Oriental Carbon & Chemicals
Oriental Carbon & Chemicals (OCCL) is a specialty chemical company manufacturing insoluble sulphur, a critical vulcanisation agent for manufacturing tyres. With limited competition and a unique product profile, OCCL has a strong presence in the domestic (~50% market share) as well as export markets. With the commissioning of the brownfield facility in early FY18E, we expect OCCL to report sales & PAT CAGR of 15.2% & 17.4%, respectively, in FY17E-19E. It is quoting at inexpensive valuation of 12.4x P/E on FY18E EPS of Rs. 56.4.
Highlights of Oriental Carbon
• OCCL – prominent player in oligopolistic 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 a CAGR of 10%+ due to robust automobile demand & increasing radialisation of tyres in the CV segment (penetration at ~30%). Radialised tyres consume almost the double quantity of insoluble sulphur (per tonnage) vs. bias tyres
• Capacity commissioning on track; volume growth to follow:
OCCL has a 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 is due to be commissioned in April 2017. With a strong relationship with customers 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 11.0% in FY17E-19E to ~30 KT in FY19E.
• “Specialty chemical” company in true sense; warrants re-rating:
OCCL is indeed a specialty chemical company with a unique product profile, limited competition in the marketplace and consequent sustainable strong EBITDA margins (25%+) and return ratios (RoIC: 20%+). With commissioning of brown field capacity, we expect sales & PAT to grow at a CAGR of 15.2% & 17.4%, respectively in FY17E-19E. We value OCCL at Rs. 870-930 i.e. 14.5-15.5x P/E on FY18E & FY19E average EPS of Rs. 60
Premco Global is a technical textile unit manufacturing woven & knitted narrow elastic fabric, which finds application in innerwear. On account of increasing consumer brand & quality consciousness and Premco’s ability to move up the value chain, the company’s prospects look robust. Premco is a supplier to brands like Rupa, Lux in the domestic market and Hanes (US) & Jockey (US) in the international market. On the back of impressive expansion in Vietnam, we expect sales & PAT to grow at a CAGR of 19.0% & 16.3%, respectively, in FY16-19E.
Highlights of Premco Global
• Niche segment-narrow elastic fabric/tapes:
Premco has a niche business model wherein it manufactures narrow elastic tapes. It has an installed capacity of 11 crore metre with FY16 sales volume at 9 crore metre with blended realisation at ~Rs. 8/metre. It is largely an export oriented unit with exports share in the total sales mix at ~66%. Premco primarily exports value added products in export markets, which fetches higher realisations and consequent high EBITDA margins. Its moat is technical know-how of its product profile, long gestation period of customer approval (entry barrier) & innovative product solutions
• Impressive expansion plans; first phase commissioned:
Premco is currently setting up a narrow elastic fibre plant in Vietnam with a capex of ~Rs. 20 crore. The plant in Vietnam is a result of natural preference of its customers to expand its manufacturing base in Vietnam amid low employee costs and benefits associated with Trans Pacific Pact (TPP). The capex is being implemented in two phases with each phase having a capacity of 3.5 crore metre with revenue potential of ~Rs. 25 crore each. The first phase has already been commissioned in Q2FY17. On the back of commissioning of Vietnam facility we expect volumes to grow at a CAGR of 17.6% over FY16-19E to 14.7 crore metre in FY19E (9 crore metre-FY16)
• Unlevered balance sheet; robust return ratios, moat to sustain:
Premco has a debt free balance sheet with surplus cash on books (Rs. 17 crore as of FY16). Sustained EBITDA margins have resulted in healthy return ratios with FY16, RoE, RoCE & RoIC at 25%, 33% & 56%, respectively. Going forward, we expect sales & PAT to grow at a CAGR of 19.0% & 16.3%, respectively, in FY16-19E. We value Premco at Rs. 825-880, i.e. 15.0-16.0x P/E on FY18E & FY19E average EPS of Rs. 55.0. *Taking into account the low liquidity in the scrip and its listing only on the BSE platform, we recommend a buying range of Rs. 550-600 as the entry price into the counter