Phillips Carbon Black - Situation not as gloomy as it appears; constant efforts to recover - Nirmal Bang

Phillips Carbon Black (PCB) results were broadly in line with expectations. The company reported profit of Rs 4.9 cr with improvement in EBITDA margins. Carbon Black volumes witnessed sequential improvement primarily aided by export volumes growth. However, capacity utilization dropped below 65% which resulted in lower volumes in power segment. For FY13, the company reported 4.6% YoY increase in net sales and EBITDA margins stood at 4.8% vs 10.7% in FY12. The company reported net loss of Rs 40 cr in FY13; despite this the company announced a token dividend of Rs 0.5 per share.

We believe that the prolonged slowdown in the overall auto and auto ancillary industry has led to a delay in the recovery efforts of the company. Despite the fact that safeguard duty was imposed the company could not capitalize on this owing to the weak demand in the auto industry. Our interactions with management of various tyre companies indicate that the realizations of carbon black has indeed gone up post the safeguard duty which is a positive sign. Moreover, PCB has completed the 50,000 MT expansion at the Cochin plant and the plant has commissioned in May 2013 indicating some signs of revival. In order to combat with the slowdown impact; PCB has also resorted to exports in US, Japan etc. PCB has added Nexen in its client list recently. It is also looking forward to add some more clients in the export markets. We believe that increased focus on exports will help PCB to bring back the capacity utilization rates to above 70%. An increase in capacity utilization will also enhance the power volumes of the company and contribute to profitability.

Moreover, the crude price has also corrected from the levels in Q3FY13 and has benefited PCB significantly in the form of lower raw material cost. This benefit is expected to continue to flow in the current quarter as well aiding the margins.

Although efforts for recovery are in full force by the company, these efforts will take some time to reflect in the performance of the company. Near term the performance may not improve significantly, but revival in the auto industry holds the key. The stock has been an underperformer in the last one quarter despite an up move in the broader indices reflecting concerns on the performance of the company. We believe that the current valuation largely factors all the concerns and the downside risk from these levels stands limited. The current market cap of the company is only Rs 241 cr against Sales of Rs 2,300 cr on an annual basis. We expect an improvement in FY14E over FY13 and expect the company to report sales growth of 7.3% and EBITDA margin of 6.4% and PAT margin of 1.6%.

At CMP, the stock is trading at P/E of 6.16x on FY14E earnings whereas on P/BV it is trading at 0.38x on FY14E. PCB is trading at EV/EBITDA of 6.09x FY14E. We expect PCB to report RoE of 6.1% in FY14E. We continue to maintain our BUY rating on the stock with a target price of Rs 102 indicating an upside of 48.6% from current levels.

Source : Equity Bulls

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