At OCCL we are opportunity-ready from capacity cost and ESG perspectives. Ourongoing cost moderation exercise is translating into a visible improvement
OCCL reported its second-best annual performance ever. The Company reported H34468Lakh in revenues and a 5% increase in profit after tax. This profitable growth in a yearwhen the Companys operations were presentable in only three quarters continues tovalidate the Companys competitiveness in the most challenging end of the prevailingbusiness cycle.
There were creditable features of the Companys performance during the year underreview. Even as sales tonnage remained around the same level as in the previous year theCompany generated a higher profit as a result of the Company maximizing capacityutilisation covering fixed costs and other expenses. The fact that this profit growth wasderived without increasing sales realisations represented an index of the Companyscommitment to enhance the customers price-value proposition.
The Companys handsome performance might imply that business conditions werefavourable. Nothing would be further from the truth.
There was a sharp decline in the ofitake of insoluble sulphur in the first quarter ofthe year under review following the announcement of a lockdown across countries. This wascomplemented by a substantial over-capacity in the global insoluble sulphur market onaccount of manufacturing capacities having been created aggressively the world over in thelast few years. The result is that per unit realisations for insoluble sulphur declined totheir lowest levels in recent years just above the viability threshold. The result wasthat greenfield investment economics disappeared. In this environment OCCL demonstratedits competitiveness by breaking even at a mere 40% capacity utilisation during the firstquarter.
From the second quarter onwards the Company was required to increase output. Followingthe convergence of relief consumption release in pent-up demand buoyant rural economygrowing downstream demand and strong demand from the road construction mining ande-commerce segments there was a revival in the demand of our products from the thirdquarter of FY 20-21. The Company was required to scale its production with speed toaddress the growing needs of customers.
OCCL reported peak revenues during the third quarter 33% higher than the revenuesreported during the corresponding quarter of the previous financial year. With salesreaching 95% of capacity; the Company reported its best quarter by PAT in Q3 FY 20-21 andits best quarter by margins in Q3 FY 20-21. This performance could not be extended intothe last quarter following a sharp increase in raw material costs.
Our strategic focus
One of the most important drivers of the Companys performance during the yearunder review was its capacity to make proactive improvements across all factors within itscontrol instead of waiting for market conditions to revive.
The Company pivoted its sales and pricing strategies with speed to address thechallenges of volatile markets. With the environment of rubber compounds and processingequipment evolving our marketing team played the role of a bridge to facilitate activecollaboration and communication between our technology team and customers.
The Company was audited by Eco Valdis for three successive years including a Goldrating strengthening its marketing pitch in an increasingly sensitised world.
The Company had embarked on the exercise to moderate costs from a strategic long-termperspective well before the pandemic outbreak in 2020. The Company examined everyexpenditure head. It reallocated existing talent across its expanded capacity (to come onstream from the third quarter of FY 21-22) with the objective to enhance peopleproductivity. It sustained capacity expansion through the pandemic months seeking lowercapital expenditure costs that enhanced overall project value that could lead to superiorlong-term competitiveness.
At OCCL we believe that the worst could be over for the insoluble sulphur cycle.
At the realisations that prevailed at the close of the year under review no freshcapacities were being planned across the world as investment economics remained unviable.
As the world recovers from the pandemic and there is a preference for the ownership ofpersonal mobility options an increase in global demand could complement a decline inavailable manufacturing capacities strengthening our prospects.
At OCCL we are opportunity-ready from capacity cost and ESG perspectives. Our ongoingcost moderation exercise could strengthen our financials from FY 21-22. A reallocation ofour existing people strength towards the expanded capacity could enhance per personproductivity in line with production growth. The Company will seek to increase its salesfootprint in North America.
Our strategic clarity
The Companys capacity expansion has been structured across two phases.
In the first phase the Company intends to expand capacity by 5500 MTPA of insolublesulphur and 41250 MTPA of sulphuric acid by the third quarter of the current financialyear.
In the second phase the Company intends to raise its insoluble sulphur capacity byanother 5500 MTPA.
The Companys H215 Crore capex cycle with hardly H60 Crore of itsinvestment in-the second phase left-is likely to be completed by 2023 and could generatelarger free cash flows thereafter.
The Company is likely to experience peak debt in the first half of the currentfinancial year following which a structured repayment programme could moderate debtsizably leading to the possibility of free cash generation across the foreseeable future.
The Company expects to report EBITDA margins between 28 and 32% across the foreseeablefuture based on the existing realities.
Basis of our long-term optimism
At OCCL we are optimistic of our long-term prospects for a number of reasons.
The pandemic has widened the need for personal mobility across the world as a result ofwhich the global demand for tyres is expected to grow at around 4% between 2021 and 2026.
The global economy is expected to grow at 5.5% in 2021 and higher thereafter as thevaccination rollout accelerates and consumer spending increases. The coming together ofIndias demographics millennials easy availability of financing options andincreased aspirations among the youth are driving the ofitake of vehicles.
The Indian tyre market ofitake appears to be optimistic. Indias rural market hasemerged as a large consumer following a sustained increase in minimum support prices andrecord agriculture output.
The increased radialisation trend among LCV and TBR tyre consumers on account ofsuperior mileage and fuel efficiency will translate into a larger consumption of insolublesulphur.
A growing focus on Atmanirbhar Bharat (Make in India) could increase tyre industryinvestments in the country.
The successive waves of the Novel Coronavirus continue to drive the ownership ofpersonal cars and two-wheelers on account of enhanced safety.
The imposition of anti-dumping duties on the import of Chinese tyres has helped widenthe manufacture of tyres in India.
This is expected to sustain the ofitake of tyres within India and globally translatinginto a wider addressable opportunity for a focused player like OCCL.
Joint Managing Director
At OCCL we recognise that we are in business to enhance value for all ourstakeholders.
We believe that we are in business to generate consistently better returns than whatinvestors would be able to generate from investments in alternative companies or assetclasses.
In view of this we shoulder an over-riding responsibility to invest in prudentstrategy leading to any-market competitiveness sustainable performance and an improvedperception in the minds of our stakeholders leading to a superior valuation.
At OCCL we believe that at the heart of our competitiveness lies a simple approach:generate more from less.
This need to maximise resource productivity is not just limited to material efficiency;it extends to the need to maximise returns from a given funds pool.
Over the years we attempted to maximise RoCE through a combination of the followingstrategies:
Increase output leading to higher revenues better coverage of fixed costs andstronger customer service leading to their retention and repeat business
Cost moderation leading to increased surplus available for reinvestmentstrengthening our virtuous cycle
Research-driven value-addition leading to higher margins stronger surplus andbetter perception among our stakeholders
Better working capital management leading to superior cash flows lower debt andhigher margins
Relatively low debt and low debt cost strengthening margins and rightsizing theBalance Sheet
Investment in down cycles at a low cost and in quick implementation tenuresstrengthening the Companys preparedness for a full-fledged recovery
At OCCL we recognise that the most sustainable companies across the long-term arethose possessing the lowest cost structure. This structure reinforces the capability ofcompanies to survive different market cycles making them the last persons standing andamong the first to be off the blocks during sectorial recovery.
At OCCL we embarked on the exercise to moderate fixed costs in October 2019 wellbefore the outbreak of the pandemic. This proactive approach was influenced by a sharpincrease in insoluble sulphur manufacturing capacity the world over; the Companyrecognised that this overcapacity would translate into a decline in realisations thatwould place a premium on the ability to remain competitive even during the worst end ofthe sectorial cycle.
The Company embarked on a zero-based budgeting of every major expenditure head. Itexamined every process to identify waste and redundancy; it questioned every practice withthe objective to do it better faster and cheaper.
The cost moderation exercise was completed in FY 20-21 and the effects of this will bevisible from FY 21-22. The Company reported attractive savings across the board thatmoderated its break-even point. The Company expects to generate a sustainable decline inits cost structure year-on-year. The Company expects to maintain its FY 21-22inflation-adjusted spending on talent at the same level as FY 20-21 despite a newmanufacturing line to be commissioned from the third quarter onwards. A moderated capitalexpenditure for the capacity expansion is expected to keep in check the role of debt anddebt cost (about 7.5% per annum) strengthening long-term competitiveness.
At OCCL we embarked on an expansion in our manufacturing capacity before the outbreakof the pandemic. The Company sustained this expansion through the pandemic: the downtrendempowered the Company to capitalise on a superior terms for equipment and ancillariesenhancing project value (stronger power access zero liquid discharge plant centralisedutility and higher capacity of the supporting acid plant).
The first phase of expansion of the insoluble sulphur plant and the sulphuric acidplant is expected to be commissioned by October 2021 potentially increasing theCompanys global insoluble sulphur market share about 10% to 12%.
Besides by selecting to invest during the down cycle possibly one of only two suchinstances in the world at this juncture the Company intends to emerge opportunity-ready not just larger but stronger as well.
Market presence redistribution
At OCCL we believe the time has come to broad base our global footprint with theobjective to seed our presence in markets where we enjoy only a small presence.
At a time when global insoluble sulphur demand is growing 2-3% a year and no furthercapacity expansion is likely we believe that there could be a possibility of the sectorlooking at a probable consolidation that could lead to a turnaround. This puts a premiumon OCCL to commission capacities on schedule and strengthen its marketing cum researchfocus.
OCCL intends to focus on increasing its market share in North America to 10% in threeyears. The Company intends to increase global market share from 10% to 12%. The Companyintends to sustain the increased share of Indian revenues at 40% across the foreseeablefuture.
In a knowledge-driven business the competitive difference comes down to talent. AtOCCL we intend to leverage talent by providing a platform that makes it possible for ourpeople to do different things; besides we have invested in our business with theobjective to enhance people productivity (increased production per person). In a businesswhere people cost as a component of revenues was 13% in FY 20-21 any improvement inpeople productivity can translate into enhanced margins.
During the year under review the Company strengthened talent management through a newPerformance Management System. The Company plugged gaps across functions at the GeneralManager level by recruiting from larger respectable multi-national chemical companies.This strengthened a culture of specialisation and embedded succession planning deeper intothe organisation.
The Company intends to graduate its people productivity into a visible competitivenessdriver in FY 21-22 through a prudent reallocation of existing employees across the newmanufacturing line increasing capacity (and production) without a corresponding increasein people.
OCCL has always been a research-driven organisation. Over the years this commitmenttranslated into the development of quality-enhanced products that generated superiorproductivity at the customer end.
During the last couple of years the Company deepened this focus. Even as most budgetswere pruned during the pandemic in 2020 the Company sustained its research spending. TheCompany invested 0.6% of its revenues in research reflected in the increased recruitmentof specialised research professionals and increased allocation for a full-fledged researchlaboratory expected to be commissioned in FY 21-22.
This sustained research focus is expected to translate into the development ofspecialised insoluble sulphur grades and a widening of the product basket.
In the speciality chemicals industry there is a growing respect for companies thatinvest deeper in their ESG personality.
ESG is seen as a business feature that balances the interests of the earth communityvendors customers employees and shareholders a framework of how a company cangrow in a sustainable manner.
At OCCL we enhanced this ESG perspective across our operating teams. The Companydeepened investments in talent strengthened vendor eco-system stability enhancedcustomer service through better products delivered around a superior price-valueproposition deepened environment compliance moderated resource consumption andstrengthened de-risking.
The Company charted out a strategy to enhance installed capacity at a lower averageinput cost (people funds land and resource economies). It moderated water consumptionand intends to switch to the use of natural gas in Mundra. Besides it intends to seekrespect-enhancing certifications like Responsible Care Chemicals and Eco Vadis validatingits credibility.
As an extension of this conviction the Company arranged for the vaccination of allemployees and their family members. From a community perspective the Company invested ina rejuvenation of water ponds in villages proximate to its manufacturing facilities whichwill help groundwater recharge provide water supply to the community and strengthen theCompanys commitment towards sustainability.