Phillips Carbon Black Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Carbon Black

Company

Phillips Carbon Black Ltd

Reco Price
Rs. 238.00
Price Target (1.5 - 2 Years)
Rs. 480.00
Upside
101.68%

Date

Aug 26, 2016
Sensex
27782.25
CNX Nifty
8572.55

Exchange

Code

NSE
PHILIPCARB
BSE
506590

Falling crude prices and improving working capital will be the key triggers.

Fall in crude prices, levy of anti dumping duty on chinese imports; favorable for company:
Carbon black can be manufactured using two different processes, which either use coal tar or crude derivative i.e. carbon black feed stock (CBFS) as a raw material. Post a decline in crude prices, manufacturing of carbon black using CBFS has gained traction, which benefits Indian players including PHILLIPS CARBON BLACK LTD (PCBL). In a recent update, as of November 2015, for five years i.e. till November 2020, the Government of India has imposed an anti dumping duty on imports of carbon black from China into India to the tune of $400/tonne (global realizations at $600/tonne as of Q1FY17), which protects the interest of domestic carbon black manufacturer, including PCBL.

Carbon black; significant tyre component:
Carbon black is used as a strengthening material providing tensile strength to tyres. It is a critical component for manufacturing tyres and forms 26% by volume of the tyre weight and 10% by value of tyre costs. Total global capacity for manufacturing carbon black as of CY16 was at 17.20 million tonne (MT) with total demand at 13 MT and is expected to grow at a CAGR of 4-5% in the next couple of years. In India, total capacity for manufacturing carbon black as of FY16 was at 1 MT with consumption at 0.8 MT. PCBL with a capacity of 470 KT is the largest player domestically with market share in excess of 30%. Domestic demand is expected to grow at a CAGR of 6-7% in FY16-18E.

Debt reduction on cards:
By virtue of declining profitability and an extended working capital cycle, PCBL has accumulated huge debt with peak debt at Rs 1220 crore as of FY15 (debt: equity at 2.4x). However, with enhanced profitability and working capital controls, debt has reduced to Rs 910.70 crores as of FY16 (debt: equity at 1.79x). Going forward, however, with a strong operational performance and consequent cash flow generation, we expect leverage to further improve with FY18E debt expected at Rs 800 crores.

Growing volume; operating leverage benefits to kick in:
With a positive outlook on the domestic automobile sector and consequent strong tyre demand, we expect PCBL to report strong volume growth, going forward. Moreover, this sales volume growth will be led by domestic sales, which are indeed accretive in realisations and consequent margins. Domestic to exports sales volume mix is expected to improve to 80:20 in FY17E-18E vs. 72:28 in FY16. Thus, increasing capacity utilisations and its operating leverage benefits, sales tilted more in favour of domestic vis-a-vis exports and decline in key raw material prices (CBFS) will result in an expansion of EBITDA margins in FY16-18E.

Carbon black capacity utilization improving:
PCBL has an effective installed capacity of 472000 MT for carbon black. In FY16, PCB operated at 81% capacity utilisation levels. Going forward, on the back of a pick-up in tyre demand domestically & imposition of anti dumping duty, PCBL is witnessing robust demand. Capacity utilisation is expected to augment to 93% in FY18E. Moreover, this sales volume growth will be led by domestic sales, which are indeed accretive in realisations and margins. Realisation of carbon black in export markets ($642/tonne in FY16) is lower than that in domestic market ($887/tonne) primarily on account of freight and selling expense incurred by PCBL for exports. Exports will, however, continue to provide balanced earning profile, with PCBL supplying carbon black to all major tyre manufacturers outside India.

Stock Data

CMP (Rs)
239.60
Face value (Rs)
10
52 Week Range (Rs)
234.50 - 80.00
Market cap (Rs Crores)
771.38
Price To Book Value (x)
1.49
P/E Ratio (x)
35.99
EV/EBIDTA (x)
9.56

One Year indexed Stock Performance

Phillips Carbon Black LtdSensex
Phillips Carbon Black Ltd
Return (%)
1m
3m
12m
36m
Absolute
27.82
183.05
112.04
534.70
Sensex
-0.69
19.99
8.04
49.70

Shareholders

(in %)
30-Jun
Promoter
53.56
Public
46.44
Others
0.00
Total
100

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Industry

Global automobile industry witnessed an estimated demand increase of almost 2% in FY16 which is less than FY15 estimated growth of 2.7%. Recovering automobile sales in major markets of Europe such as Spain, Italy, UK, France and Germany contributed to a growth of 8 - 9% in FY16. Increasing consumer spending, low gasoline prices and pent-up demand boosted automobile sales in US. Emerging markets of Eastern Europe, South America and Africa whose income are dependent on commodity prices, saw a sharp decline in auto sales with demand decreasing by as much as 30 to 40% for a few countries. Increased auto demand in Asia continued to be driven by China and South Asia at a slower pace of approx. 3.2%. As China is moving towards consumption driven economy model, the same is reflected in the increasing passenger car sales. Japan continues its degrowth in auto sales in a weak economy. Global demand for passenger car tyre grew by estimated 2% with improved demand in Western Europe, North America, China and India. Global demand for truck tyre declined by estimated 2% with OEM segment demand decreasing by estimated 7%.

Global Carbon black industry continued to operate at capacity utilization of 75 – 80% in FY16 against demand supply imbalance. The need for local servicing to the customer and price competitiveness are prompting major players to rationalize and restructure their capacity across geographies. International Market is witnessing aggressive competitions from low cost carbon black manufacturers.

Profile

PCBL, a part of USD 2500 million (or 2.5 billion) RP-Sanjiv Goenka Group, has a business of USD 500 million and four strategically located state-of-the-art plants at Durgapur, Palej, Cochin and Mundra. PCBL today is India's largest and globally seventh largest carbon black producer. Currently, it has a production capacity of 4, 72,000 MT per annum in India, and involves a dedicated capacity of Specialty Blacks of 40,000 MT per annum at Palej.

PCBL has etched its global footprints and has a market presence in more than 30 nations with decanting stations, warehouses located near customer locations. A few of the Company's prized customers are CEAT, MRF, Michellin, Yokohama, Birla Tyres, Goodyear, Sumitomo Tires, Bridgestone, Kumho Tires, among others.

PCBL has redefined its business by establishing captive power plants at each factory from the off-gas or waste product from the carbon black manufacturing process thus creating a sustainable green movement. The gas, a by-product of carbon black production, is harnessed for generating electricity at the Company's Captive Power Plants (CPP), at Baroda, Durgapur, Mundra and Kochi. That is why PCBL is the first carbon black company in the world to receive carbon credits. The Company has heavily cut down on carbon and gas emission, and serves green power to Large Private industrial units and State Electricity utilities.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 14
Mar 15
Mar 16
Mar 17E
Mar 18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Tax
  • Provision for Tax
  • Profit After Tax
  • Margin (%)
  • Adjusted EPS
  • 2277.46
  • -
  • 2253.23
  • 24.23
  • 1.06
  • 22.53
  • 46.76
  • 80.25
  • -33.49
  • 54.56
  • -88.04
  • -1.16
  • -86.88
  • -3.81
  • -25.11
  • 2470.19
  • 8.46
  • 2319.15
  • 151.04
  • 6.11
  • 14.20
  • 165.23
  • 94.80
  • 70.43
  • 58.36
  • 12.07
  • 1.70
  • 10.37
  • 0.42
  • 3.09
  • 1894.72
  • -23.30
  • 1742.16
  • 152.56
  • 8.05
  • 29.77
  • 182.33
  • 71.19
  • 111.15
  • 55.81
  • 55.33
  • 34.31
  • 21.03
  • 1.11
  • 6.22
  • 2102.00
  • 10.94
  • 1905.00
  • 197.00
  • 9.37
  • 30.00
  • 227.00
  • 80.50
  • 146.50
  • 60.00
  • 86.50
  • 17.3
  • 69.20
  • 3.29
  • 20.47
  • 2410.00
  • 14.65
  • 2175.00
  • 235.00
  • 9.75
  • 30.00
  • 265.00
  • 80.50
  • 184.50
  • 63.00
  • 121.50
  • 24.3
  • 97.20
  • 4.03
  • 28.75
Source: Stockaxis Research, Company Data

Valuation

The deeper market penetration has led to a rise in utilization levels. With falling crude oil prices, margins are expected to improve. Company is also aggressively working on improving working capital cycle and reducing its debt.

Hence we assign valuation of 16.69x FY 2018E indicating target price of Rs 480 which is base case valuation as per our understanding for long term horizon.

 

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