|Company||Omkar Speciality Chemicals Ltd|
|Date of report||May 2, 2017|
|Target Price (Rs)||244|
Incorporated in 1983, Omkar Speciality Chemicals Ltd (OSCL) is primarily engaged in the production of Specialty Chemicals and Pharma Intermediates. It manufactures a range of organic, inorganic and organo inorganic intermediates that find application in various industries like pharmaceutical, chemical, glass, cosmetic ceramic and poultry feeds. Its products are also exported to companies in Europe, Australia, North America and Asian countries. OSCL has decided to restructure its group companies wherein its 4 wholly owned subsidiaries will be merged with itself and its veterinary API division will be demerged into a separate company.
Restructuring of group to result in value unlocking for investors
Margin expansion on back of higher API revenues
De-pledging of shares almost complete, selling pressure to ebb
Speciality chemicals could do well going forward
Capacity expansion done for the medium term
Improving working capital, Debt reduction would result in higher return ratios
Falling institutional holding
Decreasing share of export revenues
Continued delays in commissioning of Unit V plant
Foreign exchange fluctuations
Raw material price fluctuations
View and Valuation
OSCL was facing three issues –
1. It underwent large capex over 2012-2016 without having liquidity margin for delay in commissioning of expansion due to environmental clearances. This led to liquidity issues for the company and the promoters pledged their shares to raise money for the company (beginning quarter ended Dec 2013). As the commissioning of the capacities got delayed, promoters came under pressure to repay the loans borrowed and had to sell their free shares to repay loans and unpledge the previously pledged shares. This unnerved some investors and the share price did not
perform despite improving financials.
2. Environmental clearance for the Unit 5 plant took longer than expected. This resulted in bloated CWIP, lower depreciation and interest charges and postponement of revenues and margins from the new capacities.
3. The veterinary API intermediates business which was doing well did not get the required valuation (say in line with the likes of Sequent Scientific in India and Zoetis abroad). This prompted the management to demerge the division so that the division gets independent (higher) valuation.
While the third issue has got resolved with the NCLT tribunal approval being given on April 13, 2017 and the certified copy of the order having been received on April 28,2017, the promoters have also depledged most of their shares by continuing to sell their holding. Some of the expanded capacities have now gone on stream and the results thereof are reflected from the results of Q2FY17. The balance capacities (Unit V) may soon go on stream. We hence think that the company and its promoters are just coming out of a vicious circle and the stock price may now gradually rise reflecting this and the potential value unlocking due to demerger.
The risk to this thesis is if the liquidity situation continues to be stiff and/or the demand supply situation of its key products have undergone a bearish turn and/or the promoters have in their stress period committed some acts that are not in the best interest of the company and/or their minority shareholders and now they come to light.
We feel investors could buy the stock at the CMP and add on dips to Rs 152-156 band (4.75x FY19E EPS) for sequential targets of Rs. 195 (6.0x FY19E EPS) and Rs. 244 (7.5x FY19E EPS) in 2-3 quarters. Once all the capacities are commissioned
we believe the stock has the potential to rise even more and reach Rs 488 over the next 2 years. Even at that price the stock would trade at 15xFY19E EPS and 1.5x Mcap/Sales as compare to 5.5x of Zoetis, the largest global animal health company.
Incorporated in 1983, Omkar Speciality Chemicals Ltd (OSCL) is primarily engaged in the production of Specialty Chemicals and Pharma Intermediates. It manufactures a range of organic, inorganic and organo inorganic intermediates that find application in various industries like pharmaceutical, chemical, glass, cosmetic ceramic and poultry feeds. Its products are also exported to companies in Europe, Australia, North America and Asian countries.