times.

      Second, I think 70-75% market share is pretty good, it would be tough to grab all the market. Infact even the tyre cos would want to maintain a second source of supply. All the cos usually have 2-3 sources of supply.

  • Hardtoget

    hi Ayush, any reason you have exited Manjushree, also do you think the markets will change perceptions about companies like OCCL

    • Ayush

      The lastest quarter hasn’t been good while the co has undertaken a lot of debt.

    • Ayush

      Regarding OCCL, we feel undervaluation is high and markets would recognize the same in due course.

      • Roberto el Sandriano

        Hi Ayush,
        Just want to understand on what parameters do you feel that OCCL is highly undervalued. Is it Price/BV, Mar. Cap/Sales or PE?
        Though Gujarat Reclaim cannot be compared to OCCL, does OCCL have scalability like Gujarat Reclaim?
        Regards,
        Roberto

        • Ayush

          Would like to know your views and parameters to judge the undervaluation in a stock?

          OCCL has decent scope to expand and grow. They might need to think after 3-5 years.

          • Roberto el Sandriano

            Hi Ayush,
            My knowledge on stock valuation is limited and may not make a good reading. The only time I got it right on stock undervaluation was on Managlore Chemicals where I thought that market cap was unjust in relation to its sales.
            In case of OCCL specifically I was just trying to broadbase my knowledge since you have mentioned that it is highly undervalued. I do understand that it quoting below its BV and a low PE. Was more interested from a learning perspective than investing.
            Regards,
            Roberto

  • Usamah

    What price level do u expect OCCL to be in 2 yrs considering things unfold as expected?

    • Ayush

      Hi,

      We don’t pre-build specific price targets. On the valuations front, if we the margins remain at the level they are, we feel stock deserves 8-10 times PE

  • Thanks for the post Ayush

    I was analysing OCCL past financials and noticed that their performance improved drastically post 2007/2008. During 1998-2007 a) Their ROE barely crossed 5% only twice b) Net margins were less than 3% with occasional substantial losses during 1998-2004 and during 2004-09 around 4-6%. They have earned high ROE only during the last three years. So my question is what has changed drastically in the last 3-4 years, which has resulted in substantial change in their fortunes.

    • Ayush

      Hi,

      Good to see that you have gone through their performance in detail. Plz refer to the complete mgmt interview, you will get a better understanding.

      The change has been since about 2005, this is when the co started expanding capacities and getting operational leverage. Also, they were able to tap bigger global customers. The price of insoluble sulphur was increased by Solutia in 2008-09 when the input prices increased multifold. Since then the raw material prices came down but the end product pricing was maintained. So its a combination of scale & better pricing.

  • Continuing my earlier comment: I also noticed that since 1998, only during the 2010 it has traded above book value. Else for most of the last decade it has traded below book value.

  • Shankar

    Ayush,

    I have been following this counter for quite some time.

    I was looking at some weakness in the stock with slow down in Europe. What is your expectation on the Sep Qtr? Do you think, the price might drop subsequent to Sep Qtr and provide a good opportunity to accumulate

    Regards

    • Ayush

      Hi Shankar,

      Yes, there has been quite a bit of slowdown in EU and hence OCCL hasn’t been able to grow much. I don’t expect too much of weakness in Q2 while stable nos may provide upside.

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  • Vivek Gautam

    OCCL is one of the cheapest high quality stock available at a v low PE of 7 odd at cmp.

  • Unfortunate Insider

    OCCL touched 564 congrats Ayush.How are the future prospects ?any triggers?

    • Ayush

      What a nickname vivek….lol

  • Investor101

    hi Ayush, What is your take on the poor results by OCCL, almost nil topline growth YoY(with decrease in EPS) and topline degrowth QoQ. Can you share your insights and do you think that sales can grow from here? Even though the company business is niche, the growth is too slow. Would like to know your views.
    Do you find the results disappointing/poor or along your expected line?

    Also would like to know your views about the numbers posted by Thangamayil. The company is still paying high interest cost but sales growth has picked up and company has finally posted positive operating income(but net loss due to debt).

    Thanks a lot for you help in answering questions with such patience. Thanks to dalal-street team.

    • Ayush

      Hi,

      OCCL nos are inline with our expectations. Co would be already operating at about 85% capacity utilization so we can’t expect high growth till the Mundra expansion comes up……which should happen over next 1 year.

      I’m not tracking Thangamayil.