Oriental Carbon & Chemicals (Buy @173 with target of 250) lkp

The story so far ………..

Oriental Carbon & Chemicals Ltd – OCCL belongs to the JP Goenka Group of companies and is the sole producer of Insoluble Sulphur – IS in India with a market share of more than 90% and its brand – Diamond Sulf is the market leader in India. The Rs215cr OCCL exports close to 65% of its revenues and has close to 15% market share globally and the US based – Flexsys is the global leader with a market share of more than 80%.

IS is a key ingredient for vulcanization of rubber and is consumed by the tyre industry worldwide. OCCL has grown its top-line and bottom-line at a CAGR of 20% and 60% over the last 3 years and is a proxy play on the radialisation of Tyre Industry globally.

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The story ahead ………..

OCCL with a capacity of 11,000mtpa at Haryana put up another facility at the Mundra SEZ in two phases – Phase-I of 5,500mtpa went on stream during August 2011 while Phase-II of 5,500mtpa went on stream during May 2012. It now has doubled its capacity to 22,000mtpa and has enough land at Mundra SEZ to put up another facility of 11,000mtpa at the opportune time. The SEZ offers OCCL tax benefits besides freight savings.

We believe that India offers traction to OCCL given the growing demand for radial tyres in MHCV which have a higher IS content. We expect replacement demand to pick-up in India going forward which would act as an additional trigger. Although 50% of its exports are to Europe, we believe that there are opportunities to grow volumes given the fact that OCCL has expanded capacities at the right time. Europe is witnessing a shift from conventional to value added grades of IS as they are more economical and provide flexibility in production to tyre majors. Despite not having presence in the US, OCCL is witnessing good traction in Europe, Latin America, Africa and South East Asia and supplies to almost all the well known names in the Tyre Industry.

In our opinion OCCL with sustainable EBIDTA margins of 27% and ROE of 20% trading at 4xFY’13-14E earnings is a proxy play on the global tyre industry. The capital intensive nature of the business coupled with closely guarded technology acts as entry barriers for new entrants. We recommend BUY with a one-year price target of Rs250

Thanks and Regards

LKP Advisory