Centrum puts Hold rating on Oriental Carbon and Chemicals with target price of Rs 1105

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Published: December 1, 2017 3:48:53 AM

We retain our Hold rating on Oriental Carbon & Chemicals (OCCL) with a revised TP of Rs 1,105. Q2 performance was subdued and trailed our estimates due to lower than expected volumes as ramp-up at Mundra remained slow yet steady.

Centrum, Centrum put hold, Centrum rated hold, Oriental Carbon & Chemicals, Mundra remained slowWe retain our Hold rating on Oriental Carbon & Chemicals (OCCL) with a revised TP of Rs 1,105. Q2 performance was subdued and trailed our estimates due to lower than expected volumes as ramp-up at Mundra remained slow yet steady. (Image: Reuters)

We retain our Hold rating on Oriental Carbon & Chemicals (OCCL) with a revised TP of Rs 1,105. Q2 performance was subdued and trailed our estimates due to lower than expected volumes as ramp-up at Mundra remained slow yet steady. We reduce our earnings estimates marginally as we trim our volume growth estimates but remain positive on company’s prospects led by solid demand outlook for IS in domestic market and opportunity for gaining market share in new geographies of US & China. Consolidated margins are expected to improve materially over FY17- 19E led by i) benefits of operating leverage and ii) turnaround of its downsized subsidiary Duncan Engineering. Revenue rose 7.3 % y-o-y but was down 3.5 % q-o-q to Rs 74.7 crore.

Revenue increase y-o-y was largely driven by volumes but the ramp-up of Mundra line was lower than our expectations as management pointed out that minor hiccups in ramp-ups were encountered. Realisations were largely flat on dollar basis but unfavourable currency movements impacted rupee realisations and impacted sequential volume growth. EBITDA stood at Rs 22.6 crore, with margins at 30.3%. Gross margins expanded 60 bps y-o-y to 79.4 % and other expenses were higher by 11 % y-o-y led by increased freight & foreign exchange losses on forward contracts.

OCCL’s subsidiary Duncan engineering reported positive PAT in Q2FY19 after several years of losses and is on track to achieve its full turnaround in due course. Management has guided for optimum utilisations in phase-1 of Mundra by Q4FY18E. Work on phase 2 remains on track with expected commissioning by Q2FY19E and thus volume growth is expected to remain strong over FY18-19E. This would help the company i) tap new markets such as US & China and build market share globally, ii) augment domestic growth visibility, and ii) improve margins through economies of scale. We tweak our volume growth estimates marginally and build volume growth of 11.7%/19% for FY18E/19E and adjust our costs marginally.

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