Oriental Carbon & Chemicals Limited (OCCL) Q3 FY23 Earnings Concall Transcript

Oriental Carbon & Chemicals Limited (NSE:OCCL) Q3 FY23 Earnings Concall dated Feb. 10, 2023.

Corporate Participants:

Akshat Goenka — Promoter & Managing Director

Anurag Jain — Chief Financial Officer

Analysts:

Saravanan Balakrishnan — Individual Investor — Analyst

Viraj Shah — Shah Investments — Analyst

Karan Mehra — Mehta Investments — Analyst

Samarth Singh — TPF Capital — Analyst

Nehal Jain — SK Securities — Analyst

Aditi Sawant — ADM Advisors — Analyst

Unidentified Participant — — Analyst

Yogansh Jeswani — Mittal Analytics — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q3 FY ’23 Earnings Conference Call of Oriental Carbon & Chemicals Limited.

This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.

[Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Akshat Goenka, Promoter and Joint Managing Director of Oriental Carbon & Chemicals Limited. Thank you, and over to you, Mr. Goenka.

Akshat Goenka — Promoter & Managing Director

Good afternoon, and a very warm welcome to everyone. Along with me, I have Mr. Anurag Jain, CFO; and SGA, our Investor Relation advisors. We have uploaded our results and investor presentation for the quarter and nine months ended 31st December 2022 on the stock exchanges and company website. Hope each one of you had a chance to go through the same.

During quarter three FY ’23, the company clocked revenues of INR104 crores, a growth of 8% year-on-year. However, volumes were impacted due to disruption on account of the war and other issues mainly in Europe. EBITDA has also grown by 19% to INR23 crores, and PAT stood at INR10.4 crores. Margins were impacted due to higher input costs and freight costs.

We also could not get expected allocations from North America this year, primarily due to high freight rates. We are approved with our customers there and expect to be more competitive for next year and win the business then. As a result, we don’t expect to start the second phase of expansion of our project right now, and we will again review the situation in the next six months.

In spite of this year being very challenging on sales and costs, we are comfortably generating surplus free cash flow. Debt reduction is going at a good pace. We are even paying some term loans early to save on interest costs. By the time our demerger’s appointed date comes around, we expect to have less than INR85 crores of term loans to remain in the books. This is a very, very low and very comfortable amount, and this is extremely positive situation to be in.

The demand sentiments for a majority of the Automotive segments such as passenger vehicles, commercial vehicles and tractors have remained healthy, aiding in the improved offtake for the industry participants. The domestic automobile sector has experienced a robust resurgence in the current fiscal year aided by a recovery in economic activity and greater mobility and is expected to grow at high single-digit levels across segments in FY ’24.

Commercial vehicle volumes could see a growth of approximately 9% and passenger vehicles could see a growth of approximately 10%. A favorable mix of factors is propelling demand for commercial vehicles to the pre-pandemic peak in the ongoing financial year, aided by robust recovery in demand due to the increased government spends on infrastructure development, increased fleet utilization, better availability of financing and replacement demand, which will all support sales of commercial vehicles going forward.

The Indian tire industry will be able to scale a turnover of INR1 lakh crores in the next three years on the back of new capacities. The industry has completed investment of INR35,000 crores in the last three years in new capacity creation and debottlenecking with the major beneficiary being truck and bus radials and passenger car radials.

In the recent ATMA Summit, they are projecting growing at a double-digit CAGR for the next 10 years, which augurs very well for us. They are talking of tripling in the next 10 years. The trend of shifting production out of China, along with a comparative and conducive environment is making India a preferred global supplier of tires.

Coming to our demerger. The demerger of the Chemicals Business undertaking of the company to OCCL Limited is progressing very well. SEBI and stock exchanges have given their approval for the scheme, and we have filed the application in NCLT, Ahmedabad. The scheme is spending before the Tribunal for their sanction and approval. We expect all the shareholders to support this scheme very well for the meeting, which will be held under the NCLT’s directions. And this will be a very important step in the growth of our company.

Now I would like to hand over the line to Mr. Anurag Jain to update you on the financial performance of the company.

Anurag Jain — Chief Financial Officer

Thank you, Akshat. I will take you all through the standalone financials of the company. Total income for Q3 FY ’23 stood at INR103.6 crores as compared to INR95.8 crores in Q3 FY ’22, a growth of 8% year-on-year. And for nine months FY ’23, it was INR363.5 crores, a year-on-year growth of 28%.

EBITDA for Q3 FY ’23 stood at INR23.4 crores as compared to INR19.7 crores in Q3 FY ’22, a growth of 19%. And EBITDA for nine-month FY ’23 stood at INR71.1 crores as compared to INR66.8 crores in nine months FY ’22, a growth of 6%. EBITDA margins stood at 22.6% for Q3 FY ’23 and 19.6% for nine-month FY ’23.

Profit after tax for Q3 FY ’23 stood at INR10.4 crores as compared to INR10.6 crores in Q3 FY ’22 and stood at INR32.2 crores in nine-month FY ’23 as compared to INR35.6 crores in nine-month FY ’22. PAT margins stood at 10.1% for Q3 FY ’23 and 8.8% for nine months of FY ’23.

With this, I would like to open the floor for questions and answers.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Saravanan Balakrishnan, an Individual Investor. Please go ahead.

Saravanan Balakrishnan — Individual Investor — Analyst

Yes, thanks for giving me this opportunity. Sir, my first question is primarily on the raw material and freight cost. From January, the freight costs based on Baltic Dry Index has significantly come down, and even the sulfur cost have come down. So will this benefit pass on in the coming quarters? That is question one.

And on the last conference call, you mentioned like the pricing could only be passed to the customer with a time line. So could you elaborate more on that?

Anurag Jain — Chief Financial Officer

Yes, you are right. The reduction in sulfur and the reduction in freight costs are all positives for the company and should help us in the future. And yes, you are right that there is a time lag in passing on the prices, but that has now been corrected because the prices have stabilized or are coming down now. So that has now been corrected. So it was — that was an issue till earlier quarters but not now.

Saravanan Balakrishnan — Individual Investor — Analyst

Got it. Sir, you mentioned about like different OEM tire companies like have communicated about expanding multiple times in the next like five years to seven years. Is there any interesting trend or again feedback coming from the OEM partners, especially…

Anurag Jain — Chief Financial Officer

You’re talking about?

Saravanan Balakrishnan — Individual Investor — Analyst

Like from a product standpoint. So even last time, you spoke about different bloom characteristics and dispersion are getting researched more on the insoluble sulfur product, right, from that standpoint I’m asking, sir?

Anurag Jain — Chief Financial Officer

No, these are the characteristics which continue, and there is nothing new to add because this is not something which is developing on a daily basis. So the concerns of the customers remain the same, and these are the parameters on which we will continue to excel and sell our product.

Saravanan Balakrishnan — Individual Investor — Analyst

Got it. Got it. And also, the review of expansion of the second phase, look I think that we’ll again revisit next year, right, post how the demand is looking?

Akshat Goenka — Promoter & Managing Director

Yes, yes. We’ll evaluate it after six months.

Saravanan Balakrishnan — Individual Investor — Analyst

Got it. And one last question, sir, like about the global insoluble sulfur downturn, any signs of existing capacity getting reduced or new capacity coming in especially from Flexsys?

Akshat Goenka — Promoter & Managing Director

No, I mean, I have not heard of Flexsys talking about reducing or expanding their capacity.

Saravanan Balakrishnan — Individual Investor — Analyst

Got it. Got it. Got it. That’s it from my end, sir, and all the best. Thank you so much.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Viraj Shah from Shah Investments. Please go ahead.

Viraj Shah — Shah Investments — Analyst

Hi, sir. Good afternoon. So sir, in the results, I can see the topline has grew by 8% in quarter three on Y-o-Y basis and 28% on a nine-month basis. You mentioned that the volumes are impacted. So this would be on realization fund or can you throw some colors on that please?

Anurag Jain — Chief Financial Officer

Yes, the volumes were impacted. And therefore, for the quarter, the volumes were less than what they were in the earlier quarter.

Viraj Shah — Shah Investments — Analyst

Okay. Okay. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Karan Mehra from Mehta Investments. Please go ahead.

Karan Mehra — Mehta Investments — Analyst

Hello, sir. Good afternoon and thank you for the opportunity. Sir, can you give some commentary on how our business is going on in Europe since it’s a 50% less contributor? Also in case you can elaborate something on the current demand scenario?

Akshat Goenka — Promoter & Managing Director

So from a market share perspective, our business is stable and growing in Europe. However, there was a sharp downturn last year in Europe, which has resulted in lower offtake, overall capacities. And this year, first, things were looking quite bad, But now, signs are more encouraging coming from Europe. So we have to wait and watch and see how it unfolds.

Karan Mehra — Mehta Investments — Analyst

Okay. And, sir, our EBITDA margin. So, it has reduced to 20% to 22% level, which earlier we used to maintain about 27% to 30%. So, why aren’t we able to pass on these costs even when there are only a few players for this insoluble sulphur?

Akshat Goenka — Promoter & Managing Director

It’s not about few players or more players. The fact is that today, the global capacity utilization is, I would say, 70% or below. So, of course, there that demand/supply mismatch has been there for some time and it will be that still demand of the product doesn’t grow and the economy doesn’t grow.

Secondly, as we’ve always said that apart from margin what we try to focus on is a fixed margin per ton. And as the sales price goes up and the turnover goes up, even though the margins may be the same or thereabouts, even if even they go up or down a little, the percentage term will reduce and the vice versa will happen in case the selling price comes down and the costs go down suddenly for the same profit, the margin will look higher.

Karan Mehra — Mehta Investments — Analyst

Yeah. So, sir that answers my question I will join back the queue for further questions.

Akshat Goenka — Promoter & Managing Director

Thank you.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Samarth Singh from TPF Capital. Please go ahead.

Samarth Singh — TPF Capital — Analyst

Hi. Good afternoon. Thanks for the opportunity. Yeah. With China Sunshine having expanded the capacity, I think China now finally become sort of has gone from being in importer of insoluble sulphur to being neutral or maybe even a net exporter. So have we seen them get more aggressive in trying to get validations from the MNC clients and trying to gain market share there.

Akshat Goenka — Promoter & Managing Director

I would say that China is now competing with Asia along with China, but their movement still has not happened towards the west.

Samarth Singh — TPF Capital — Analyst

Okay. So, we are not seeing any more from them [Speech Overlap].

Akshat Goenka — Promoter & Managing Director

Aggression in Asia?

Anurag Jain — Chief Financial Officer

Aggression in Asia, no but not in the west.

Samarth Singh — TPF Capital — Analyst

Got you. And [Speech Overlap]

Anurag Jain — Chief Financial Officer

Also, if you actually saw the recent remarks that they let out. It appears that this capacity expansion that they’re going to do or have done or something of that sort, they may shut-down the old capacities.

Samarth Singh — TPF Capital — Analyst

Right, right.

Anurag Jain — Chief Financial Officer

That is what they have alluded to in their remarks. At least that’s what. I could call out of it.

Samarth Singh — TPF Capital — Analyst

Got you. And also I think Shikoku is planning an expansion right at 20% increasing their capacity.

Akshat Goenka — Promoter & Managing Director

Yeah, yeah. We’ve read the news that they are planning on increasing by 10,000 tons approximately adding another line. Let’s see how that unfolds.

Samarth Singh — TPF Capital — Analyst

Okay.

Akshat Goenka — Promoter & Managing Director

Difficult for me to comment on their strategy at this stage.

Samarth Singh — TPF Capital — Analyst

Right, right. But in general, we would think that given the under capacities your competitors would not be going ahead, but it does not seem like they are maybe they have lower return expectations where they’re going ahead and putting capacity, given [Speech Overlap]

Akshat Goenka — Promoter & Managing Director

We also don’t know [Technical Issues] Shikoku will put this capacity, that may be. I mean their plants are also quite or maybe they’ll shut down an old plant. It’s maybe — it is very difficult to speculate on their on their minds for it, because. So we do know that it’s not. We do know the price of their selling at, we know their return profiles that are happening. So it’s difficult for me to comment on the strategy being this.

Samarth Singh — TPF Capital — Analyst

Fair enough. And then just a question on Europe. I think. If you could just give some color. I think you said that our volumes were lower Q — quarter-over-quarter in Europe. But on a y-o-y basis, at least I think — at least passenger vehicle sales have been pretty strong in Europe for the month of October, November and December. So, have we seen an increase there or are we more towards commercial vehicles in Europe or.

Akshat Goenka — Promoter & Managing Director

No, I’ll let Anurag answer that, but just one small thing that we noticed in quarter three. We noticed a lot of companies across the globe did inventory correction. So they had built-up inventories and then this suddenly reducing it and now so that we saw some order reductions coming because of that and now we are seeing things normalized back and the orders coming in.

Anurag, anything to?

Anurag Jain — Chief Financial Officer

No no, you are absolutely right. Akshat, and I just want to add two points that we set sell to tire companies. And whether it is more on passenger like it on or the. commercial vehicle is not something that we can make out as of as of now. And, yes, the the export sales to Europe were lesser in Q3 versus the last year Q3, but there were two factors demand and inventory correction and I think that is going to be corrected in the coming quarters.

Samarth Singh — TPF Capital — Analyst

Great. Last question from my side, if you could please provide me just with the the cash, debt and investments on the balance sheet as of the end-of the quarter.

Akshat Goenka — Promoter & Managing Director

Yeah. Sure. The cash and investments.

Samarth Singh — TPF Capital — Analyst

So, on debt I gave my expected projection for low for long-term term loans as of 30 September to be sub-85 crores because we are process of repaying quite a lot. What is the exact position just now?

Anurag Jain — Chief Financial Officer

The long-term debt today as of 31 December was INR114 crores.

Samarth Singh — TPF Capital — Analyst

Okay, INR114 crores as on 31 December. So, we expect that to reach, sub-INR85 crores by 30 September.

Anurag Jain — Chief Financial Officer

Yeah.

Samarth Singh — TPF Capital — Analyst

Okay. And the cash and investments?

Anurag Jain — Chief Financial Officer

Investment and cash put together was INR170 crores.

Akshat Goenka — Promoter & Managing Director

DId you get that Samarth? Ivestments and cash put together was INR170 crores.

Samarth Singh — TPF Capital — Analyst

INR170 crores. Great. Okay. And you said — you said sub-85 around the time of the demerged expecting to be around 30 of September.

Anurag Jain — Chief Financial Officer

I mean, we expect the appointed date to be sometime in quarter three. So,we don’t expect it to be earlier than 30 September, but 30 September or in sometime in that quarter.

Samarth Singh — TPF Capital — Analyst

Got it. Excellent. Thanks a lot guys. Good luck. [Speech Overlap]

Operator

Thank you. The next question is from the line of Nehal Jain from SK Securities. Please go ahead.

Nehal Jain — SK Securities — Analyst

Sir, what is the outlook on the Indian tire industry?

Akshat Goenka — Promoter & Managing Director

The outlook on the Indian tire industry in the recent ATMA Summit, they said that they will grow 3 times in the next 10 years, which is double-digit CAGR.

Nehal Jain — SK Securities — Analyst

Right. So, but we have heard that — like what’s the international outlook? We’ve heard that in Europe, there is a slowdown in the tire manufacturing sector, because of Bank [Technical Issues] and higher energy costs. So what is your views about it.

Akshat Goenka — Promoter & Managing Director

Our view on that is that, I would expect Europe to be stagnant in the coming years. Maybe grow in a very minor way. I think the US and Latin America would do well. India, of course, is going to grow at double-digits. Asia is also expected to grow.

Nehal Jain — SK Securities — Analyst

Right. So, but do you think that, what impact level India — will India’s manufacturing — tire manufacturing segment will boost or what impact will that on us? Store, what impact will that have on us. Alright, I’m just going by the estimates that they themselves put out for themselves of double-digit CAGR growth for the next 10 years, that’s their own estimates. Got it, sir. And with respect to radialization. How will that lead to grow like [Indecipherable].

Anurag Jain — Chief Financial Officer

Sorry?

Nehal Jain — SK Securities — Analyst

With respect to all radialization, how will that lead to our growth?

Anurag Jain — Chief Financial Officer

So what happens is, that this is something, which is now attaining maturity, but however still little bit away from perfection. Whenever utilization grows insoluble sulphur consumption grows, so the effect is that the tire company growth, say, by 10% insoluble sulphur consumption would grouw by, say, 12%. So, the growth of insoluble sulphur consumption should be about 1.2% more than the tire industry group.

Nehal Jain — SK Securities — Analyst

Okay. Understood, sir. Thank you. That was helpful.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Aditi Sawant from ADM Advisors. Please go ahead.

Aditi Sawant — ADM Advisors — Analyst

Yeah. Hello. Thank you so much for the opportunity. I have couple of questions, first is, how is the penetration level in US and China currently and where they see that growing in next one or two years? Second is.

Akshat Goenka — Promoter & Managing Director

Sorry, go ahead.

Aditi Sawant — ADM Advisors — Analyst

Yeah. Second is, if you can help me with your volumes and utilization for this quarter and nine month.

Akshat Goenka — Promoter & Managing Director

China, penetration is next to nothing today and we have no predictions for where it is going to reach in the next two years. It is anybody’s guess, but we would assume it to remain what it is today. North America, we have been selling a decent amount. Over the last few years, because we have certain plants allocated to us. It is extremely important focus market. We have over the years been trying to get approvals and then allocations to significantly ramp up our sales in North America. We finally have all the approvals in place and continue to work towards more approvals. And I am very confident that in the next year or two years or as things progress, we will start getting significant allocations as well from that market. This year, we had some issues, because obviously the freight cost was very high, so we were not as competitive as they wanted us to be, but now freight costs have come down a lot and I’m sure that they’re are going to be very competitive going forward.

Aditi Sawant — ADM Advisors — Analyst

Yeah. Thanks. That was helpful and can you just comment on volume and utilization for this quarter and nine-month?

Akshat Goenka — Promoter & Managing Director

No. Sorry. We don’t give this kind of figures, please.

Aditi Sawant — ADM Advisors — Analyst

Okay. Just last question if I can ask is, have we added any new tire customers?

Akshat Goenka — Promoter & Managing Director

Yes, yes, we have added new tire customers.

Aditi Sawant — ADM Advisors — Analyst

Okay, okay, sir. Thank you. That’s it from my side.

Operator

Thank you. The next question is from the line of Saravanan Balakrishnan, an Individual Investor. Please go ahead.

Saravanan Balakrishnan — Individual Investor — Analyst

Yeah. Thanks for giving me this opportunity again, once again, sir. So, one quick question about Duncan Engineering. So, last thing. So like so it was mentioned like, so we have significantly reduced the debt and also like had good spike in sales. So. I just want to understand though in-game Duncan Engineering. And also like, are there anything that we’re doing to improve the repeat order rates from the customers?

Because last time my understanding is, like 30% of Duncan Engineering’s revenue is coming from top-five customers side. We also trying to diversify that number to a wider group?

Akshat Goenka — Promoter & Managing Director

So I’ll try to answer all those questions. I’ll do my best to do that. Look, as far as Duncan Engineering is concerned, we are at growth. We’re rapidly growing in that company. We have been growing for the last couple of years. This year also, we are on-track to grow 30% from the previous year. And so we are working on adding more people, more products and as well as adding more customers. So, yeah, so we are certainly in a growth phase in that company and there is no more. I don’t know how define the end game, but the strategy at Duncan is to continue to grow by adding new products and new customers.

Saravanan Balakrishnan — Individual Investor — Analyst

Got it. And regarding the margins, like. I think — like this is the current ones are the baseline metric that we are again looking at, right?

Akshat Goenka — Promoter & Managing Director

I have never said that current [Speech Overlap]

Saravanan Balakrishnan — Individual Investor — Analyst

Sure, sure. [Speech Overlap] like we are looking at. Got it.

Akshat Goenka — Promoter & Managing Director

So, our target is to maintain 15% EBITDA margin in that business, which is very good for that industry.

Saravanan Balakrishnan — Individual Investor — Analyst

Got it, got it, got it.

Akshat Goenka — Promoter & Managing Director

And from an investors’ perspective actually, one should also look at the ROCE and ROE of [Indecipherable]. I think. I think it’s a low so-far, we managed to do all this, with very low. CapEx, so the free cash generation is quite good.

Saravanan Balakrishnan — Individual Investor — Analyst

Right. Makes sense. I think, yeah, I think that’s it for me and thank you. I wish you all the best, sir. Thank you so much.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Riya Verma [Phonetic] of NR Securities [Phonetic]. Please go ahead.

Unidentified Participant — — Analyst

Hi Sir, thank you for this opportunity. Sir most of my question have been answered, I just had two questions. Firstly how do you see demand/supply dynamics for the initial use of sulphur in the next two three?

Akshat Goenka — Promoter & Managing Director

We would like to always say that we see it improving, because we don’t see significant capacity coming online and demand should keep improving, but last few years demand has been stagnant. So unless we have some. External new external issues. I mean demand should be improving going-forward. And on secondly, we see our market share increasing going ahead? Any view on that? Yes, yes, that is what we are consistently working towards every year.

Unidentified Participant — — Analyst

Right. Okay. Thank you. That answers were my questions.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Yogansh Jeswani from Mittal Analytics. Please go ahead.

Yogansh Jeswani — Mittal Analytics — Analyst

Hi sir. Thanks for the opportunity. So just one question on your US side of the business to. In the current turnover new movie had some contribution from US coming in and can you help us quantify that also with the approvals that you mentioned that are win lined-up. Going-forward, what kind of turnover are we expecting from USA next two, three years.

Anurag Jain — Chief Financial Officer

So, as. Akshat has already explained. America is a major focus market for us. And yes, currently also we are getting contribution sir from America and we do see. Major majority of our growth in the next two three years coming from America. And there was one more question you asked — we missed that Can you repeat that.

Yogansh Jeswani — Mittal Analytics — Analyst

So if you could quantify that percentage that we are that we are getting from US out of the total turnover.

Anurag Jain — Chief Financial Officer

No, unfortunately, that is something I cannot specify as of now because of competition issues. Understood. Next is on your margins. So given that the industry is think difficult times, but going-forward, do you think that the margin that you used to be 30% plus kind of. Those will come back once the industry normalizes or do you think that those margins can’t be maintained. So there are two aspects to it. One is, as pointed out earlier to a similar question. We look at margins in rupees per ton basis. And when raw-material prices are high and even if the margins are maintained as an overall percentage EBITDA comes down, because the turnover grows higher. So for example, if the margin is 40% at INR100 — again is 40% at INR200 — is again INR40 rupees at INR200, then as percentage you can come down. Now assuming that the raw-material prices come down to the levels that they did two-three years ago. Then, yes, it will — our margins, EBITDA margins would recover even at the same rupees per metric ton margin. The second is of, of course, as the sales ramp-up and there will not be any significant increase in fixed costs. Again, our margins will come down to, it will help our margins, EBITDA margins going up.

Akshat Goenka — Promoter & Managing Director

Freight cost is a very critical element of this, because freight cost is not something that we can never recover. From our customers, because our competition is not exposed to that. So if freight costs are higher then our margins will be lower. If freight costs come down, then that helps our margins.

Yogansh Jeswani — Mittal Analytics — Analyst

Got it., sir. That’s so that’s helpful, sir. Thank you. Thank you. [Operator Instructions]. As there are no further questions, I would now like to hand the conference over to the management for closing comments. Over to you sir.

Akshat Goenka — Promoter & Managing Director

I take this opportunity to thank everyone for joining on the call. I hope, we have been able to address all your queries. For any further information, kindly reach out to us or Strategic Growth Advisors, our IR advisors. Thank you once again.

Operator

Thank you. On behalf of Oriental Carbon & Chemicals Limited, that concludes this conference. Thank you for joining us. You may now disconnect your line.