Phillips Carbon Black - Volumes to improve yoy; stock rallied; Hold - Anand Rathi

Slowdown in domestic market continues. We expect Phillips Carbon Black to report 3QFY14 volumes have risen 1.2% qoq (11.7% yoy). Last year's quarter had a very low base due to demand in the domestic market dropping and more imports by domestic clients. On account of the rise in export volumes, we expect revenue to have grown 8.4% yoy. And the contribution from power could have declined, by 11.2% yoy, to Rs. 180m.

Disappointment in carbon black. We expect a 5.6% EBITDA margin in 3QFY14 vs 2.7% in 3QFY13. This 290-bp improvement in OPM would be due to the pass-through of raw material costs. Carbon black imports are squeezing the company. Though we expect other expenditure to be up 132bps to 11.5% yoy, we expect the EBITDA margin to have improved 290bps due to substantially lower raw-material costs (as percent of sales).

Expected to report profit. We expect a Rs. 47m profit in 3QFY14, a steep 513% jump yoy. We expect the volume pickup to have pulled the profit up. The company was struck by dumping by China and other countries. The government has imposed a 30% safeguard duty on carbon-black imports from China. Though this would help reduce imports over time, we do not see any benefit in domestic volumes in 3Q.

Our take. Since the 30% safeguard duty was imposed in Oct'12 (till Oct'13) and 25% on CB imports from China till 31 Dec'13, such imports have slid. Imports, though, from Korea have now risen. The 50,000-ton Cochin plant CB expansion was completed in May'13. An MoU has been signed with the Tamil Nadu government to set up a new CB and power plant; environment clearances are in progress. In view of global developments, project work at Vietnam is under review. We value the stock at a target PE of 3.5x FY15e earnings. We downgrade the stock to a Hold, with a target price of Rs. 49. Risks. A slowdown with original equipment manufacturers and adverse forex movement.

Source : Equity Bulls

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