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Limited long term growth prospects mar visibility…

Oriental Carbon & Chemicals (OCCL) reported a healthy performance in Q4FY21. Net sales in Q4FY21 came in at | 104 crore, almost flat QoQ while up 22% YoY, amid healthy volume reported by key tyre players domestically. EBITDA in Q4FY21 was at | 36 crore with corresponding EBITDA margins at 34.7%, down 260 bps QoQ but near its normalised range.

Ensuing PAT in Q4FY21 was at | 25 crore, down 13% QoQ. The company also declared a final dividend of | 10/share with total dividend for FY21 at | 14/share. On a full year basis, for FY21, topline decline was limited to 3.2% YoY with PAT up 4.8% YoY amid ~500 bps expansion in EBITDA margins.

Key highlights from Q4FY21 conference call The company is hopeful of demand picking up pace from July 2021 onwards.

Key highlights from the call include: (i) global insoluble sulphur capacity currently is pegged at ~3,00,000 tonne with China Sunshine executing incremental capacity addition of ~30,000 tonne, OCCL executing ~11,000 tonne (both phases combined), (ii) Global supply–demand scenario is well balanced with capacity utilisation at optimum levels, (iii) OCCL expects to commission the Phase-1 of 5,500 tonne of insoluble sulphur and 42,000 tonne of sulphuric acid plant by October 2021 (delayed by three months due to Covid related restrictions) with revenue potential of ~| 100 crore and capex spend of ~| 150 crore, (iv) out of the planned capex it has already incurred ~| 120 crore as of FY21 with balance ~| 30-35 crore to be incurred in FY22E, (v) key raw material prices have now stabilised after a steep up move in past six months.

Raw material price impact is not yet fully built in and is likely to impact Q1FY22E performance, (vi) OCCL reiterated its EBITDA margin guidance of ~28-32% in the long term, (vii) the company expressed its intention to further consolidate its market share in the domestic market (present levels at ~55-60%) and gain further market share in global markets (~10%), (viii) OCCL has committed ~| 60 crore towards alternative investments (~| 30 crore already invested as of FY21), which is primarily in the domain of high yielding debt as well as private equity.

It intends to increase it to ~20% of its networth, going forward (~| 100 crore), (ix) gross debt as of FY21 end was at | 178 crore and is likely to peak out in H1FY22E at ~| 185 crore (net debt as of FY21 is <| 30 crore), (x) OCCL is not keen on diversifying from its present business model.

Valuation & Outlook

OCCL manufactures a key raw material (insoluble sulphur) for the tyre industry and enjoys a near monopoly in its product category domestically. However, with limited long term growth visibility in the base business amid greenfield expansion making less economic sense coupled with non-optimal capital allocation strategy, makes us drop coverage on OCCL. We advise investors to exit OCCL at the CMP and switch to other tyre ancillaries like Phillips Carbon Black in our coverage, which have a well charted growth trajectory as well as near optimal capital allocation strategy.

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