Phillips Carbon Black Ltd

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1 4 Recommendation BOOK PROFITS Pain not yet over CMP (09/02/2015)* Rs. 131 Phillips Carbon Black (PCB) reported results in line with expectations; with EBITDA margins at 10.0% vs 9.3% in Q2FY15. The company reported PAT of Rs Target Price Rs cr in Q3FY15 vs Rs 4.1 cr in Q2FY15. Sector Stock Details Carbon Black BSE Code NSE Code Bloomberg Code PHILIPCARB PHCB IN Market Cap 451 Free Float 46.44% 52- wk Hi/Lo (Rs) 173/46 Avg. volume BSE (Quarterly) 305,760 Face Value (Rs) 10 Dividend (FY14) 0% Shares o/s (Crs) 3.4 Relative Performance 1Mth 3Mth 1Yr PCB -5.6% 16.5% 156.2% Sensex 6.9% 3.3% 42.4% Going forward: Management has hinted that Q4FY15 will be a weak quarter. We have revised our estimates downwards for FY15E taking into account a weak Q4 performance. We have lowered our sales estimate for Q4 as the company will have to pass on the entire benefit of decline in crude prices in the form of lower realizations. In the domestic markets the realizations are formula driven and thus the company can pass on the increase/decrease in raw material costs to its clients. However, in the export markets realizations are not formula based and thus the company will have to take an inventory loss of Rs 40 cr as the company maintains inventory of nearly 2 months. We expect EBITDA margins to decline to 3.8% in Q4FY15 and expect the company to report a net loss of Rs 4 cr led by higher inventory losses. For FY15E we expect the company to report EBITDA margins of 7.8% and PAT of Rs 8 cr. Although Q4 is not expected to be a good quarter for the company, from business perspective the decline in crude prices will act as a beneficial factor for the company in the long term. The benefit is likely to accrue in the form of lower working capital requirement, better margins, reduction in the cost of hedging, lower differential rates as compared to Chinese products leading to increased demand for the products of the company. Moreover, some higher margin could be generated through non tyre segment which includes cycle tyres, rubber pipes, conveyor belts etc. Shareholding Pattern 31 st Dec 14 Promoters Holding 53.56% Institutional (Incl. FII) 10.57% Corporate Bodies 11.54% Public & others 24.33% Silky Jain- Research Analyst silky.jain@nirmalbang.com Year Net Sales Growth EBITDA We expect an improvement in performance in the company in FY16E and expect EBITDA margins to improve to 10.4% vs at 7.8% for FY15E and expect the company to report PAT of Rs 70 cr in FY16E as compared to Rs 8 cr in FY15E. At CMP, PCB is trading at P/E of 9.85x and 6.69x on FY15E and FY16E EPS whereas on EV/EBITDA it is trading at 7.73x and 5.98x on FY15E and FY16E estimates. Although declining crude prices will result in long term benefit for the company, we cannot ignore the fact that Q4 is likely to witness weak performance. Considering the current valuation of company at 5.98x EV/EBITDA on FY16E which leaves limited upside from current levels, we believe that the stock will remain an underperformer in the near term. Therefore, we recommend investors to book profit in the stock. Given the cyclicity of the business model, we value the stock at FY16E estimates and arrive at a target price of Rs 139 (6x EV/EBITDA). Margin Adj PAT Margin EPS (Rs.) P/E (x) EV/Sales EV/ EBITDA FY13A 2, % % % FY14A 2, % % % FY15E 2, % % % FY16E 2, % % % P a g e

2 Q3FY15 Result analysis Particulars Q3FY15 Q3FY14 YoY Q2FY15 QoQ Net sales % (8.0%) Other operating income (17.5%) 1.0 (53.9%) Total income % (8.1%) RM cost % (9.3%) RM cost % of sales 76.1% 78.7% 77.2% Gross Margins 23.9% 21.3% 22.8% Employee cost % 19.9 (12.4%) Selling and admin cost % 21.7 (18.7%) Other exp % % Total expenditure % (8.8%) EBITDA % 61.4 (1.0%) EBITDA margin 10.0% 7.2% 9.3% Other income (43.1%) 3.0 (23.5%) Interest (13.8%) 24.8 (11.3%) Depreciation % 15.7 (2.2%) Loss on forex transactions (32.2%) 18.6 (19.6%) PBT 10.8 (16.9) N/A % Tax 3.8 (1.5) N/A % Tax rate 35.4% 8.6% 23.0% PAT 7.0 (15.5) N/A % PAT margin 1.1% (2.8%) 0.6% EPS 2.02 (4.5) N/A % Net sales witnessed 8.4% YoY increase whereas it declined 8.0% QoQ led by lower volumes on sequential basis. RM as % of sales improved both QoQ and YoY as lower raw material prices benefited the company which resulted in improvement in margins. As the raw material prices have come down sharply the company is not targeting to replace CBFS by CBO. The current mix of CBFS to CBO stands at 80:20 Depreciation stands higher due to commissioning of Kochin plant. Loss on forex transactions declined with stable rupee during the quarter. On an average tonnes of carbon black per month is being imported from China/Korea. 2 P a g e

3 Segmental Performance Segmental performance Q3FY15 Q3FY14 YoY Q2FY15 QoQ Revenue from Carbon Black % % Revenue from Power % % Less: Intersegmental Revenue % 12.7 (2.8%) Net sales from operations % % EBIT Carbon Black 24.1 (4.3) N/A % Margin 3.8% (0.8%) 3.3% Power % 21.0 (5.3%) Margin 61.0% 68.1% 64.4% Total % % Margin 6.7% 2.7% 6.4% PBT 10.8 (16.9) N/A % EBIT margin in CB segment improved on sequential basis at 3.8% in Q3FY15. On YoY basis margins improved from negative 0.8% to positive 3.8%. EBIT margin in power business witnessed decline both on QoQ basis and YoY basis; however management expects it to improve with improving capacity utilization. Particulars Q3FY15 Q3FY14 YoY Q2FY15 QoQ Carbon Black Volumes (MT) 77,374 66, % 82,736 (6.5%) Domestic (MT) 55,910 46, % 60,504 (7.6%) Export (MT) 21,464 20, % 22,232 (3.5%) Carbon Black Realization 82,771 81, % 77, % Power volumes (12.9%) 48 (5.0%) Power realization % % Domestic volumes witnessed improvement on YoY basis as efforts of the company to improve volumes is yielding results. Exports is the key focus area of the management going forward. Capacity utilization witnessed sharp improvement and stood at 68% vs 71% in Q2FY15 and 61% in Q3FY14. Realisations in the power segment witnessed improvement as the company got open access for selling power outside at higher rates. 3 P a g e

4 Financials Profitability (Rs. In Cr) FY13A FY14A FY15E FY16E Balance sheet (Rs. In Cr) FY13A FY14A FY15E FY16E Net Sales 2,281 2,276 2,442 2,296 Share Capital Other op income Reserves & Surplus Total Income 2,285 2,277 2,443 2,298 Share Holder's Funds Total Cost 2,175 2,143 2,253 2,060 Deferred Tax Liab EBITDA Long Term Loans Dep Short Term Loans Op Income Other Long Term Liab Interest Total Liabilities 1,464 1,548 1,585 1,601 Other Income Net Fixed Assets Forex gain/loss Total Investments PBT Current Assets 1,189 1,033 1,186 1,133 Tax Sundry Debtors PAT (reported) Cash & Bank Adj PAT Loans & Advances & Others Shares o/s ( No. in Cr.) Inventories EPS Current Liabilities & Provision Adj EPS Net Current Assets Adj Cash EPS Other Long Term Quarterly (Rs. In Cr) Mar.14 June.14 Sep.14 Dec.14 Total Assets 1,464 1,548 1,585 1,601 Net Sales Cash Flow (Rs. In Cr) FY13A FY14A FY15E FY16E EBITDA Operating income Dep Change in WC Op Income Taxes paid Interest Other Adjustment Other Inc Forex Forex gain/loss CF from Operation PBT Capex Tax Investment (incl interest) PAT Total Investment Performance Ratio FY13A FY14A FY15E FY16E Dividend Paid Sales growth 4.5% -0.3% 7.3% -5.9% Share Capital EBITDA margin 4.8% 5.9% 7.8% 10.4% Premium/Reserves Adj.PAT margin 0.7% 1.0% 1.9% 3.0% Borrowing ROE 2.6% 4.4% 9.3% 12.1% Interest ROCE 4.2% 5.3% 8.3% 10.8% Total Financing Valuation Ratio FY13A FY14A FY15E FY16E Net Chg. in Cash Price Earnings (x) Cash at beginning Price / Book Value (x) Cash at end EV / Sales Per Share Data FY13A FY14A FY15E FY16E EV / EBIDTA Reported EPS EV / Total Assets Adjusted EPS Dividend Yield 0.4% 0.0% 0.0% 0.7% BV per share Dividend per share Per tonne analysis FY13A FY14A FY15E FY16E Turnover Ratios FY13A FY14A FY15E FY16E Sales per tonne 78,272 79,122 77,171 74,828 Debtor Days Cost per tonne 74,515 74,461 71,151 67,083 Inventory Days EBITDA per tonne 3,758 4,661 6,019 7,745 Creditor Days P a g e

5 NOTES Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL )is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. NBSPL is in the process of making an application with SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose) NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. This document, at best, represents Analyst opinion and is meant for general information only. NBSPL, its directors, officers or employees shall not in any way be responsible for the contents stated herein. NBSPL expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e