Oriental Spinoff

THE COMPASS

Oriental Carbon is proposing to hive off its carbon black division to a subsidiary company. Though the rationale for the move has not been cited, its 1998-99 annual report offers some hints. The company has a diversified chemicals product portfolio making carbon black, insoluble sulphur and single super phosphate.

Carbon black is the chief contributor to performance accounting for 72.3 per cent of its 1998-99 turnover of Rs 113.6 crore. Insoluble sulphur came next at 18 per cent. The company has said that capacity utilisation in the sulphur unit was 80 per cent against 63 per cent in the previous year. Also, demand for insoluble sulphur exceeded supply and the company's sales were constrained by capacity availability. The unit has reached optimal utilisation and since there is substantial export potential, the company was working out the modalities for enhancing capacity.

With a relatively high gearing of 1.7:1 it had little flexibility on the debt front and poor market sentiment for commodity chemicals' company makes raising equity a difficult task. Thus, the hive-off could be towards enabling Oriental to expand its insoluble sulphur capacity.

Posh Investments is a subsidiary of OCL Investments, which, in turn, is a subsidiary of Oriental. Apparently, no cash seems to be changing hands but Oriental will be allotted shares in this company. Hence, it is likely that debt pertaining to the carbon black division will be transferred to Posh Investments as part of the deal.

The transfer of the carbon black division will see a drop in sales but profitability would improve. At present, profitability is at a very low level with the company turning in a net profit of Rs 2.36 crore on a sales of Rs 117.82 crore in 1998-99 and Rs 0.03 crore on a sales of Rs 82.81 crore. Thus, it is obvious that the carbon black division is not really contributing to performance. Dumping of carbon black had affected performance of the industry but anti-dumping levies and a pick-up in demand from the tyre industry has resulted in better performance. Still, rising carbon feedstock prices due to rising oil prices is affecting margins.

By hiving it off to a subsidiary, Oriental Carbon can then contemplate a sale of a stake in the company or the entire business itself. The funds from the proceeds can be then used to repay residual debt and fund the expansion of its chemicals business.

Hikal Chemicals

Hikal Chemicals' share price has been rising after it announced its results for 1999-00 last week. The share price has risen from Rs 275 on May 12 to Rs 344 on May 16. In the fourth quarter ended March 2000, the company's sales has increased by 35.6 per cent to Rs 28.81 crore and its net profit has increased by 3.11 times to Rs 28.81 crore during this period. The company has also issued a bonus in the ratio of 1:1 which has further boosted sentiment.

For the full year 1999-00, its sales increased by 110 per cent to Rs 102.81 crore and it achieved a net profit of Rs 17.27 crore against a loss of Rs 2.74 crore in the previous year. Even on a quarter on quarter basis, its fourth quarter performance is better than the third quarter performance. This year saw it enjoy the full benefits of the thiabendazole unit which was commissioned in 1998-99 but faced some teething problems. This unit is a 100 per cent EoU which sells its output to Merck & Co, USA which markets it through Novartis AG worldwide.

The sustained improvement in performance also bodes well for its acquisition of Novartis' Panoli agrochemicals plant. Hikal will make pesticides at this plant which will be supplied to Novartis which in turn will market it. Thus, the arrangement is similar to its thiabendazole plant with the difference that this product is marketed worldwide.

Its cash profit in 1999-00 amounted to Rs 30.2 crore and assuming that its working capital position is under control, the business should release cash for the company to meet its funding requirements. The acquisition of the Panoli plant will see its capital employed go up and could affect returns in the short term. Hikal's ability to utilise its expertise in the chemicals industry to reduce costs and improve realisations could see returns accrue in the medium to long term though. At the current price, the share discounts the 1999-00 per share earnings by ten times.