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Saturday, November 21, 2009

Oriental Carbon & Chemicals Ltd:Future growth prospects and outlook,buy/sell/hold,analysis and recomendation,news/views and results

Scripscan:Oriental Carbon & Chemicals Ltd

Story:Belonging to G.P. Goenka group, OCCL is engaged in the production of InsolubleSulphur, Sulphuric Acid and Oleums. However, more than 80% of its turnover isderived from Insoluble Sulphur.Insoluble Sulphur is mainly used in Tyre Industry. Except Hindustan Zinc where Insoluble Sulphur is a small by-product, OCCL is the only manufacturer of insoluble sulphur in India, supplying to all major tyre manufacturers in India. Co. is also exporting a large quantity of its production as exports are more profitable. It has installed capacity of 10,000 tonnes (recently increased to 11,500 tonnes through de-bottlenecking) and Plant is running at full capacity. Growth in the Indian markets for Insoluble Sulphur is twice the growth rate of Tyre Industry due to increasing share of Radial Tyres which consume more Insoluble Sulphur.In 2008-09, OCCL achieved 14% growth in production to 10703 tonnes as compared to 9391 tonnes in previous year. Domestic sale was down 11% and exports 5% over previous year in quantity terms resulting in total sale of 9822 tonnes. This was mainly due to the impact on demand in the second half of the year, of the globaleconomic slow down. Impact of severe economic slow down was somewhat mitigated by supplying to additional customers/Plants. R/M prices had risen to unprecedented levels upto Sept. '08 which subsequently came down to earlier levels. Softening of R/M prices led to better profitability and PAT increased by 370% to 7.63 crs.Dividend was increased to 15%.Sale of Sulphuric Acid was down by 23% at 24769 tonnes and Oleum was higher by 37% at 6947 tonnes. Selling price of Acid had gone down to historical low due to sluggish demand.Traditionally, International demand for Insoluble Sulphur was growing at 4% p.a.However, due to global slowdown, there was significant reduction in demand for Insoluble Sulphur which led to reduced sale of the product in the second half. Though domestic demand started showing recovery towards end of the year, Intl. demand continued to be sluggish with many Tyre Plants peforming at reduced capacities. Despite same, OCCL managed to improve its performance by starting supplies to new customers, additional Plants of existing customers. Insoluble Sulphur market in America, Europe and Africa is dominated by a single supplier but OCCL maintains advantage as second supplier. Price of R/M continued to increase upto second quarter of the year but same witnessed unprecedented and rapid fall in second half of the year. Although co. had to reduce selling price due to reduced R/M prices but reduction in selling price was less than proportionate, leading to expansion of profit margins. Exports were 6483 tonnes which means 65% of the total sales came from exports.In 2008-09, OCCL started process of de-bottlenecking to increase the capacity by 12%. Now, production capacity stands increased to 11,500 tonnes from June 2009 onwards. OCCL has reported bumper results for Q2. Its PAT for Q2 alone is 8.57 crs. which is more than PAT of entire 2008-09. EPS for Q2 is 8.31. Main reason for such stupendous performance is low R/M prices, increased production capacity due to de-bottlenecking and extremelybuoyant/strong demand from domestic as well as Intl. Tyre Cos. H1 PAT stands at 11.60 crs. translating to H1 EPS of 11.25. Co. has declared 15% interim dividend.Big expansion is being undertaken by various Tyre Cos. in India as well as abroad.However, no new capacities of Insoluble Sulphur are in pipeline except a Chinese Co.planning expansion of its capacity. Considering the same, Insoluble Sulphur hasbecome a seller's market, wherein OCCL is commanding pricing power. In order to cater to increasing demand, OCCL has planned to set up an EOU in Mundra SEZ with capacity of 12,500 tonnes. This Plant will increase its existing capacity by 100%. Co. has already acquired the land and commercial production should start by end of 2010.OCCL is likely to perform extremely well in coming Qtrs. also as, prices of its R/M continue to be at low level whereas demand of Insoluble Sulphur has become more strong. For 09-10, OCCL is likely to achieve sales of 132 crs. and PAT of 25.50 crs. which will lead to EPS of 24.75.Stock is trading at just 2.63 x FY10E EPS. Such valuations are extremely tempting considering the foll:
1. B.V. is Rs. 66/- B.V. will increase to Rs. 87/- as on March 2010.
2. Co. is Monopoly producer of Insoluble Sulphur.
3. Demand for Insoluble Sulphur is growing rapidly due to higher
production of Radial Tyre.
4. Globally, no new capacities of Insoluble Sulphur coming (except one in
5. Insoluble Sulphur has become a sellers market.
6. Current Market Cap is just Rs. 65 crs. which is really low considering
that OCCL is 2nd position globally.
7. Company has embarked upon to double its production capacity.
Even if OCCL gets modest P.E. Ratio of 6, its share price should be, logically,
Rs. 150/- based upon FY10E EPS.


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