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Saturday, November 19, 2016

Omkar Speciality Chemicals Ltd



CMP = 148



Omkar Speciality Chemicals Ltd. (OSCL) is primarily engaged in the production of specialty chemicals and pharma intermediates. Diversified portfolio of over 200 products which include inorganic intermediates of Selenium derivatives, Iodine derivatives, Molybdenum derivatives, Cobalt derivatives, Bismuth derivatives, Tungsten derivatives and the organic intermediates include Tartaric acid derivatives and derivative of several other rare elements.  These products find niche applications in various industries like pharmaceutical industry, chemical industry, glass industry, cosmetics, ceramic, pigments and cattle and poultry feeds.






OSCL has 4 subsidiary companies (Lasa Labs, Rishichem Research Ltd, Urdhwa Chemicals and Desh Chemicals) with 9 manufacturing units in state of Maharashtra.





OSCL is importing and exporting  several raw material from and to abroad. Its location of all manufacturing is close proximity to consumption area of product or raw material and to the  ports like Dharamtar, Jaigad and JNPT besides connectivity to road and rail.  It will saves transportation time and costs significantly.






OSCL has a strong and well diversified customer base developed over the last 3 decades from different industry segments like pharmaceuticals, chemicals, glass, cosmetics, ceramic pigments, poultry, veterinary feed etc. Further the enhanced processes to cater to the specific needs of the customers gives OSCL an added advantage. Some of its major customers in the pharmaceutical segment include Cipla, Ranbaxy, Glenmark, Wockhardt and Ipca and Dr Reddy’s being its most vital customers in pharmaceuticals segment. Its other prominent customers in chemicals segment are Clariant-UK, BASF, Dupont, Asahi India Glass, Suguna Poultry, Venky’s India, Gharda Chemicals etc.






OSCL has good R&D capabilities and infrastructure to develop new high value added products and APIs.  R&D facilities are accredited by Department of Scientific and Industrial Research (DSIR) recognition. Mr.  Pravin Herlekar himself  chemical  Engineer  from  the  IIT Mumbai and he has a team of experienced scientist. With various product and process patents filed, OSCL’s Intellectual Property (IP) plays an integral role in developing a rich patent portfolio of the company. It  has filed claim for 18 patents of which 3 have already been granted. OSCL has acquired Rishichem Research Ltd in 2010 to strengthen its R&D. It has developed several new niche value added products like 5 iodo 2 methylbenzoic acid (used in anti-diabetic & brain tumour imaging),  di-azo salicylic acid (used in veterinary APIs), iodo benzoic acid (used as a pharma intermediate). Selenium anhydride (used in steroid manufacturing), cuprous iodide (used in tyre manufacturing) etc.



http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/370607F0_C6AF_4012_9187_D0B6B85B04AA_182226.pdf






OSCL management has initiated process to demerge Lasa Laboratory in March 2016 and it is expected to be completed in March 2017.



http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/982350B0_957E_4346_BBD4_DC4E8546CED4_153801.pdf


Investment Rationale



Increased restrictions due environmental issues have forced the chemical and API manufacturers to close unsafe units in China. It has created demand and supply gap and sharp rise in chemicals prices. Specialty chemicals are key ingredients for pharmaceuticals (APIs) manufacturing and APIs are main raw material for drugs manufacturing thus both are going to be key growth driver for OSCL and LASA.


Companies with higher production capacities will benefit most. OSCL has already got environment clearance for unit 5 which will double its current operational production capacity from  5,350 metric tonnes to 10,750 metric tonnes in next 4 -5 months. Company has expanded its capacity from 950 metric tonnes in FY 2011E to 10,750 metric tonnes FY 2016E.


Recently OSCL has posted best ever result for H1. Aggressive capacity expansion and strong R&D work in past 3- 4 years has started yielding reward and sales growth is coming through niche value-added chemicals.






http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/953A9FD0_F62E_400F_98ED_AB04FD2F91B2_170133.pdf


OSCL has developed high entry barrier manufacturing processes for new niche high value added molecules for specialty chemicals and APIs. The company is also working in new fields like retroviral protease inhibitors (anti HIV) and oncology space. All these technical capabilities gives it clear edge over its competitors.

Lasa Lab (Veterinary API) to contributes higher revenue due to capacity expansion & also company has developed advanced intermediaries in Iodine Derivative segment like Anti-Diabetic which is in process of receiving approvals & will start commercial production post approval in coming quarters.

OSCL will continue to launch new high value added products, which find application in various end user markets, which offer significant growth opportunities to the company going forward.


OSCL has large product portfolio and strong customer base which covers several sectors. It has insulated the company from risk over dependency on specific sector or customer.

OSCL does not have direct competitor and it has an edge over its peers mainly on the back of its R&D focus, operational flexibility, product diversity and its ability to launch new products with IPR filing. 


Even though OSCL has very strong fundamental but in the last 3 -4 months it has not participated in rally of chemical sector  because promoters have pledged and sold some portion of their shareholding.


It is very easy to understand from above mentioned investment rationale that in the past 6 years OSCL has acquired 4 companies, increased its manufacturing capacity 10 x fold, product portfolio increased from 80 to 200 +,  patent filing for 18 product and 3 approval, same time company has paid good dividend every years since listing in 2011. Working capital cycle is on the high side because major raw materials like Iodine and Selenium are imported from Chile with transit time more than 2 months. Now demerger and listing of Lasa Lab is in process. All these activities are need significant capex and sufficient working capital to day-to-day business operations. Company has not gone for any enhancement in working capital or equity dilution. 

In this case if promoters has pledged or sold some portion of their shareholding to meet the business requirement than nothing wrong with it. In fact company has created huge asset and intellectual property in past 6 years. In future they have option to buyback or issue preferential shares against loan of 27.2 Cr to the company. Pledge shares will released  before end of December 2016 as per guidelines given by management. 


http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/27CE8A56_19BF_44DD_95EB_151271EF4FF9_145815.pdf


Conclusion


Omkar Speciality Chemicals is one of the most trusted name for quality products and serving to all major customers like Cipla, Ranbaxy, Glenmark, Biocon and Dr Reddy’s being its most vital customers in pharmaceuticals segment.  Its customers in chemicals segment are Clariant-UK, BASF, Dupont, Asahi India Glass. Suguna Poultry. The company excels in supplying products to both the segments which have stringent quality concerns, reflecting its significant supplier credibility. 

Company has received environmental clearance for Unit V of Chiplun and expected to start commercial production in coming quarter. Overall it will increase the production capacity of Lasa laboratory more than double and sales growth is expected to grow at a robust rate in future.  Listing of Lasa laboratory is expected to be completed in Q4  it is going unlock decent value for investors. 

OSCL has corrected heavily in recent market correction due to demonetisation. At  cmp 148 it is providing best investment opportunity for short term as well as for long term. Allocation can be given 10 to 20%.