Oriental Carbon & Chemicals Research Report By ICICI-Direct

Oriental Carbon & Chemicals

Proxy – auto play, steady growth trajectory…

 Oriental Carbon & Chemicals (OCCL) reported a steady Q4FY18 performance. Net sales for the quarter came in at Rs 89.8 crore, up 9.4% YoY. EBITDA in Q4FY18 was at Rs 24.1 crore with corresponding EBITDA margins at 26.9% (down 340 bps YoY)

 EBITDA margins in Q4FY18 came in muted primarily tracking MTM on forward forex contracts (~Rs 2 crore), adjusting for which it was in its normal range of 28-30%

 Consequent PAT for Q4FY18 came in at Rs 14.5 crore, up 56% YoY. Higher PAT for the quarter is supported by a higher tax rate (52%) in the base quarter i.e. Q4FY17

 For full year FY18, net sales were at Rs 328.2 crore (up 10.3% YoY). EBITDA was at Rs 98.2 crore (EBITDA margins at 29.9%, up 60 bps YoY) and PAT at Rs 56.8 crore, up 6.4% YoY

 OCCL supplies key raw material i.e. insoluble surplus to domestic as well as global tyre companies. Hence, it is a proxy on robust auto and consequent tyre industry growth

 OCCL has already begun trial runs from the Phase-2 of brownfield expansion and expects to commence commercial production soon

OCCL – key player in closely guarded insoluble sulphur industry

OCCL is a speciality chemical company manufacturing insoluble sulphur, a critical vulcanisation agent for manufacturing tyres.

As per industry estimates, total insoluble sulphur (IS) market globally as of CY15 is at ~264 KT dominated by three major players i.e. oligopolistic in nature. Eastman Chemicals (US) is the market leader with close to ~70% market share followed by Japanese Player Shikoku with ~15% market share.

OCCL with total sales volume in the range of ~26 KT is the third credible player with ~10% market share. Its market share in the domestic market is pegged at ~55-60%.

Globally, demand for insoluble sulphur is expected to grow at 5.2% CAGR in CY15-20E with demand in India growing at a CAGR of 10%+ due to robust automobile demand & increasing radialisation of tyres particularly in the CV space.

Capacity in place, volume led growth to sustain

OCCL has a current capacity of 28500 tonnes and is largely operating at ~90% utilisation level as of FY18.

As part of its brownfield expansion OCCL is due to commission its Phase 2 of expansion of 5500 tonnes in FY19E. With the history of commissioning ahead of schedule and capacity already under trial runs, we expect the Phase 2 to commence commercial production by Q1FY19 end.

This is likely to lead volume led growth to sustain at OCCL. We expect insoluble sulphur sales volume to grow at a CAGR of 9.7% to ~32 KT by FY20E.

Speciality chemical company in true sense, portfolio stock, retain BUY!

OCCL is a speciality chemical company in the true sense with robust amount of value addition being done to procured raw materials as RM to sales is low at ~25% with remaining major expenses being power & fuel (~12%) and other expenses (~22%).

OCCL also has a unique product profile, limited competition in the marketplace and consequent sustainable strong EBITDA margins (28%+) and return ratios (RoIC: 20%+).

OCCL has a healthy balance sheet with controlled working capital cycle (~75 days) and robust CFO’s with average CFO yield in FY18-20E at ~9%. Going forward, with robust demand prospects and incremental capacity in place, we expect sales & PAT to grow at a CAGR of 10.2% and 21.3%, respectively, in FY18-20E. We value OCCL at Rs 1300 i.e. 16x P/E on FY20E EPS of Rs 81.1/share and assign BUY rating on the stock.