Oriental Carbon & Chemicals Ltd.
1.) INSOLUBLE SULPHUR INDUSTRY :
"Flexis" has 75% - 80% of the global market share (excluding China).
It once enjoyed upto 90% market share. "Flexis" used to buy out other insoluble sulphur manufacturers.
Flexis was acquired by Solutia which in turn was acquired by Eastman Chemicals recently.
There are around 6 - 10 Chinese manufacturers of insoluble sulphur who are primarily selling to the domestic market.
There are only 2 quality insoluble sulphur manufacturers in the world apart from OCCL & Flexis.
Insoluble Sulphur : Volumes
India = 8000 MTPA
Global = 2.25 - 2.5L MTPA
2.) OCCL ventured into insoluble sulphur production in 1994 by sourcing technology from a Japanese company. The co. set up a 3000 MTPA insoluble sulphur plant in Dharuhera, Haryana. Subsequently this plant was expanded to 5000TPA.
During FY05, OCCL set up a second plant at Dharuhera with capacity of around 5000MTPA.
Over the next few years, the co. expanded these units further through de-bottle-necking which enabled the total installed capacity at Dharuhera to expand to its current capacity of 14,500 MTPA. The total production of Insoluble Sulphur from Dharuhera operations was 14409 MT during FY12.
Thereafter, OCCL set up a greenfield 11,000 MTPA project in Mundra SEZ in 2 phases.
Phase - I with installed capacity of 5500 MTPA was commissioned in mid August 2011. During the remaining 7 months of FY12, this unit was able to produce 2983MT of insoluble sulphur.
The second Phase of 5500 MTPA capacity was commissioned in May 2012. This phase is expected to stabilize by September 2012.
The total capex for Phase I & II, amounted to Rs. 135Cr. (Rs.80Cr. + Rs.55Cr.)
The Total Present Installed Capacity of OCCL is 25,500 MTPA which roughly accounts for 10% of Global insoluble sulphur industry. As of July end, 18,500MT capacity was booked / sold. Management hopes to get approvals from some tyre cos. by September for the Mundra Phase II.
Out of the 4 units of OCCL (2 in Dharuhera & 2 in Mundra) 3 are EoU's & one is under DTA (for Domestic Sales).
3.) Insoluble Sulphur : OCCL
Realizations (Rs. lakh / MT) Raw Material Expense Volumes
FY07 - Rs.68,500/- per MT Rs.21.83Cr. 8283MT
FY08 - Rs.68,000/- per MT Rs.33.71Cr. 10,530MT
FY09 - Rs.1,01,000/- per MT Rs.60.26Cr. 9822MT
FY10 - Rs.94,000/- per MT Rs.29.47Cr. 12,506MT
FY11 - Rs.1,03,000/- per MT Rs. 46.56Cr. 13,796MT
FY12 - Rs.1,18,000/- per MT Rs.72.52Cr. 17,417MT
Q1FY13 - Rs.1,30,000/- per MT Rs.12.31Cr. 4299MT
"Sulphur & Coating Oil" are the main Raw Materials of the co. accounting for more than 85% of the total RM expense. Both are derivatives of Crude Oil.
During FY09, the prices of Sulphur & Coating Oil went up drastically due to speculation as can be seen by the doubling of RM expense in FY09 yoy despite lower volumes.
In FY10, despite RM prices dropping sharply, the realizations of the co. remained more or less constant.
A co. which increases prices when input prices rise but does not reduce prices when input prices fall, is a "good co."
Hence, on this parameter, OCCL is a good co.
4.) There is no known substitute of insoluble sulphur for Vulcanization.
5.) According to the management, the global demand for insoluble sulphur is growing by 4% pa.
6.) Sulphuric Acid & Olum are the by products of insoluble sulphur manufacturing. They contribute to approx. 10% of OCCL's sales.
7.) Import Duty = 10%
8.) According to the management, insoluble sulphur is not a "commodity" as Flexis sets the prices.
9.) EFFECTIVE TAX RATE :
The Mundra SEZ units enjoy a tax holiday whereas the effective corporate tax rate for the Dharuhera units is 33%.
Therefore, as the output from the Mundra units increases, the effective corporate tax
Hence the effective corporate tax rate in Q1FY13 was 25% vs 32.72% yoy.
FY12 = 29.2%
FY13-17E ~ 20% - 22%
10.) Cost of Insoluble Sulphur / Total Raw Material Expense of Tyre Manufacturers =< 10%
11.) The co. is supplying to all major global tyre manufacturers apart from Mechlin & Americans. Hence, 2/3rd of its revenues are coming from Exports.
12.) As no tyre manufacturer wants dependence on a single supplier (Flexis), OCCL is finding ready buyers in them.
13.) OCCL is also concentrating on adding Value Added Grades of insoluble sulphur to increase realizations. Currently, a third of its sales are coming from Value Added insoluble sulphur.
14.) A 1% drop in rupree depreciation translates into a 35bps increase in OCCL's OPM.
15.) 50% of the capacity of OCCL is booked in advance.
16.) OCCL revises its prices on a quarterly / half yearly basis with its customers.
17.) OCCL is in a power intensive business. "Power & Fuel" expense which was around 12.5% of sales in FY12, has further increased to over 16% of sales in Q1FY13.
18.) ENTRY BARRIERS :
i.) Tyre manufacturing industry is fragmented whereas the insoluble sulphur industry is concentrated thereby leading to favorable terms of trade for the latter.
ii.) Global tyre manufacturers have potential liabilities regarding safety issues. Moreover, as insoluble sulphur is a minor cost for tyre manufacturers, the resistance to price increases & incentive to shift to a new supplier is low.
iii.) A new entrant in insoluble sulphur manufacturing will have to wait for around 18 months (approval time from tyre manufacturers) from the date of commissioning of the plant for commercial production to begin.
18.) Usage of Insoluble Sulphur in radial tyres is more. Hence the increasing radialization of domestic CV tyre industry will lead to increased domestic demand in future. Despite this, the % of exports will contribute to 75% of Sales from 65% in FY12.
19.) FY13E :
Volumes = 22,000 MT (25% growth yoy)
Sales = Rs.286Cr.
EBITDA = Rs.75-80Cr.
PAT = Rs.40-45Cr.
Net Debt = Rs.101Cr. (Peak Debt)
20.) Schrader Duncan :
OCCL has good relations with tyre cos. Hence, it is confident of selling Schrader Duncan's output gainfully as both cos. will have common customers. At peak capacity Schrader Duncan will do sales of Rs.75Cr. with OPM of 10%. Schrader Duncan does not require any capital infusion from OCCL.
Schrader was existing this business globally & OCCL was getting a good deal, hence they opted for it.
As per their claims, Schrader Duncan has shown a marginal operating profit in Q1FY12. Also, after the Mulund land sale, it has become debt free.
Considering the attractive price, & the complementary product, Schrader Duncan acquisition seems to be a fair use of capital.
21.) PROMOTERS :
i.) OCCL & Schrader Duncan are the only 2 operating business of the promoters. They have no other business.
ii.) During FY01, OCCL sold its Carbon Black business to Continental. But the more than Rs. 50Cr. profit on sale of this division went into write offs of loans & advances.
iii.) OCCL has also bought expensive residential property for the promoters in Gurgaon.
iv.) Mr. Arvind Goenka took over as MD from one Mr. Taneja in 2008-09.
22.) VALUATION : TTM
CMP = Rs.115/-
MCap = Rs.119Cr.
EV = Rs.220Cr.
EBITDA = Rs.60Cr.
PAT = Rs.32.5Cr.
PE = 3.66x
EV / EBITDA = 3.66x
FY13E EBITDA = Rs.75-80Cr.
FY14E EBITDA = Rs.100Cr.
EV / EBITDA = 2.75-2.93x (FY13E)
EV / EBITDA = 2.2x (FY14E)
23.) Promoter has promised a Payout Ratio of 20%.
24.) OCCL has plans for setting up phase III & IV at Mundra. The Capital Outlay for this 11,000 MTPA capacity will be around Rs.125Cr. The management is re-evaluating the schedule of this capex as per their assessment of the demand outlook of global tyre industry.
25.) Portfolio Weightage = 5%
24.) OCCL has plans for setting up phase III & IV at Mundra. The Capital Outlay for this 11,000 MTPA capacity will be around Rs.125Cr. The management is re-evaluating the schedule of this capex as per their assessment of the demand outlook of global tyre industry.
25.) Portfolio Weightage = 5%
