>ORIENTAL CARBON & CHEMICALS LTD (GEPL)

OVERVIEW
The radial tyre has lead to the development of insoluble sulphur. The reason is that for the adhesion of the rubber compound to the steel cord a high level of sulphur is required. With normal sulphur this high level would lead to blooming during storage in the unvulcanized state. This bloom destroys the desired tackiness of the compound. Therefore instead of normal sulphur, polymeric sulphur is used. This is insoluble and hence cannot bloom. Insoluble sulphur, is thus a non-blooming vulcanizing agent used almost exclusively in rubber compounding, mainly in components requiring a high degree of stickiness or tack, including radial tires, belting, and hoses. World wide there are only a few manufacturers of Insoluble Sulphur and the Pick of this Week is the sole manufacturer in the country namely Oriental Carbon and Chemicals Limited (OCCL). This J P Goenka group company has its plant located at Dharuhera in Haryana is also engaged in manufacture of sulphuric acid and oleum which contributed around 18% of the total turnover in FY '09.

INVESTMENT RATIONALE
With its prospects tied inextricably to the motor vehicle and tyre industries, the insoluble sulfur industry currently faces its most challenging conditions in 25 years. Even prior to the emergence of the global financial crisis in the fourth quarter of 2008, the tyre industry - and, by extension, the insoluble sulfur market was facing a difficult 2008, as a sharp spike in oil prices over the first eight months of the year raised raw material costs nearly across the board, reduced miles driven (and thus decrease in replacement tyre demand), prompted both consumers and businesses to put off new vehicle purchases. The economic crisis has greatly exacerbated these factors, hitting the motor vehicle industry particularly hard. Insoluble sulphur suppliers have responded to these difficulties by idling under-utilized capacity, postponing planned expansions, and reducing their operating costs. The current difficulties follow five years of unusually strong volume growth during the 2002 to 2007 period as insoluble sulphur demand benefited from rising production of radial passenger and truck tyres, particularly in China, as well as in India, Thailand, Brazil, and Russia. In line with the above scenario OCCL also saw its exports drop by 5% to 6483 MT and the local off take was also lower by 11% at 3339 Mt. This impact was more evident in the second half but this was to some extent cushioned by supplying to new customers plants. The second half also saw drop in the raw material prices and the selling prices also got adjusted in line with this though the margins were maintained. The growth rate for insoluble sulphur in the country is twice the growth rate of the tyre industry the primary reason for this is the ever rising share of radial tyres as consumes a higher level of insoluble sulphur. The company is virtually the second preferred supplier of the product to America, Europe and African markets. On the domestic front the demand has turned for the better in the last qtr of FY '09 and this is expected to improve further in the current year.

Internationally there has been a slow and steady shift towards value added insoluble sulphur grades (HS, HD) which are easy to handle and gives more production flexibility to its users. OCCL has also developed these grades and has started supply of High Stable grade to a few tyre companies. This development has given the company an edge over the Chinese suppliers who have yet develop them and it also enables OCCL to get better realization for its product. Seeing the ever increasing future demand, the company has taken up debottlenecking of its plant and this shall increase its capacity by 15% and this expanded capacity is expected to be operational by July '09. The company also has plans to put up a new plant at a SEZ, land for which has been acquired. More details in future on this project.

Investment Concerns
Demand linked to auto industry and increase in crude price can affect margins

Valuation
At the CMP of Rs. 33, OCCL trades 3x its FY10E earnings of Rs. 9.7. Long term investors can add OCCL to their portfolio.

To see full report: OCCL