OCCL Analysis part 2

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It’s been a while since I wrote a blog. I hope you and your family are in perfect health and you got fully vaccinated till now. I’m resuming my writing and wanted to start with the extension of OCCL Analysis. If you haven’t read the previous blog on OCCL, then Read it before starting this one.

Let’s begin…

As we all know, the Coronavirus pandemic affected almost all businesses and OCCL is not any exception. Due to the lockdown, transportation had a major impact which got passed onto this company. Sales were hampered followed by the profits. But the management has done an excellent job by cutting the costs and maintaining the strength of the company. 

In a concall, the CEO said that the breakeven point was at 40% of the capacity and they were able to survive.

Due to lockdown, there was an increase in supply compared to the demand which pushed the price of Insoluble Sulphur down. But now the situation seems to get back at pre covid level.

Allow me to take you to the expansion plans of this company.

The expansion is of 2 phases which were declared a long back but the pandemic delayed the plan. So the 1st phase is of expanding the IS capacity by 5,500 MTPA and 41,250 MTPA of Sulphuric Acid which is expected to get completed by October 2021. 2nd phase of expansion is increasing the IS again by 5,500 MTPA which is expected to get completed by 2023. 

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With this expansion, the company is expected to increase their Global Market Share to 12% (the current share is 10%). The goal of the management is to gain a 10% market share in North America in 3 years. 

The main advantage of this company, as I see it is that among the global large players, this might be the only company that is dedicatedly focused on Insoluble Sulphur. If you see the other global players like Eastman (IS revenue < 6% of Total Revenue), Shikoku ( IS Revenue < 23%), China Sunshine (IS Revenue < 10%) have many other chemicals in their portfolio. Recently Eastman announced to spin off their IS business. This dedication allows OCCL to grow faster than the other companies. 

Let’s Talk about the Financial Updates.

The pandemic had a major impact on the company. The revenues and profits reduced significantly but the management was able to break even and posted a low profit. There has been seen a sudden drop in cash balance as there was a funding requirement for the expansion. The expansion will get completed next month (October 2021), therefore, the depreciation will increase by approximately 6 Crs. 

The company uses the double depreciation method which creates a deferred tax liability (DTL). DTL inflates the profits of the company temporarily. I don’t think DTL will get reduced by the next 5 years. 

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As I noticed that a decent amount of cash is invested in Alternate Investment Funds (AIF) which usually has a lockin period of 5 years and the management might increase the investment to Rs 50Crs in 2-3 years from 22Crs. Now, the question arises, don’t they have any better place to reinvest in the business, if not then why they don’t increase the dividends and reward the shareholders?

Yes, this question might seem valid and the company increased the dividend payout ratio to 35%. The company will need funds to expand more in the coming years and therefore, using these funds will be better than taking debt. A total of Rs154 Crs are invested in Mutual Funds, NCDs and Bonds. 

Valuation:

I would say, this company is a low-risk low-return type of Investment. The growth rate seems to be between 10-15% on the basis that the global industry is expected to grow at 3-4% for the next 5 years and the company is expected to increase their market share from 10% to 15-18% in the next 5-10years. The beta I calculated turned out to be 0.66 and the cost of equity is currently at 10%. 

I valued the company with a discounted cash flow model and the intrinsic value turned out to be Rs. 1060 which is more or less equal to the CMP. Here is the image of the forecast and the valuation.

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Please note that there are many assumptions used while calculating and changes might be made according to the situation going forward which might turn out to be wrong. So do your own research and do not completely rely on this. Thank you!

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Meet Mehta

Meet Mehta

21 | Small & Mid Cap Investor | CFA L1 candidate | Blogger | Reader | Engineer | Life-Long Learner
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