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.
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).