| Summary of Contents STOCK IDEAS Phillips Carbon Black
Cluster: Cannonball
Recommendation: Buy
Price target: Rs185
Current market price: Rs135
Fillip from improving demand environment Key points - Improving demand environment: Phillips Carbon Black Ltd (PCBL), a leading carbon black manufacturer in India, is among the key beneficiaries of the revival in the domestic tyre industry. Apart from the strong demand from the passenger car segment and the replacement market, the reduced imports of truck bus radial (TBR) tyres from China have also boosted the demand for carbon black from the domestic tyre companies.
- Anti-dumping duty to aid profitability: The recent notification regarding the imposition of anti-dumping duty on carbon black imports from China, Russia, Australia and Thailand is expected to improve the pricing power of domestic carbon black producers. Thus, we believe that the domestic manufacturers would be in a better position to protect their margins by passing on the cost increases (if any) on account of the rise in crude oil’s price.
- Timely expansion of manufacturing capacities: PCBL is expanding its carbon black production capacity at Mundra by 90,000 million tonne (MT), taking its total carbon black capacity to 360,000MT by the end of Q2FY2010. The addition of new capacities is well timed given the improving demand environment. We expect the company’s carbon black sales volume to grow by 17.5% in FY2010, resulting in segmental profits of Rs102.4 crore for the carbon black business in FY2010 as against a loss of Rs35.6 crore in FY2009.
- Surplus power sale to boost earnings: PCBL has waste heat recovery (WHR) power project capacities at Baroda (12.5MW), Durgapur (30MW) and Mundra (16MW; scheduled to be commissioned in Q4FY2010). After catering to the captive needs, the company is able to generate substantial revenues from the sale of surplus power in the open market. We estimate the power division would contribute 41% to the total EBIDTA of the company in FY2011.
- Attractive valuations: In view of the distinct improvement in the demand environment and the incremental earnings from the sale of surplus power, we expect the company to report a significant improvement in its financial performance over the next two years. PCBL is estimated to report a net profit of Rs91.5 crore in FY2011 as against a net loss of Rs64.8 crore in FY2009. Despite the turnaround in its financial performance and healthy return ratios, the stock trades at attractive valuations of 4.2x FY2011 earnings and 4.3x FY2011 EV/EBIDTA. We initiate coverage on PCBL with a Buy recommendation and a price target of Rs185.
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