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Company Background

Oriental Carbon & Chemicals Ltd (OCCL), part of Duncan JP Goenka Group led by Mr Arvind Goenka, Managing Director, entered into manufacturing of Insoluble Sulfur (IS), a rubber vulcanizing agent used by radial tyre manufacturers and sold under „Diamond Sulf‟ brand, in 1994. Currently, it has a capacity to produce 34,000 MTPA of IS at its plants at Dharuhera, Haryana and Mundra, Gujarat.

Not only OCCL is India‟s only producer of IS where it commands a ~55-60% domestic market share, it is amongst the only three globally recognised players in IS, with ~10% global market share. Sulfuric Acid and Oleum are its other products. Duncan Engineering Ltd (DEL; erstwhile Schrader Duncan Ltd), its subsidiary, is engaged in the manufacturing of pneumatic products such as hydraulic and pneumatic cylinders, pneumatic valves and accessories

Investment Rationale

Buoyancy in tyre demand resulted in better CB volumes

* During Q4FY21, OCCL‟s topline from chemicals business reported a ~23% y-o-y growth to Rs 1,044.4 mn led by strong demand pickup in replacement market and OEMs. Management highlighted that domestic tyre market did relatively better due to buoyancy in automobile demand driven by shift in consumer behavior, preference for personal mobility, Government spend on infrastructure and increased demand from rural markets. This has led to optimum capacity utilisation of IS plants, at both the locations, during the quarter. Demand for IS is expected to benefit from the completion of a strong capex cycle undertaken by the domestic tyre industry and expected strong recovery in commercial vehicle demand.

* ~92% of OCCL‟s standalone revenues are contributed by the chemicals business. Standalone revenue during FY21 declined by 3.2% at Rs 3,325.1 mn on back of subdued Q1FY21. DEL witnessed a topline de-growth of 4.4% at Rs 415 mn.

* With COVID-19 Second Wave induced lockdown in many states, demand momentum has moderated in May and June. The Company lost more than 20% of its Q4FY21 topline in each month. With the ease of lockdown restrictions management is hopeful of strong demand pickup going forward.

* OCCL is well positioned for growth in coming years. We have built in a revenue growth of ~24 and 17% for FY22E and FY23E respectively and keeping in view OCCL’s robust track record and expectations of rise in demand pickup post ease of lockdown restrictions. Further, our estimates are contingent upon the future uncertainties of COVID-19 disruptions which might impact our forecasts.

Standalone EBIDTA margins set to stabilize ~32%

* During Q4FY21, consolidated EBIDTA margins increased significantly by 370 bps to ~32% due to optimum capacity utilisation and reduction in operating efficiencies achieved due to prudent cost control measures undertaken by the Company. However, RM prices have started hardening significantly during Q1FY22, which will have an impact on H1FY22 margins. To mitigate this, the Company is contemplating an IS price hike which is expected anytime. The Company witnessed EBIDTA margin of ~31% during FY21 inspite of subdued performance in Q1FY21.

* We expect OCCL‟s (standalone) capacity utilization to touch ~75% by FY23E, on its capacity of 45,000 MTPA and EBIDTA margins stabilizing at ~32% by FY23E. This is due to better economies of scale, post commissioning of 11,000 MTPA of IS capacity

Planned capex of Rs 2.16 bn - to increase IS capacity by 11,000 MTPA

* OCCL is incrementally enjoying a favourable market positioning as the „Second Alternate Supplier‟ in global markets, particularly in the West. The Company is increasing it‟s IS and Sulfuric Acid capacity by 11,000 MTPA and 42,000 MTPA respectively at Dharuhera. The total capex is estimated at ~Rs 2.16 bn, of which IS expansion is estimated at ~Rs 1.83 bn, funded through a mix of debt and internal accruals of 2:1. IS expansion comprises two equal phases of 5,500 MTPA each.

* With COVID outbreak, Phase-I has been delayed due to suspension of civil work and labour availability issues faced by the Company. With this delay, Phase-I capacity of IS and the entire capacity of Sulphuric Acid is expected to get commissioned in October 2021 (earlier expected by the end of July 2021). The Company will undertake Phase-II expansion, after commissioning of Phase-I, depending on automotive market conditions.

Valuation

* OCCL is one of the only three globally recognized IS players. However, a semblance of competition is emerging from China. With the revival of the automotive segment, we expect OCCL to emerge as a strong player with its focus to enhance its footprint across all domestic and global consumers and remain in a strong position to capture higher market share with its new incremental capacities. OCCL is consistently delivering in-line with the highest global standards.

* We have valued OCCL on PE basis, assigning a multiple of 14x to FY23E EPS of Rs 108.2. We maintain „Buy‟ on the stock with the target price of Rs 1,515/- (~42%) in 18 months.

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