OMKAR SPECIALTY: Co's Capacity Addition to Boost Earnings

Omkar Specialty Chemicals (OSCL) is expanding capacity fast. With high capacity utilisation and strong margins, these additional capacities stand to boost its profits in the coming quarters. Retail investors would do well to buy the scrip with a longterm horizon. 

BUSINESS OSCL makes niche value-added organic as well as inorganic chemicals, which are derivatives of iodine, molybdenum, selenium, cobalt and tartaric acid. It primarily caters to the pharmaceutical industry apart from chemicals, glass, cosmetics, pigments and ceramics sectors.
OSCL has a wide portfolio of products to which it continues to add regularly through its R&D. It imports almost all its raw materials, but predominantly sells in India. The supply contracts with customers are linked to raw material prices and exchange rates, which safeguard OSCL’s margins even in volatile times.
The company had floated an IPO in January 2011 to fund the expansion of its production capacity from 750 tonne to 3,650 tonne by September 12. 

GROWTH DRIVERS: OSCL has already added nearly 1,000 tonne of capacity. It also recently acquired a company in Ratnagiri with an installed capacity of 2,800 tonne per annum. This capacity will begin commercial operations from April 2012 onwards and is expected to generate 40-45 crore of turnover in FY13. It is also on track to add another 1,800 tonne of capacity at its Badlapur units in the next 6-8 months. 

FINANCIALS: In the first 9 months of FY12, OSCL's revenues jumped 66.6% to 126 crore, while net profit grew 63% to 11.7 crore. Its interest cost was up 93% at 6.2 crore, while depreciation more than doubled to 3.1 crore. The company has consistently maintained its operating profit margins at above 20% and net profit margins above 9%. Its debt-equity ratio stood at 0.7 at the end of September 2011. Between June and December 2011 the promoters' stake has gone up by 0.38% to 59.11% 

VALUATIONS: OSCL is currently trading at a priceto-earnings multiple (P/E) of 8.3 based on profits for the trailing 12 months, which is in line with its peers. The company's capacity addition plans are set to boost its earnings in the coming quarters.