We recommend ?BUY? on ORIENTAL CARBON AND CHEMICALS LTD (OCCL) for a target of INR 1242 – valuing the company at P/E 18x of FY20E Earning.
CMP: INR 1114
Target Price: INR 1242
Investment Rationale:
- OCCL, is one of the market leaders in the production of Insoluble Sulphur for the Tyre and Rubber industry around the world both in terms of quality as well as quantity.
- The company is oriented towards growth in a socially and environmentally sustainable manner.
- It has state of the art manufacturing facilities in India at Dharuhera (Haryana) and at Mundra (Gujarat).
- OCCL strong belief in quality at each production stage has helped it to be widely accepted around the world as a preferred vendor by leading tyre companies.
- The company today offers the widest range of Insoluble Sulphur in the world.
- With well-equipped lab in place, it?s research and development team is constantly experimenting, evolving and innovating to make products better performing and more stable.
- Widely appreciated by leading tyre manufactures for experience and innovation in it’s product range OCCL is now looking at a brighter and sustainable future.
Valuations And View:
OCCL is among the top three players globally and the market leader domestically in the production of Insoluble Sulphur (IS). It is well positioned in an oligopolistic market with marquee customer base, robust margins, strong balance sheet and cash surplus. With reduced tyre imports and growing radialization, the domestic tyre industry is expected to grow which would lead to increased demand for Insoluble Sulphur. We value the business at 18x FY20E EPS and recommend a BUY rating on the stock with a target price of INR 1242 per share.
Risk & Concerns
- Demand and Sales Realisation: The Demand of Insoluble Sulphur Market is linked with total tyre production globally. The growth is coming in from production of more Radial Tyres, high performance and safety tyres and capacity addition by Tyre companies. Therefore, the threat of reduction in demand shall be significant only if global tyre demand falls significantly.
- Quality: Company always strives to meets the international quality parameters. With increasing usage of Insoluble Sulphur per tyre, dispersion as a property has become crucial.
- Production and Input Material Related Risks: Raw material supplies are ensured through maintaining multiple vendors and adequate stocks. Sufficient back up of utilities are maintained to ensure continuous supply. Due emphasis is laid on safety and preventive maintenance to avoid unnecessary interruptions.
- Competition: Competition is a risk as well as opportunity. The Risk of competition from new manufacturers, mainly from China, is met through continuous product and process improvement to maintain quality and cost advantage over them and through collaborative efforts with tyre companies to see that their requirements are met. Further, high technology barrier coupled with exhaustive approval processes of tyre manufacturers acts as a deterrent for entry of new manufacturers.
Company Background
Oriental Carbon and Chemicals Limited (OCCL) was established in 1978, belonging to the Duncan JP Goenka group of companies manufacturing insoluble sulphur under the brand ?Diamond Sulf?. In 1994 OCCL set up a unit for manufacturing of Insoluble sulfur which later emerged as the star product of the group. Oriental Carbon & Chemicals Limited is as much a people driven company as it is a technology driven one. It is on these cornerstones that OCCL has been able to build its standing and reputation in the Industry.
Today OCCL, 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 both in terms of quality as well as quantity. The company is oriented towards growth in a socially and environmentally sustainable manner. It has state of the art manufacturing facilities in India at Dharuhera (Haryana) and at Mundra (Gujarat). Apart from Insoluble Sulfur OCCL also manufacture Sulphuric Acid and Oleums in our 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 28,500 Mt per annum with new capacities slated to be added in near future.
With well equipped lab in place, its research and development team is constantly experimenting, evolving and innovating to make products better performing and more stable. It take pride in consistently working on enhancing the performance of its products and setting a new paradigm in product’s performance. Widely appreciated by leading tyre manufactures for experience and innovation in it’s product range OCCL is now looking at a brighter and sustainable future.
Products
- Diamond Sulf ? Insoluble Sulfur
- Sulfuric Acid
Industry Overview
The Abrasives industry has two major players offering a full range of Abrasive products, one of which is GNO. GNO has a leadership position in several product-market segments. Apart from the two major players in the market, there are a few medium-sized players and a number of small local players. Besides, imports from china are present in many categories, particularly at the low end. Some of the players from Europe and Japan have their agents and/or distributors to service mainly the precision grinding or polishing or surface preparation segments. In the case of Coated Abrasives, a few important international players have set up conversion facilities. Also, most of the Power Tool players are now focusing on developing their accessories business which includes Thin Wheels and some Coated Abrasives. The market, over a period of time, has become highly price sensitive. Over the past few years, import of low cost products with acceptable quality has substantially increased. Unscrupulous trade practices by some of the players give them undue cost advantage. Key success factors are good quality, cost, innovation, differentiation, service and
