Oriental Carbon Research Report By ICICI-Direct

Earnings at inflection point; quality play…

– Oriental Carbon & Chemicals (OCCL) is a speciality chemical
company manufacturing insoluble sulphur, a key raw material used
in vulcanisation of rubber while manufacturing tyres

– It is the only Indian company manufacturing this quite essential
product and is among the top three in oligopolistic market globally

– The topline growth at OCCL was muted over FY15-17E largely due to
capacity constraints with the company operating at 90%+ utilisation
levels (capacity at 23000 tonne)

– Sending the robust product demand and expedite capex (brownfield
at Mudra facility) execution, OCCL has commissioned the Phase 1 of
expansion (5500 tonne) ahead of schedule in Q3FY17. The company
is successfully penetrating the North American and Chinese markets
for selling the incremental produce

– With phase 2 (5500 tonne) due for commissioning in Q2FY19E, we
believe OCCL will witness robust growth in topline & bottomline,
going forward. We expect sales to grow at 14.0% CAGR in FY17-19E
with PAT growing at a CAGR of 16.6% in FY17-19E

– Hence, with earnings at an inflection point and early commissioning
of expansion, we have revised upward our estimates and increased
our target multiple to value OCCL at | 1125

OCCL – Key player in oligopolistic insoluble sulphur market!
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 20-22 KT is the third credible player with ~10% market share. Globally, demand for insoluble sulphur is expected to grow at 3-4% CAGR in the next few years with demand in India growing at 10%+ CAGR due to robust automobile demand & increasing radialisation of tyres in the CV segment (penetration at ~30%).

Impressive brownfield expansion on track; volume led growth to follow
OCCL has current capacity of 23000 tonne and is largely operating at
~90% utilisation level in FY16. Sensing the same, OCCL had launched an
impressive expansion plan where it intends to increase its capacity
(brownfield) by 11000 tonne in two phases. The first phase of 5500 tonne has already been commissioned in December 2016 (four months ahead of schedule). With a strong customer relationship, focus on further penetration in the Chinese & North American markets and increasing product demand, we expect OCCL to report healthy volume led growth in FY17E-19E. We expect OCCL to report insoluble sulphur sales volume CAGR of ~12.0% in FY17E-19E to ~28.4 KT in FY19E (22.7 KT in FY17E).

Quality portfolio play, robust margins and return ratios, retain BUY!
OCCL is a speciality chemical company with 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 profile with FY16 debt: equity at 0.3x & average CFO in FY14-16 at ~| 60 crore (yield ~6.5%). With early commissioning of brownfield capacity and robust product demand, we expect sales & PAT to grow at a CAGR of 14.0% & 16.6%, respectively, in FY17E-19E. We value OCCL at | 1125 i.e. 17.0x P/E (1.0x PEG) on FY18E & FY19E average EPS of | 66.2. We maintain BUY recommendation on OCCL.