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Oriental Carbon & Chemicals - Sulphur springs

By Kaustubh Ghotikar | 8/15/2011 4:36 PM Monday

With a five-year CAGR of 57.64 per cent, and 25.54 per cent in topline and bottomline, its status as market leader in its product line, doubling of capacities, good clientele both in the domestic and international markets, a 10-year dividend-paying track record and PE of merely 3.4x, Oriental Carbon & Chemicals Ltd. merits a second look. Hence, we recommended this scrip, which is currently available at Rs 119.

Part of the J P Goenka Duncan Group, Oriental Carbon & Chemicals Ltd. (OCCL) is the manufacturer of insoluble sulphur and sulphuric acid. Insoluble sulphur, generates 90 per cent of its revenues, while the balance comes from sulphuric acid. Insoluble sulphur is a vulcanising agent that increases the durability of rubber, and hence, OCCL’s products find application mainly in the tyre industry. Of the total insoluble sulphur revenues, nearly 60 per cent come from exports, while the balance comes from domestic sale.

While it looks like a plain vanilla business, what one needs to know is that OCCL is the only manufacturer of insoluble sulphur in India. Thus, it stands to be a direct beneficiary of the tyre industry. OCCL already has an envious list of clients that includes Bridgestone, Continental AG, Kumho Tyres, Goodyear on the international front, and Apollo Tyres, Bridgestone India, Ceat Tyres, MRF Tyres, Goodyear India, Birla Tyres, and J K Tyres on the domestic front. In fact, OCCL is a preferred supplier to international tyre companies.

The icing on the cake is the fact that most of the tyre companies in India are currently on an expansion spree. International companies such as Michelin and Yokohama too, are setting up tyre capacities in India. In India, there is also a shift towards radialisation of tyres, which consumes more insoluble sulphur. While 98 per cent of passenger cars are radialised, radialisation of commercial vehicles is still less at 12 per cent, and presents a good growth opportunity. All of this should create incremental demand for OCCL’s insoluble sulphur in the coming years.

OCCL is fully poised to take advantage of these opportunities, by almost doubling its insoluble sulphur capacity by 11000 MTPA, taking it to 23000 MTPA in two phases at the Mundra SEZ. The trial runs for Phase I (5500 MTPA) have started, while Phase II is expected to be commissioned in Q4 FY12, and once completed, this expanded capacity would push its revenues to a different trajectory altogether. In fact, a reliable source tells us that post the Phase II commissioning, OCCL could continue into Phase III and Phase IV expansion of insoluble sulphur capacity at Mundra SEZ. According to OCCL’s annual report, its land at Mundra SEZ is big enough to support another 11000 MTPA of capacity. The only concern is that, if an auto slowdown occurs domestically or globally, OCCL could bear the brunt of the same.

On the financial front, OCCL started Q1 FY12 on a strong note, with a 34 per cent topline growth to Rs 47.34 crore, while profits grew by 6 per cent to Rs 7.79 crore. At these numbers, OCCL’s valuations look quite low at a PE and EV/EBIDTA of merely 3.3x and 3.4x respectively. One can grab the scrip with a year’s target of 150.

 

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