Oriental Carbon & Chemicals

Background

Oriental Carbon & Chemicals , belonging to JP Goenka Group of companies, is one of the market leaders in the production of Insoluble Sulphur for the Tyre and Rubber industry around the world. 

It has state of the art manufacturing facilities in India at Dharuhera (Harayana) and at Mundra (Gujarat). Apart from Insoluble Sulfur OCCL also manufacture Sulphuric Acid and Oleums in the chemical complex at Dharuhera. 

Starting in 1994 with modest capacities of 3000 mt per annum capacity, The production capacity of Insoluble Sulphur now stands at 22,000 Mt per annum.


Main Products/Segments

Oriental Carbon & Chemicals enjoys a dominant market position in the domestic market by virtue of being the only local manufacturer of Insoluble Sulphur in the country.

The company also reportedly enjoys a favourable market position as the ‘Second Alternate Supplier’ in the global industry, which is dominated by Flexsys of USA.

The other products manufatured are Sulphuric Acid & Oleum which constitute less than 10% of the Sales Mix. Insoluble Sulpher contributed 90.65% of Sales in FY12.

Exports constitute ~64% of Sales in FY12.


Main Markets/Customers

Insoluble Sulphur is a key ingredient for vulcanisation of rubber and is mainly consumed by the Radial Tyre Industry. Increased Radialisation of tyres in domestic market is favourable for the company.

Strong customer base comprises major tyre companies in the world like Continental AG, Goodyear, Bridgestone, Pirelli, Kumho Tyres etc. for exports and Apollo Tyres, Bridgestone, JK Tyres, MRF Tyres, Ceat Tyres, Goodyear India, etc. in the domestic market.


Bullish Viewpoints

  • 2nd Alternate Supplier – Solutia remains the market leader with 70-80% market share. Oriental Carbon commands 8-10% market share. Shikoku Japan caters to mostly Japan & Korean markets. Chinese production is consumed in-country. That leaves Oriental Carbon in a “preferred” alternate supplier position for Europe and RoW markets. (No US presence at the moment).
  • Long Term Relationships – Most tyre majors view the relationship with OCCL as strategic in nature. The co-operation therefore extends to commercial and technological terms framed to be mutually beneficial, with a long term perspective.
  • Excellent Track record – While 5yr Sales CAGR is a healthy 25%, Net profits have galloped away at an astonishing 73% 5yr CAGR. This is on the back of Operating Margins moving up from 14-15% levels to ~30% levels in last 2 years. Please read the Oriental Carbon Management Q&A to read why this looks sustainable.
  • Higher Grade products – The company has been making investments in manufacturing of tailor made grades of Insoluble Sulphur, which command a premium over conventional grades of Insoluble Sulphur as the European markets are witnessing a shift from conventional to value-added grades of Insoluble Sulphur. The value-added grades provide economies and more flexibility in production to the tyre majors.
  • Consistently growing Exports – Exports have climbed up from ~46 Cr in FY08 to over 140 Cr in FY12 at a ~32% CAGR. This establishes growing acceptance with Tyre majors worldwide.
  • Comfortable Debt position – Long Term debt stood at 116 Cr in FY12. At a comfortable debt-to-equity ratio of 0.77x the company seems well-placed to fund its growth requirements in the near to medium term.
  • Aggressive Capex – The company has doubled capacities by completing an 11,000 MTPA green-field expansion at Mundra SEZ taking the total capacity to ~22,500 MTPA. This was completed at a cost of ~120 Cr. It has lined up another 11,000 MTPA expansion at the same premises, which will be taken up on better demand visibility.
  • Lower tax rates – The Mundra Facility enjoys MAT credit at 18% rates. The effective tax rate may come down to 20-22% for the company as production from the Mundra facility takes off. The company can offset the 18% MAT credit against overall tax liability for the company.

Bearish Viewpoints

  • Cyclical nature of the business – The demand of Insoluble Sulpher is essentially derived from demand for tyres in vehicles which remains cyclical and depends heavily on economic conditions.
  • Direct linkage of Raw material to Margins – High correlation of operating margins to raw material volatility. The time lag is 3-6 months for RM price volatilty pass-on.
  • Slowing demand situation in Europe – The company mentions some slack in demand from Europe which it hopes will be offset from demand uptake from other markets.
  • Aggressive Capex – The company has just finished doubling its capacity to 22,500 MTPA and is working at 60-70% capacity utilisation levels. It has also plans for aggressively expanding another 11,000 MTPA in 2 phases of 5500 MTPA. In view of the slowdown in demand, further expansion may have to be put on hold for longer than the company anticipates ( ~6m).
  • Slower growth in FY13 – Q1FY13 results point to a better performance on the Operating Margins front. But Sales growth is tapering off at barely 18% (FY13 Sales growth at 36%). This result is a cause for concern and may be pointing to lower volume growth of only 10-15%. This is because Rupee depreciation benefits of last 6 months (lag effect) would have contributed significantly to the volume growth of 18% for the quarter.

Barriers to entry

  • Small market size. Estimated to be ~250,000 MTPA
  • Closely guarded technology. Market Leader Solutia dominates with 70-80% market share. Only 4-5 players globally.
  • Long Term relationships with most tyre majors – preferred alternate supplier.
  • Capital intensive nature of the business
  • Long time required for getting approvals from the tyre majors, more than 2 years.
  • The tyre majors need a minimal assured supply of 2500-5000 MT for them to even consider switching vendors. Small tyre customers usually do not bet on a new vendor unless a tyre major has first approved.

Interesting Viewpoints

  • Next opportunity from US market – The company has been pursuing some tyre majors for penetrating the US market. The next big growth will come from the company’s success on that front
  • Big beneficiary of rupee depreciation – Exports contributed ~64% of Sales in FY12. Imports for FY12 ~14% of Sales (RM, CG, Spares & traded goods).

Disclosure(s)

Donald Francis: No Holdings in the Company;


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