Oriental Carbon & Chemicals Ltd
Growth set to kick in, play on tyre sector recovery
Oriental Carbon & Chemicals (OCCL) has positioned itself as the market leader in Insoluble Sulphur (IS) chemistry capturing 60% domestic & ~10% global market share. The global IS market is dominated by mere four quality players including OCCL, is itself a proof of niche and specialized chemistry the company operates in. Our faith in the company’s profitable business growth stems from the fact that (a) Domestic insoluble sulphur demand is set to grow at 6-8% annually led by robust rubber & tyre consumption (b) expansion of IS capacity to increase penetration in existing & foray in newer geographies like North America and global increase market share of the company (c) focus on specialized products in exports will improve the product mix and margins. OCCL business is governed by strong R&D, marquee client base and strong visibility in international markets. High initial capital requirements, longer client approval period & lower asset turn makes it difficult for a new entrant to successfully replicate the business model of OCCL. We believe as tyre industry is set to regain its growth path on the back of robust demand of auto, strong replacement segment momentum and increase in shift towards radial tyres from bias tyres which will create strong demand momentum. Considering the future growth visibility of this net cash company with strong dividend payout history (20-25%), we assign BUY rating with target price of INR 1036 per share.