Phillips Carbon Black (PHICAR) 250

Transcription

1 Result Update Rating matrix Rating : Buy Target : 36 Target Period : months Potential Upside : 44% What s changed? Target Changed from 34 to 36 EPS FY19E Changed from 16.9 to 18. EPS FY2E Changed from 19.4 to 21.2 Rating Unchanged Key financials FY17 FY18 FY19E FY2E Net Sales EBITDA Net Profit EPS Valuation summary FY17 FY18 FY19E FY2E P/E Target P/E EV / EBITDA P/BV RoNW* RoCE* ROIC* * Return ratios adjusted for revaluation reserve amounting to ~ 5 crore in FY17-2E Stock data Stock Data Market Capitalization 438 Total Debt (FY18) 78 Cash and Cash Equivalent (FY18) 139 Enterprise Value week H/L ( ) 319 / 75 Equity Capital 34.5 Face Value 2 MF Holding (%) 3.1 FII Holding (%) 11. Stock data 1M 3M 6M 12M Phillips Carbon Black Oriental Carbon (OCCL) Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia, CFA shashank.kanodia@icicisecurities.com May 7, 218 Phillips Carbon Black (PHICAR) 25 Q4 marred by one-offs, robust growth journey to resurface, tilt towards speciality Phillips Carbon Black (PCBL) reported a steady Q4FY18 performance amid rising crude price and a consequent increment in raw material and end product realisations Net sales in Q4FY18 were at 753. crore, incorporating 5% YoY volume growth with carbon black (CB) sales volume at 13 KT Carbon black realisations for Q4FY18 were at US$187/tonne ( 7.6/kg) vs. US$85/tonne ( 54./kg) in Q4FY17 EBITDA in Q4FY18 was at 12. crore with corresponding EBITDA margins at 13.5%. EBITDA/tonne in Q4FY18 was at 993/tonne Margins came in a tad lower primarily tracking the management s accounting approach of expensing out the de-bottlenecking exercise expenditure (worth ~ 2 crore) instead of capitalising the same Adjusted for same and other one-offs, normalised EBITDA/tonne for the quarter was at ~ 12,5/tonne. It was also supported by highest ever quarterly sales volume of speciality grade carbon black at 6, tonne with total speciality grade CB sales volume at ~16 KT in FY18 PAT in Q4FY18 was at 74.3 crore vs crore in Q4FY17. Higher PAT for the quarter was also supported by a lower effective tax rate, which came in at ~15%, with full year FY18 tax rate at 24.4% Brownfield expansion on track, increasing share of speciality grade CB On the back of robust product demand amid supply side constraints, PCBL is running its plant at more than optimum capacity utilisation levels. Carbon black sales volume in FY18 was at 41.5 KT on effective capacity of ~411 KT, implying capacity utilisation level of 95%+. Sensing the capacity constraints, PCBL has undertaken a de-bottlenecking exercise wherein its effective capacity increased by 3 KT to 441 KT at the end of FY18. PCBL is also executing an impressive brownfield expansion plant worth ~ 32 crore that will further augment its capacity by 8, tonne taking the overall capacity to 521 KT by the end of FY19. This is likely to lead volume led growth to sustain, going forward. Note, the incremental capacity has a higher share of speciality grade CB lines (44 KT out of 11 KT) with overall share of speciality grade CB increasing from ~4% in FY18 to ~8% in FY2. Speciality grade carbon black EBITDA margins are to the tune of ~4-5x normal grade CB that will aid improvement in EBITDA margin and structural uptick in earnings, going forward. Robust topline, earnings growth; upgrading estimates; reiterate BUY! PCBL has overcome its commodity tag status in the past to a more structural sound manufacturing set up producing key material for the tyre, paints, plastics and ink industry. With capacity expansion in place, we expect PCBL to clock CB sales volume CAGR of 9.4% in FY18-2 with consequent increase in sales at 19.% CAGR over the aforesaid period. With increasing share of speciality grade CB and brownfield nature of expansion plan, conservatively, we build in EBITDA/tonne of ~ 11,45/tonne for FY19 & ~ 12,2/tonne for FY2E vs. ~ 9,6/tonne for FY18. At the PAT level, we expect earnings CAGR of 26.% in FY18-2E. We value PCBL at 36 i.e. 17x P/E on FY2E EPS of 21.2 and retain our BUY rating on the stock. We also derive comfort from higher double digit return ratios matrix (2%+) at PCBL and CFO yield of ~9% in FY18-2E. We have a BUY rating on the stock since 35 levels and still believe it has more upside leg room given the robust product demand, sound financials and prudent management pedigree. ICICI Securities Ltd Retail Equity Research

2 Company Analysis Phillips Carbon Black (PCBL) is an RP-Sanjiv Goenka group (CESC promoter group) company manufacturing carbon black domestically. PCBL was incorporated in 196 in collaboration with Phillips Petroleum Company, US. In 1988, PCBL entered into a technical collaboration with Columbian Chemicals Company, US. PCBL s first plant for manufacturing carbon black was set up in Durgapur (West Bengal) with an installed capacity of 14 KT, which commenced production in As of FY16, PCB has four plants across India manufacturing carbon black with associated waster heat recovery power plants; Durgapur, WB (147 KT, 3 MW); Mundra, Gujarat (14 KT, 3 MW); Palej, Gujarat (95 KT, 12 MW); Kochi, Kerala (9 KT, 1 MW). Producing power from waste gases makes PCBL a carbon neutral company. Carbon black increasing capacity to aid volume growth!! PCBL has an effective installed capacity of 411 kilo tonne (KT) for carbon black (name plate capacity at 472 KT) as of FY17. On this it clocked sales volume of ~41 KT in FY18, implying capacity utilisation in excess of 95%. With the de-bottlenecking exercise (3, tonne) complete at the end of FY18, its effective capacity increased to 441 KT as of FY18 end. PCBL is further augmenting its capacity by 8 KT through brownfield route, which will take its total capacity of 521 KT by start of FY2E. This is likely to lead volume led growth to sustain at PCBL with CB sales volume CAGR at 9.4% in FY18-2E. Exhibit 1: Capacity, production & capacity utilisation levels PCBL also sells high margin speciality grade carbon black, which finds application in plastics, inks, etc. Its volume in FY18 was at ~16 KT (8.2 KT in FY17). Going forward, with increased capacity addition in the speciality grade carbon black domain we expect speciality grade carbon black sales volume at ~ 24 KT in FY19E & ~ 36 KT in FY2E tonne % FY17 FY18 FY19E FY2E Capacity Production Capacity Utilization Levels 8 Exhibit 2: Rubber grade and speciality grade CB volumes Exhibit 3: Rubber grade to speciality grade CB sales mix tonne FY17 FY18 FY19E FY2E Rubber Grade Volume Specialty Grade Volume % FY17 FY18 FY19E FY2E Rubber Grade Share Specialty Grade Share ICICI Securities Ltd Retail Equity Research Page 2

3 Net sales to grow at CAGR of 19.% in FY18-2E We expect sales to grow at a CAGR of 19.% in FY18-2E largely tracking 9.4% CAGR in volumes and 9.% CAGR improvement in realisations (tracking a rebound in crude oil prices). Exhibit 4: Net sales trend We expect PCBL to record net sales of 3283 crore in FY19E & 368 crore in FY2E FY17 FY18 FY19E FY2E Exhibit 5: Sales break up PCBL generates power out of waste gases generated during the manufacturing of carbon black. On an average, it generates ~11 units of electricity per tonne of carbon black produced. Its captive consumption is ~35 units with the rest ~75 units being sold to the external grid. This surplus power sales contributed a steady ~3% of total sales at PCBL and drives operational efficiencies FY17 FY18 FY19E FY2E Carbon Black Sales Power Sales EBITDA/tonne (including hedging costs) is expected at ~ 11,45/tonne in FY19E & ~ 12,2 in FY2E ( 9615/tonne in FY18) Exhibit 6: EBITDA & EBITDA margins trend Margin expansion to drive EBITDA & PAT, going forward Operating leverage benefits on account of brownfield nature of expansion and increasing share of speciality grade CB are expected to lead to EBITDA margin expansion of ~11 bps in FY18-2E. We expect PCBL to clock EBITDA margins of 16.3% in FY2E vs. 15.2% in FY18. Exhibit 7: PAT & EPS trend FY17 FY18 FY19E FY2E EBITDA EBITDA Margin % FY17 FY18 FY19E FY2E PAT EPS ( ) /share ICICI Securities Ltd Retail Equity Research Page 3

4 tonne Exhibit 8: Return ratios profile In FY18-2E, on account of sales volume growth and expansion in EBITDA margins, we expect PCBL to stage an impressive PAT CAGR of 26.% over FY18-2E. We expect PCBL to report PAT of 31 crore in FY18E and 365 crore in FY2E vs. 23 crore in FY18. Corresponding EPS is expected at 18. in FY19E & 21.2 in FY2E vs in FY18. Increasing profitability to result in improved return ratios profile Return ratios were subdued in the past due to subdued profitability. However, with the robust performance, the same has improved with RoE & RoCE expected at 2%+, respectively, in FY18-2E. Exhibit 9: Debt: equity trend % FY17 FY18 FY19E FY2E 2,5 2, 1,5 1, , , , ,912.1 FY17 FY18 FY19E FY2E x RoE* RoCE* Debt Equity Debt:Equity *Return ratios adjusted for revaluation reserve amounting to ~ 5 crore Absolute debt to remain, debt gearing set to improve By virtue of declining profitability and elongated working capital cycle, PCBL has accumulated huge debt with peak debt at 122 crore as of FY15. However, with enhanced profitability and working capital controls, debt has reduced to 78 crore, as of FY18 end. Going forward, however, with impressive brownfield expansion underway and greenfield expansion on the anvil, we expect absolute debt to remain at similar levels in FY18-2E. Debt gearing, however, is expected to decline with consequent debt: equity at.4x in FY2E vs..5x as of FY18. Greenfield expansion PCBL, at its recent board meeting, has also approved a greenfield expansion to the tune of ~ 5 crore with incremental capacity of ~12 KT (effective capacity, rated capacity at 15 KT), which is due to be commissioned in FY2E end. Conservatively, we do not factor any incremental volumes from this greenfield expansion. However, we build in incremental capex of ~ 25 crore on account of it (FY19-2E). Exhibit 1: Capacity addition trend FY17 FY18 FY19E FY2E FY21E Existing Capacity De-bottlenecking Brownfield expasnion Greenfiled expansioon ICICI Securities Ltd Retail Equity Research Page 4

5 Outlook and valuation On the back of robust product demand amidst supply side constraints, PCBL is running its plant at more than optimum capacity utilisation levels. Carbon black sales volume in FY18 were at 41.5 KT on an effective capacity of ~411 KT, implying a capacity utilisation level of 95%+. Sensing the capacity constraints, PCBL has undertaken a de-bottlenecking exercise wherein its effective capacity has increased by 3 KT to 441 KT at the end of FY18. PCBL is also executing an impressive brownfield expansion plant amounting to ~ 32 crore, which will further augment its capacity by 8, tonne taking overall capacity to 521 KT by the end of FY19. This is likely to lead volume led growth to sustain, going forward. Note, incremental capacity has a higher share of speciality grade CB lines (44 KT out of 11 KT) with overall share of speciality grade CB increasing from ~4% in FY18 to ~8% in FY2. Speciality grade carbon black EBITDA margins are to the tune of ~4-5x the normal grade CB that will aid improvement in EBITDA margins and a structural uptick in earnings, going forward. PCBL has overcome its commodity tag status in the past to a more structural sound manufacturing set up producing key material for the tyre, paints, plastics and ink industry. With capacity expansion in place, we expect PCBL to clock CB sales volume CAGR of 9.4% in FY18-2 with consequent increase in sales at 19.% CAGR over the aforesaid period. With increasing share of speciality grade CB and brownfield nature of expansion plan, conservatively, we build in EBITDA/tonne of ~ 11,45/tonne for FY19 & ~ 12,2/tonne for FY2E vs. ~ 9,6/tonne for FY18. At the PAT level, we expect earnings CAGR of 26.% in FY18-2E. We value PCBL at 36 i.e. 17x P/E on FY2E EPS of 21.2 and retain our BUY rating on the stock. We also derive comfort from higher double digit return ratios matrix (2%+) and CFO yield of ~9% over FY18-2E. We have a BUY rating on the stock since 35 levels. We still believe it has more upside leg room given the robust product demand, sound financials and prudent management pedigree. The key risk to our call is crude crossing US$1/barrel vs. the prevailing price of ~US$75/barrel and decline in coal tar price in Chinese markets primarily tracking muted production growth in the aluminium space. Exhibit 11: What s changed?? Particulars FY19E FY2E Old New % Change Old New % Change Revenue 2, , EBITDA EBITDA Margin % bps bps PAT EPS Exhibit 12: Valuation Summary Sales Growth EPS Growth PE EV/EBITDA RoNW* RoCE* ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY FY19E FY2E * Return ratios adjusted for revaluation reserve amounting to ~ 5 crore ICICI Securities Ltd Retail Equity Research Page 5

6 es Recommendation history vs. consensus estimate ( ) (%) Apr-15 Jul-15 Sep-15 Dec-15 Feb-16 May-16 Jul-16 Sep-16 Dec-16 Feb-17 May-17 Jul-17 Sep-17 Dec-17 Feb-18 May-18 Price Idirect target Consensus Target Mean % Consensus with Buy Source: Bloomberg, Company, ICICI Direct Research; *I-direct coverage on Phillips Carbon Black was initiated on July 216 Key events Date/Year Event 23 PCBL increases its carbon black capacity in Durgapur to 1,35, metric tonne (MT) taking total Carbon Black Capacity to 2,, MT 27 The company enters into a MOU for a carbon black plant in Vietnam 29 PCBL commences production of carbon black from the greenfield capacity at Mundra with capacity of 9, MT (Total Carbon Black Capacity: 3,6, MT). PCBL witnesses difficult market conditions with PCBL reporting loss at the PAT level in FY9 21 PCBL completes 5 years in operation. Golden jubilee year 212 PCBL further augments its carbon black capacity at Mundra & Durgapur. Commences 5, MT carbon black plant at Mundra (Total Carbon Black Capacity: 4,1, MT); Commences 8 MW co-generation power plant at Mundra, Gujarat (Total Power Capacity: 76 MW). Commences 12, MT carbon black plant at Durgapur (Total Carbon Black Capacity: 4,22, MT) 214 PCBL commences 5, MT carbon black plant at Kochi (Total Carbon Black Capacity: 4,72, MT) 215 PCBL records highest lifetime turnover of 247 crore in FY15. Consequent EBITDA & PAT stood at 152 crore and 13 crore respectively. 216 As of FY16, PCBL has four plants across India manufacturing carbon black with associated waster heat recovery power plants; Durgapur, West Bengal (147 KT, 3 MW); Mundra, Gujarat (14 KT, 3 MW); Palej, Gujarat (95 KT, 12 MW); Kochi, Kerela (9 KT, 1 MW). It is currently headed by Sanjiv Goenka (Chairman), CEO Kaushik Roy and CFO Raj Kumar Gupta. In FY16, PCB distributed dividend of 2.5/share (EPS - 6.6/share) 217 PCBL successfully turns around its operations with operational efficiencies and economies of scale resulting in ~4 bps improvement in EBITDA margins to 13.% in FY17E vs. 8.7% in FY16. PCBL has recently concluded an interim dividend of 6/share 218 PCBL has successfully commissioned 3, incremental capacity as part of its de-bottlenecking exercise and is well poised for another 8, capacity addition as part of its brownfield expansion. Board of PCBL has also approved a greenfield project amounting to ~ 5 crore, involving a capacity expansion of 12 KT (effective capacity) with likely commissioning by FY2E end Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Position Change (m) 1 RPG Ventures 31-Mar Dotex Merchandise Pvt. Ltd. 31-Mar Fidelity International 31-Oct FIL Investment Management (Singapore) Ltd. 3-Jun Wellington Management Company, LLP 31-Mar Kerala State Industrial Development Co., Ltd. 31-Dec Principal PNB Asset Management Company Ltd. 31-Dec Morgan Stanley Investment Management (Japan) Co., 31-Dec-17 Ltd L&T Investment Management Limited 31-Mar IDBI Asset Management Limited 31-Mar Source: Reuters, ICICI Direct Research Recent Activity Shareholding Pattern (in %) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Promoter FII DII Others Buys Sells Investor name Value Shares Investor name Value Shares Fidelity International +13.M +4.6M Franklin Templeton Asset Management (India) Pvt. Ltd. -2.8M -.7M Morgan Stanley Investment Management (Japan) Co., Ltd. +5.5M +1.8M Sundaram Asset Management Company Limited -.9M -.2M Wellington Management Company, LLP +2.7M +.8M Kotak Mahindra Asset Management Company Ltd. -.3M -.1M Principal PNB Asset Management Company Ltd. +1.5M +.5M Baillie Gifford & Co. -.2M -.1M RAM Active Investments S.A. +.7M +.2M Van Eck Associates Corporation -.1. Source: Reuters, ICICI Direct Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary (Standalone) Profit and loss statement Crore (Year-end March) FY17 FY18 FY19E FY2E Net Sales Other Operating Income Total Operating Income Growth (%) Raw Material Expenses 1, , , ,344.9 Employee Expenses Selling Expense Other Operating Expense Total Operating Expenditure 1, ,16.9 2, ,2.3 EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional Item.... Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY17 FY18 FY19E FY2E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Interest & Dividend paid Inc/(dec) in Share Cap.... Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY17 FY18 FY19E FY2E Liabilities Equity Capital Reserve and Surplus 1,91.5 1, , ,877.6 Total Shareholders funds 1,126. 1, , ,912.1 Total Debt Deferred Tax Liability Minority Interest / Others.... Total Liabilities 2,87.9 2, ,567. 2,859.3 Assets Gross Block 1,59.7 1, , ,8.3 Less: Acc Depreciation Net Block 1, , ,78.4 1,685. Capital WIP Total Fixed Assets 1, , , ,985. Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets ,56. 1,2.6 1,32.7 Current Liabilities Provisions Current Liabilities & Prov Net Current Assets Others Assets Application of Funds 2,87.9 2, ,567. 2,859.3 Key ratios (Year-end March) FY17 FY18 FY19E FY2E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share (Incl Invst) Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE* RoCE* RoIC* Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio * Return ratios adjusted for revaluation reserve amounting to ~ 5 crore ICICI Securities Ltd Retail Equity Research Page 7

8 RATING RATIONALE ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 8

9 ANALYST CERTIFICATION We /I, Chirag Shah PGDBM; Shashank Kanodia CFA MBA (Capital Markets), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. 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