Equity Analysis: Oriental Carbon & Chemical Ltd.

Oriental Carbon & Chemical Ltd. (OCCL), belonging to JP Goenka Group of companies, is one of the market leaders in production of Insoluble Sulphur for the Tyre and Rubber industry around the world. It has manufacturing facilities at Dharuhera (Haryana) and at Mundra (Gujarat). OCCL’s Insoluble sulphur "Diamond Sulf" is undisputed leader in India. Apart from Insoluble Sulfur OCCL also manufacture Sulphuric Acid and Oleums.

Background of Goenka Group:

It would be unfair if we don’t talk about the great Goenka family before deluging in OCCL’s business. The fascinating journey of the Goenka Group started in 1820 by Ramdutt Goenka, who moved from Dundlod, a small town in Rajasthan, to do business with the British East India Company. An entire generation of Goenkas remained traders until independence and became the most influential Marwari family in Calcutta after the Birlas. Goenka family got the full control of Octavious Steel and Duncan by 1960s. At that time, the assets were divided between Goenka brothers. Duncan came in KP Goenka’s fold. KP Goenka later acquired interests in tea, automobile tyre, ancillaries, jute, cotton textiles and electric cables. 

In early 1979, KP Goenka split family assets among his three sons Ramaprasad (RP), Gouriprasad (GP) & Jagdishprasad (JP). GP and JP continued with the Duncan brand as Duncan Goenka and Duncan International, but RPG created his own group identity RPG Enterprises. J.P. Goenka currently serves as the Chairman of Duncan International India Ltd., Schrader Duncan Limited and OCCL.  J.P. Goenka didn’t undertake dramatic takeovers coups like his brothers RP Goenka and GP Goenka, but he has been a steadfast and respected industrialist. His legacy is being carried forward by his son Arvind Goenka and grandson Akshat Goenka.

Business background:

OCCL has 2 lines at Mundra Port SEZ for Insoluble Sulphur with capacity of 11,000MTPA and 2 lines at Daruhera with capacity of 12,000MTPA. Company manufactures various grades of Insoluble Sulphur – high dispersion, high stability and special grades. There is one line of Sulphuric Acid at Daruhera with capacity of 46,000MTPA. The Sulphuric Acid has around 7% contribution to the top line.

Exports contribute around 71% to the top line. Insoluble Sulphur has important application in tyre industry. OCCL has clients in 21 countries and has approvals from all major tyre manufacturers including Continental AG, Good Year, Bridgestone, Pirelli, MRF, Apollo, JK Tyres etc. Michelin is the only large tyre company which has not approved OCCL for supplying insoluble Sulphur. The reason mentioned by management is that Michelin requires commitment for large amount of supplies which OCCL is not in position to supply. North America is the largest market for insoluble Sulphur and Asia has the highest growth.

Financial Analysis:

Balance Sheet analysis:

1. Debt/equity:

Every company faces headwinds during their lifetime. Creditors may put pressure to repay loans during difficult times which may further deteriorate the financial position. An investor should invest in a company with limited leverage. OCCL has been reducing debt since 2012. D/E at the end of FY2015 was 0.3.

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Debt	29.54	26.47	25.55	22.56	18.64	53.40	113.95	99.12	82.45	69.82
Equity	54.43	56.25	59.34	66.68	91.32	123.91	149.36	170.74	202.75	243.54
D/E	0.5	0.5	0.4	0.3	0.2	0.4	0.8	0.6	0.4	0.3

2. Current ratio:

A company should have current ratio of more than one. This would mean that company has available resources to pay off all current liabilities if need be. OCCL has healthy current ratio of 1.6.

(Rs.  Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Current Assets	18.75	23.93	35.27	33.14	40.29	61.4	84.68	88.48	95.26	106.47
Current Liabilities	13.87	15.62	22.35	17.46	17.9	26.14	35.42	57.27	62.05	68.27
Current ratio	1.4	1.5	1.6	1.9	2.3	2.3	2.4	1.5	1.5	1.6

Conclusion:

OCCL has a strong balance sheet with a small equity base of Rs. 10.31 Cr. The total liabilities of OCCL (small + long term) is Rs. 138.1 Cr at the end of financial year 2015. OCCL’s current assets and cash & bank balance total to Rs. 124.2 Cr which can largely cover all liabilities of OCCL.

Profit & Loss:

1. Sales growth & profitability

OCCL has a healthy CAGR of 20% over last 10 years. The operating profit CAGR is 24% and net profit CAGR of 33%. OCCL has been able to improve margins while increasing the sales. OCCL seems to have price bargaining power with its clients, which is a typical feature of oligopoly business. Oligopolies are price setters rather than price takers. The company has great focus on increasing cost efficiency which has led to reduction in operational expenses. The company has been posting healthy net profit margins. 

(Rs.  Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	CAGR 2006-2015
Sales (A)	54.1	64.47	90.79	122.49	126.87	159.01	217.82	225.45	261.7	282.58	20.2%
Operating profit (B)	9.93	10.74	12.83	15.16	40.96	47.79	55.75	57.56	68.15	71.29	24.5%
Operation profit margin (B/A)	18.4%	16.7%	14.1%	12.4%	32.3%	30.1%	25.6%	25.5%	26.0%	25.2%
Net profit after tax	3.84	2.89	1.62	7.63	29.46	37.38	31.46	27.38	40.44	51.32	33.4%
Net profit margin (C/A)	7.1%	4.5%	1.8%	6.2%	23.2%	23.5%	14.4%	12.1%	15.5%	18.2%

2. Tax rate

An investor need to understand if the company is paying out tax to government as per prevailing tax rate. If this is not the case, she should understand the reason for the same. OCCL tax payout is lower than the prevailing rate. OCCL’s SEZ line received 100% tax holiday till last year which will reduce to 50% for next 5 years. Management communicated in investor call that they expect tax payout to be on MAT (Minimum Alternate Tax) basis i.e. ~20.0% for next 6-7 years as OCCL is going for expansion in its Mundra plant which would be eligible for 100% tax break.

(Rs.  Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Profit before tax	4.64	4.74	2.07	7.44	34.17	43.62	44.5	40.05	50.16	62.97
Tax paid (ex dividend tax)	0.87	0.72	0.88	0.5	4.82	6.23	13.04	12.65	9.72	11.65
Tax paid	18.8%	15.2%	42.5%	6.7%	14.1%	14.3%	29.3%	31.6%	19.4%	18.5%

3. Interest coverage

OCCL boasts healthy interest coverage. This means that company has sufficient operating profits to cover for its interest expenses.

(RS.  Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Operating profit	9.93	10.74	12.83	15.16	40.96	47.79	55.75	57.56	68.15	71.29
Interest expenses	1.75	2.41	3.27	3.93	2.42	2.69	8.31	12.78	11.05	8.1
Interest coverage	5.7	4.5	3.9	3.9	16.9	17.8	6.7	4.5	6.2	8.8

Conclusion:

OCCL has delivered strong growth in last 10 years without compromising on its profitability which, despite some gyrations, has stabilized at strong levels.

Cash Flow Statement:

1. Cumulative PAT vs Cumulative CFO:

OCCL’s cumulative CFO is more than the cumulative PAT. This means that the company has been able to realize its proceeds from its clients. An investor should be careful with investing in companies where CFO is lower than PAT as it may be due to fictitious revenues or due to low bargaining power of the company with its clients.

(Rs.  Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	Total
PAT	3.84	2.89	1.62	7.63	29.46	37.38	31.46	27.38	40.44	51.32	233.42
CFO	-1.12	7.19	5.77	17.66	36.31	29.28	30.41	46.63	51.53	69.97	293.63

2. Cash flow analysis:

OCCL has positive Operating Cash Flows over last 10 years which allowed it to fund its expansion largely from its internal accruals.

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	Total
Cash from Operating Activity	-1.1	7.2	5.8	17.7	36.3	29.3	30.4	46.6	51.5	70.0	293.6
Cash from Investing Activity	-3.4	1.7	-2.5	-11.3	-20.0	-63.3	-77.3	-29.1	-23.2	-31.4	-259.8
Cash from Financing Activity	5.1	-6.9	-3.1	-6.0	-11.2	31.0	50.8	-19.6	-31.7	-31.6	-23.2
Net Cash Flow	0.6	1.9	0.1	0.4	5.2	-3.0	3.9	-2.1	-3.4	7.0	10.7
Cash & Eq. at the end of year	1.7	3.1	3.2	2.4	7.5	4.6	8.5	6.4	5.5	12.5

Conclusion:   

Strong operating cash flows have allowed OCCL to expand its operations without putting much pressure on its balance sheet with leverage. Operating cash flows have largely remained positive in last 10 years. 

3. Operating parameters:

OCCL has been improving on its operating parameters except the receivable days. The receivable days have increased from 42 to 64. This increase may lead to company not realizing the proceeds from the sales leading to increase in pressure on CFO.

Net fixed asset and inventory turnover have shown marked improvement in last 4 years.

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Net Fixed Asset Turnover (High is better)	0.95	1.19	1.74	2.40	2.00	2.39	1.56	1.21	1.36	1.51
Receivables Days (Low is better)		42.46	45.55	40.51	46.39	55.19	62.20	68.71	60.46	63.69
Inventory Turnover (High is better)		4.92	5.35	6.67	8.19	9.84	9.31	6.98	7.01	7.52

Business Analysis

1. Market size and comparison with peers:

The total market size of insoluble Sulphur is around 240,000 MTPA. The market size of insoluble sulphur utilized by top tyre companies is 210,000MTPA. Eastman Co. has 80% of the market and rest 20% is equally shared by OCCL (~11-12%) and Shikoku. While Eastman is major player, OCCL has positioned itself as alternate supplier. Shikoku mainly caters to Japanese and Korean markets.

The market size for insoluble sulphur is going to increase to 340,000 MTPA by 2020. The market size of high insoluble sulphur (which OCCL deals with) should be around 310,000MTPA. All three major players are increasing their capacity to atune with the increased demand for insoluble sulphur. This may lead to increase in overall production by 50,000-60,000MTPA in next few years. This increase shouldn’t result in global glut but ensure enough supplies for sustainable growth of tyre industry. This, however, will not be true if Eastman mischievously change their pricing strategy in adverse manner.

OCCL is confident of capturing market size of 40,000MTPA (almost double of current levels) in future which means company would further need to expand their capacities once the current expansion happens. OCCL is currently expanding its capacity by 48% to 34,000MTPA by 2018.   

Tyre companies across the globe are planning for expansion to the tune of USD 28 billion till 2020. Indian market is going to see increased radialization (require more insoluble sulphur than normal tyre). The CV segment is currently 25% radialized which could increase to 75% by 2020. The dosage of insoluble sulphure in tyres has increased to 1.42 kg per per 100kg of the tyre rubber and is expected to increase further to 1.46 by 2020 as per report by Notch. The increase in radialization in India and increased dosage in radial tyers will drive growth for insoluble sulphur industry and OCCL.

The entry barriers for a new player are high as tyre companies go for reputed name. Tyre companies take more than 2 years to give approval for supplying insoluble sulphur to them. This is also a relatively high capex business further increasing the barriers for entry of new players.

2. Cost optimization:

The raw materials for the company are – Sulphur and Naphthenic Oil. Sulphur is available in ample and Naphthenic Oil is procured locally and internationally. Presence at the port allows company to control its freight charges. OCCL will commission coal pat boiler in their Mundra plant which should reduce the costs further by Rs. 2 Cr every year (Rs. 1 Cr on each line). The operational expenses as percentage of sales have reduced from 83% to 75%. Tax exemptions and focus on optimizing power costs have kept the costs in control.

(INR Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Sales (A)	54.1	64.47	90.79	122.49	126.87	159.01	217.82	225.45	261.7	282.58
Operating profit (B)	9.93	10.74	12.83	15.16	40.96	47.79	55.75	57.56	68.15	71.29
Opex (%ge of sales)		83.3%	85.9%	87.6%	67.7%	69.9%	74.4%	74.5%	74.0%	74.8%

3. Increase in production capacity & sales

OCCL has increased its capacity of insoluble sulphur by 4.8 times and Sales has increased by 5.2 times. This means that company has been thoughtful about their expansion and has been able to efficiently convert the additional capacity into sales.

Increase in production in 10 years	4.8 times	4,000MT in 2006 to 23,000MT in 2015
Sales	4.2 times	Rs. 273 Cr from 50 Cr

OCCL is increasing its capacity by 11,000MTPA by investing Rs. 159 Cr by 2018. This is an expenditure of Rs. 14.5 cr (159/11) by thousand MTPA capacity expansion. Assuming the current utilization levels & margins, incremental capacity 11,000MTPA should result increase in annual top line by around Rs.130 Cr.

4. Capex vs CFO

The total Capital expenditure by OCCL in last 10 years is around Rs. 187 cr. Consolidated operating cash flow during the same period is Rs. 293 cr. OCCL has strong cash flows to support its expansion plans in near future.

5. Creation of value for stakeholders

The retained profit in last 10 years is Rs.188 cr whereas the value created for the shareholder is Rs. 525 cr. This means OCCL’s created value of Rs. 2.8 by retaining Re. 1 by the management.

(Rs  Cr./10 million)	2005-14
Total retained profits of last 10 years	188.36
Total increase in market capitalization	525.01
Value created	2.79

Conclusion:

OCCL is a significant player in a niche market which is a sweet spot for the company. OCCL has a sufficiently large market to expand its business profitably. Management has been expanding the capacity with  strong focus on cost optimization. Management has created significant value for the shareholders in last 10 years.

Valuation:

1. Price to Equity:

OCCL is currently available at PE of 10.3 which provides sufficient margin of safety to the investors.

2. Market cap & Book Value:

OCCL has a market cap of Rs. 571.4 Cr and has book value of Rs. 236.5. A small cap company which is a leading player in a niche market is a good investment opportunity.

3. Dividend Yield

The dividend payout has increased at CAGR of 29% over last 10 years whereas Net Profit has increased at CAGR of 33%. The dividend yield is around 1.5%. OCCL has been handsomely rewarding its shareholders with consistent dividend.

(Rs.  Cr./10 million)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	CAGR 2006-2015
Net profit	3.84	2.89	1.62	7.63	29.46	37.38	31.46	27.38	40.44	51.32	33.4%
Dividend payout	1.05	1.08	0.57	1.80	4.81	4.80	5.99	6.01	8.43	10.52	29.2%
Retained earning	2.79	1.81	1.05	5.83	24.65	32.58	25.47	21.37	32.01	40.80	188.36
Dividend %ge	27.34%	37.37%	35.19%	23.59%	16.33%	12.84%	19.04%	21.95%	20.85%	20.50%

Conclusion:

OCCL is currently available at cheap levels and provides significant safety of margin for the shareholders.

Management Analysis:

1. Promoters and Succession planning, Management

Mr. JP Goenka is the Chairman of OCCL and his son Mr. Arvind Goenka (age 53 years) is the Managing Director. Mr. Arvind Goenka is a commerce graduate from St. Xaviers College, Kolkata. Mr. Arvind commands rich experience of over 30 years in managing and/or looking after Industries of diverse business Interests such as jute and cotton textiles, rubber chemicals and industrial engineering products.

Mr. Akshat Goenka served as Senior Manager of Oriental Carbon & Chemicals Limited April 01, 2012 and served as its Vice President since June 01, 2014. Mr. Akshat Goenka (age 27 years) has been Joint Managing Director of Oriental Carbon & Chemicals Limited since June 01, 2015 and has been its Director since May 14, 2015. He played a key role in setting up Phase-I and Phase-II of the new Plant of the Company for manufacturing Insoluble Sulphur at SEZ Mundra, Gujarat. Mr. Akshat Goenka is being groomed to be next Managing Director of the company.

2. Salary of promoters vs Net profits:

Mr. Arvind Goenka salary is Rs. 4.5 lakhs per month increasing by Rs. 0.5 for next 3 years. The total remuneration for MD is Rs. 1.43 Cr per annum

Mr. Akshat Goenka’s salary will be Rs. 3.75 lakh per month increasing by Rs. 0.5 lakh every year.

The salary increment for MD and CFO is 18% and 47% respectively over previous year against increase in profit by 25% and turnover 16%. In case of Chief Financial Officer, increase is higher due to his elevation to CFO during the year. Average increase in the remuneration of all employees was 14%

3. Project execution skills

Management has successfully undertaken expansion projects in the year 1994, 2005, 2008 and 2012.

OCCL is increasing its Insoluble Sulphur capacity by 11,000MTPA till 2018 to 34,000 MTPA. This would require capex of Rs. 159 cr funded in debt to equity ratio of 2:1. The project IRR is expected to be 25% and payback in around 4 years.

4. Promoter shareholding:

Promoter holds around 51% shares in OCCL. Of the rest, around 36.5% are held by public and 12.5% by institutions. The FII holding is very low. The promoter holding reduced from 56.4% to 51% as the Promoter sold their shares to L&T Mutual funds, which invested in OCCL at price of 525 per share. OCCL’s consistent performance has now captured the eyes & ears of institutional investors.

Conclusion:

Management has unblemished pedigree and has successfully implemented projects on consistent basis so far. 

Other important aspects:

Europe market has significant contribution to the top line. The EUR depreciation has led to less realized value of sales in Rs. The sustained pressure on EUR may dampen the overall numbers if OCCL is not able to increase its base in North American and Asian markets.

OCCL has a subsidiary – Schrader Duncan Ltd (SDL) (50% shareholding) which manufactures pneumatic components and automotive products like tyre fitting and servicing units. SDL is currently loss making. The top line last in 2015 was Rs. 65 cr. Management opined in its last investor call that they are devising strategy for the company and will come up with concrete plans soon.

Conclusion:

OCCL has a unique business with guarded technology. OCCL’s ability to become a significant player in such a niche market makes it an attractive proposition. The current valuations are cheap and possibility of permanent loss of capital is significantly low.

Amendment (Jan 9, 2016):

1. Cash Flow Analysis: Corrected reference to FCF. 

OCCL has positive FCF which allows it to fund its expansion largely from its internal accruals

replaced with

OCCL has positive Operating Cash Flows over last 10 years which allowed it to fund its expansion largely from its internal accruals.

2. Increase in Production capacity and Sales: Corrected the sentence. 

OCCL is increasing its capacity by 11,000MTPA by investing Rs. 159 Cr by 2018. This is an expenditure of Rs. 13.3 cr per MTPA. Assuming the current utilization levels & margins, this 11,000MTPA should result increase in top line by Rs.130 Cr.

replaced with 

OCCL is increasing its capacity by 11,000MTPA by investing Rs. 159 Cr by 2018. This is an expenditure of Rs. 14.5 Cr (159/11) by thousand MTPA capacity expansion. Assuming the current utilization levels & margins, incremental capacity 11,000MTPA should result increase in annual top line by around Rs.130 Cr.

Disclaimer:

All data has been taken from public resources. I’m currently invested in OCCL and may have biased views. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer's. 

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”