Orient Carbon OCCL Business Analysis

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Orient Carbon and Chemicals Limited (OCCL) belongs to JP Goenka Group of Companies and manufactures Insoluble Sulphur, Sulphuric Acid and Oleums.

A small percentage of revenue comes from the Hydraulic and pneumatic equipment which is manufactured by its subsidiary, Duncan Engineering (50% stake).

Orient Carbon, OCCL, is the only manufacturer of Insoluble sulphur in India, the rest of the demand is imported.

They supply products to leading global tyre brands including Continental, Bridgestone, Apollo tyres, MRF, Goodyear, CEAT, Sumitomo, etc.

The company was incorporated as Dharuhera Chemicals Limited in 1978 and in 1983, the company merged with Orient Chemical Limited who was manufacturing black carbon which is used in the rubber industry, especially in tyres.

Later in 2000, the carbon black business was cut loose and they started to focus on Insoluble Sulphur.

Also Watch: Orient Carbon and Chemicals Limited (OCCL) Analysis by Dr, Sagar RV

 

Products of Orient Carbon:

The company currently produces Insoluble Sulphur, Sulphuric acid and oleum.

They sell Insoluble Sulphur under the brand name of ‘Diamond Sulf’.

And recently they launched their latest brand ‘Dyamix-pre-dispersed sulphur’ which is a different form of sulphur.

Major raw materials for the company are Sulphur (of course) and coating oil. There is a risk involved with the coating oil as the price of this raw material depends upon the crude oil price as it is extracted from the crude oil itself.

If the crude oil price shoots up suddenly, then it may have an impact on the margins of the company.

80% of the revenue comes from the Insoluble Sulphur, approx 9% comes from Sulphuric acid and oleums and 11% from equipment.

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47% of the revenue comes from domestic and 53% comes from the exports.

Major revenue comes from the exports as it has a global market share of approximately 10% and Domestic market share of 55%.

Segment wise Revenue of Orient Carbon
Segment-wise Revenue of Orient Carbon

Import Exports Orient Carbon
Import Exports – Orient Carbon

Manufacturing Capacities:

The company has 2 manufacturing plants, which are in Mundra, Gujarat and Dharuhera, Haryana.

The plants are managed in such a way that the products to be exported are manufactured in Gujarat plant and the domestic supply is from the Haryana plant.

The total capacity of Insoluble Sulphur is 34,000 MT and capacity of Sulphuric Acid/Oleum is 46,000 MT. These are the annual production capacities.

Applications of the products:

First, let’s talk about the application of the flagship product which is Insoluble Sulphur.

Insoluble sulphur is basically used in the rubber industry and especially in tyres.

Tyre manufacturer receives raw rubber as their raw material and then converts it into finished rubber depending upon the application. So there are many steps for converting raw rubber into a finished one in which in one step, the insoluble sulphur is used.

Insoluble sulphur gives more strength to the rubber and also increases its flexibility. Thus, mainly used in making of Radial tyres.

Key manufacturers of Insoluble sulphur are China Sunsine Chemical, Eastman Chemical, Henan Kailun Chemical, Shikoku Chemicals, etc. And of course OCCL.

It is important to know that the demand for Insoluble sulphur is intertwined with tyre production. More the tyre production, more the chemical will be used.

Sulphuric acid has many applications such as a dehydrating agent, catalyst, solvent and absorbents, wastewater processing, production of cleaning agents, processing of minerals, producing explosives, detergents, etc.

Some of the major players operating in India sulphuric acid market are Hindustan Zinc Limited, Birla Copper Limited, Sterlite Copper Limited, Paradeep Phosphates Limited, Gujarat State Fertilizer & Chemicals Limited, Aarti Industries Limited, Khaitan Chemicals and Fertilizers Limited, etc.

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Insoluble Sulphur Industry:

Global demand for insoluble sulphur is 300,000 MTPA as per the notch report but it has now affected due to the pandemic.

Demand in India was expected around 18000 MT but also impacted due to covid.

Due to this unfortunate pandemic, there was a complete shut down of factories and due to which the demand fell drastically, domestic as well as globally.

As this is linked to the tyre industry, it is important to know the tyre industry’s size and future estimated growth.

In pre-covid times, the size of the global tyre market was $233 billion in 2017 and was estimated to grow at a CAGR of 3.8% from 2017-2025. But due to covid, the m=demand fell sharply and it is estimated that it might take a couple of years to get back to 2018 levels.

Out of the total tyre production, more than 60% goes into the replacement market and less than 40% to the OEMs.

The production of tyres is shifting to more eco-friendly and lighter tyres, leading to an increase in the usage of the Insoluble sulphur.

Penetration of radial tyres are still low in India especially in the commercial vehicle segment and it is expected to increase more in the upcoming years. Radial tyres have many advantages over the cross-ply tyres.

They are more light, strong and flexible and also provides less friction due to which the fuel consumption of the vehicle decreases.

From OCCL’s Investor Presentation Q2FY21

 

Revenue Recognition:

More than 85-90% of the revenue comes from the insoluble sulphur if we talk about the standalone statements. Usually, the company has long term contracts with their customers, say 5-6 years average.

When a tyre company gives a contract for the insoluble sulphur, they usually don’t like to change the suppliers for years and like to keep the quality and supply constant which leads to long term contracts.

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Note that the contact is long term but the price is revised every quarter. The reason behind this is the fluctuations in the price of the raw materials.

One of the major raw material that is coating oil is derived from crude oil.

Due to this, if they keep a constant rate for the customers, the profit margins will fluctuate so, therefore, the price of the insoluble sulphur is revised every quarter and the price of products are changed only if there is any significant movement in the raw material price, otherwise, it’s kept the same.

The company also has a policy in which they receive 75% of its receivables within 6 months.

Recent updates of Orient Carbon:

  • Expansion of Insoluble sulphur capacity by 11,000 MT in 2 phases, 5,500 MT each taking the total capacity to 45,000 MT
  • Expansion of Sulphuric Acid capacity by 42,000 MT taking the total capacity to 88,000 MT
  • The investment would be of Rs. 216Crs and to be funded by a mix of loans and internal accruals with a debt to equity ratio of 2:1
  • Expansion of Insoluble sulphur has been delayed due to the pandemic and it is expected to be commissioned in Q1 FY21
  • The strategy of the company moving forward would be to enter in the countries where they don’t have any exposure ie new markets which will eventually increase the market share. Currently, the company does not have exposure to more than 30-40% of the areas globally.

Financials:

Orient Carbon Balance Sheet
Orient Carbon Balance Sheet

Orient Carbon P&L Sheet
Orient Carbon P&L Sheet

Management Structure of Orient Carbon:

This is a family run business. The company has 9 directors in BOD (5 independent and 4 non-independent)

Name Dictatorship Relations
Mr. JP Goenka Chairman, Non-executive, promoter Father of Arvind Goenka
Mr. Arvind Goenka MD and promoter Son of JP goenka
Mr. Akshat Goenka Jt. MD and promoter Son of Arvind Goenka
Mr. OP Dubey Non-executive Independent None
Mr. SJ Khaitan Non-executive Independent None
Mr. BB Tandon Non-executive Independent None
Mr. K Raghuraman Non-executive Independent None
Mrs. Runa Mukharjee Non-executive Independent None
Mrs. Kiran Sahdev Non-executive Nominee director None


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