Buy Oriental Carbon & Chemicals; target of Rs 990: Centrum

Oriental Carbon & Chemicals (OCCL) continued its steady performance in Q2 with margins of 30.3% and PAT growth of 14% YoY. Phase 1 (5500 tpa) Brownfield expansion of IS capacity at Mundra is 3 months before schedule and is poised to add volume growth from Q4FY17E itself (vs Q1FY18E earlier), enabling market share gains through traction into new geographies (US & China). Despite a strong run-up (stock up 60% in 6M), OCCL’s adjusted cash flow yield stands at attractive levels of 8.5% on FY18E basis. Rollover to FY19E and maintain buy with a revised TP of Rs 990 based on our conservative adjusted OCF based methodology.

We expect EBITDA/PAT CAGR of 15.8%/15.3% during FY16-19E, led by volume CAGR of 11.8% in the IS business coupled with economies of scale resulting in higher margins. We rollover to FY19E and value OCCL on adjusted OCF (AOCF = OCF - Interest) to enterprise value (EV) yield based on 5 year average cash flows to arrive at a revised TP of Rs 990. Maintain Buy. Despite recent run-up, OCCL’s cash flow yield stands at attractive levels of 8.5% on FY18E basis. Key risks are lower volumes and margin pressure due to RM volatility.