December 06,2010 Phillips Carbon Black Ltd On a ambitious growth plan. CMP Rs. 180 Target Rs 254 Buy Key Share Data Face Value (Rs.) 10.00 Equity Capital (Rs. Crs) 33.22 Market. Capitalization (Rs. Crs) 597 52-wk High / Low (Rs.) 242/134 Average Yearly Volume 57057 BSE code 506590 NSE code PHILIIPCARB Reuters code PHIL.BO Bloomberg code PHCB IN Shareholding Pattern 30 th September, 2010 Financials (Rs. Crs) FY09 FY10 FY11E FY12E Net Sales 1200 1344 1407 1783 Sales Gr 4% 15% 14% 27% Operating Profit 9 204 224 332 PAT -65 123 106 179 PAT Gr -178% 289% -14% 69% EPS (Rs.) 0 43 32 52 Key Financial Ratios FY09 FY10 FY11E FY12E P/E 0.00 4.51 5.62 3.46 P/BV 0.42 1.69 1.11 0.86 MCap/Sales 0.08 0.41 0.42 0.33 EV/EBIDTA 56.76 5.25 4.78 3.22 ROCE -1.81% 22.73% 18.00% 28.00% RONW -28.13% 45.22% 20.00% 24.00% OPM(%) 0.84% 16.57% 15.95% 18.63% NPM (%) 0.00% 9.90% 7.53% 10.03% Debt-Equity 1.55 1.81 0.96 0.63 Performance comparison PCBL Vs BSE MidlCap Analyst: Pinaki Banerjee Tel No.: +91 33 4007 7416; Mobile: +919674040602 Email: pinaki.banerjee@skpmoneywise.com Company profile:- Philips Carbon Black (PCBL), a member of RP Goenka Group was incorporated on March 30, 1960 and is a leading manufacturer of various grades of carbon black in India. Columbian Chemical Corporation, US, a leading international producer of rubber blacks is the Technical Collaborator of the company. Investment Rationale Largest Carbon Black company in India and eighth in the world. The company is the largest carbon black producer in the country with a production capacity of 360,000 MT at present which is expected to go upto 410,000 by end of FY11. Along with that, it has also got co-generation power plants which, after meeting their own requirements are sold to the grid. Apollo, MRF, CEAT, Bridgestone, JK etc are some of the renowned clients of the company who have now embarked on a massive expansion plan. Connected to the automobile growth story The Indian automobile industry has been on a strong growth path since last year, and is expected to continue its growth momentum in future. The growth in the automobile industry shall drive up the demand for tyres also which in turn will drive the growth of the company. Revenues from power also to add significantly to the topline. The company is also increasing its power generation capacity from 60.5MW at present to 76 MW by Sep 2012. The revenues from power which stood at 4% of the topline in FY10 is expected to go upto 7%-8% in the next two years time. Since the company sources its own power from the plants, the power cost is significantly low, thereby easing the operating margins to a significant extent. Foray into Vietnam to be another feather in the cap The company has embarked upon ambitious expansion plans in India and abroad. It is setting up two plants in Vietnam with a capacity of about 100,000 MT in 80:20 joint venture with some local companies. The first phase of about 60,000 MT is expected to become operational by Sep 2012. Outlook & Recommendation We have valued the company by applying the Discounted Cash Flow Method and have arrived a fair value of Rs 254 implying an upside of 40% from current levels to be reached in 15 months time. While calculating, we taken a WACC of 12.45% from FY11E to FY15E and a terminal growth rate of 2% thereafter and hence initiate a BUY recommendation. SKP Securities Ltd www.skpmoneywise.com Page 1 of 14
Global Industry Overview:- Carbon Black is well recognized to be the best reinforcing material in rubber compounds. The tyre industry consumes about 80% of the total carbon black production around the world. As per estimates about nine million metric tons of Carbon Black are manufactured annually worldwide. Key Points:- Global demand expected to rise by about 4.30% through 2013 Source:- SKP Research Special Blacks expected to be a key item in the future A healthy global rubber market is expected to help raise the demand for world carbon black by 4.30% every year to 2013 to about 11.60 million metric tons. Majority of carbon black find use as a reinforcement material in vulcanized rubber goods, including over 60% in motor vehicles tyres alone. It is estimated that the demand for carbon black from the tyre industry is expected to increase from 3.70% every year to 6.90 million metric tons through 2013. The non tyre carbon black market is estimated to increase by 4.80% every year to 3.60 million metric tons to 2013. The market for special blacks is expected to grow by 5.90% every year to 1.20 million metric tons which at present they constitute about 10% of the overall global carbon black market on a tonnage basis. This segment, apart from offering higher margins provides the suppliers with a shield against the cyclic nature of the tyre and motor vehicles industries. Apart from the regular users like plastics, inks and paint industry, other users as conductive fillers are expected to hold out good growth prospects till 2013 and thereafter. Asia/Pacific region to be the key players ] Source:- SKP Research SKP Securities Ltd www.skpmoneywise.com Page 2 of 14
This region, with the exclusion of Japan is expected to be the key player upto 2013. This is due to the fact that the markets of China and India look lucrative due to the rapid expansion in their respective motor vehicles and tyre industries on the back of a robust economic growth. Both these countries combined together posted the largest increase in carbon black capacity from 2003 to 2008 and is expected to keep up the same momentum till 2013. The growth in US, Japan and other European nations is expected to remain muted during this time period on a weaker economic recovery, post 2008 crisis. The situation in US presents a grim picture where capacity utilization fell below 70% resulting in a number of carbon black plants being shutdown. In 1998, North America and Western Europe combined together produced 48% of the world s carbon black and is expected to account for only 23% of it by 2013. On the other hand the Asia/Pacific region which produced 36% of the world s carbon black in 1998, stands to account for about 57% of the world production in 2013. Scenario in India About 65% of the carbon black manufactured in the country are consumed by the tyre industry, 15% by the rubber industry and the rest 20% are utilized by ink, plastics and paint manufacturing industries Demand to be led by the growth in the tyre industry Source:-Company Majority of the major tyre manufactures have embarked on a massive investment drive to ramp up production to meet the demand of the ever growing automobile industry. 40% of the tyre demand are led by the OEM segment and 60% in the Replacement segment. Apart from OEM, the replacement demand for tyres are also showing signs of momentum. A replacement cycle for passenger cars is normally 3-4 years while that of commercial vehicles is of 1-2 years. The industry produced about 97 million tyres in various segments in FY10 compared to 82 million tyres produced in FY09. SKP Securities Ltd www.skpmoneywise.com Page 3 of 14
India emerging to be a major hub for automobile manufacturers Major international car makers as Hyundai, Toyota, Nissan have set up shops in the country to ride the ever increasing auto demand in the country in the passenger cars segment. Apart from this, a rise in industrial activity, strong rural demand and availability of credit at attractive rates will drive up the demand for commercial vehicles also. Other segments also hold out a good promise As mentioned before, apart from the tyre industry, ink, plastics and the paint manufacturing industry also hold out a good promise for growth in the future. Ink- The Indian Printing Ink Industry is currently valued at about Rs 1800 crore- Rs 2000 crore with an average growth rate of about 12%-15% annually. In terms of tonnage of ink manufactured in India, it is estimated to be about 110 million tons annually. Plastics- The historical growth of the Indian plastic industry has been quite impressive at about 12%-14% annually. The consumption level which at present is about 8 million tons is expected to reach a projected level of 12 million tons by 2012. Paints- The phenomenal growth of the housing sector in India, rapid urbanization along with the availability of easy to secure housing loans have been the prime drivers of the decorative paints industry which comprises about 70% of $2 billion paint industry in India. Industrial paints add up to 30% of the revenues of the industry. The size of the Indian Paint Industry is about 940 million liters. The organized sector comprises about 54% of the total volume and 65% of the value. In the last 10 years, the industry has shown a CAGR growth of about 10%-12% annually. Rubber- The production of rubber in the country varies between 7-8 Lakh tons annually amounting to about Rs 4000 crore. It is estimated that about 6000 rubber manufacturing units are present comprising of large, medium and small scale industry. The industry contributes about Rs 50 billion to the National Exchequer in the form of various taxes. The per capital consumption of rubber in the country is only about 800 grams compared to 12 to 14 kilos in Japan, USA and Europe. Thus, the country is still far from attaining saturation levels and hence provides the industry with tremendous growth prospects in the times of come. Company Overview:- Philips Carbon Black (PCBL), a member of RP Goenka Group was incorporated on March 30, 1960 and is a leading manufacturer of various grades of carbon black in India. Columbian Chemical Corporation, US, a leading international producer of rubber blacks is the Technical Collaborator of the company. SKP Securities Ltd www.skpmoneywise.com Page 4 of 14
Year Milestones 1960 Incorporated in Kolkata 1962 Production begins with its collaborator Phillips Petroleum Company, USA 1978 Collaboration with Phillips Petroleum Company, USA ends 1988 Signs Technical agreement with Columbian Chemicals Company, USA 2003 Sets up a 12MW co-generation power plant in Baroda 2005 Sets up a 12MW CPP in Palej 2007 Signs MOU for setting up a plant in Vietnam 2008 Sets up a 30 MW CPP in Durgapur 2009 90000 MT facility in Mundra commences production taking total capacity to 360000 MT 2009 Sets up a 16MW CPP in Mundra 2010 Has plans to add another 50000MT in Mundra Source:-Company Largest producer of carbon black in India and ninth in the world Rank Name Origin Country Capacity(MT) 1 Cabot USA 2010000 2 Evonik Germany 1450000 3 Columbian USA 1130000 4 Birla India 790000 5 CSRC Taiwan 740000 6 Sid Rich USA 450000 7 Tokai Japan 370000 8 PCBL India 360000 9 Omsk Russia 350000 10 Black Cat China 290000 Source:- SKP Research SKP Securities Ltd www.skpmoneywise.com Page 5 of 14
Clientele:- Renowned clients of the company include some of the world s renowned as well as the leading domestic tyre manufacturers of the country. These are Apollo, MRF, CEAT, Bridgestone, JK etc. Revenue:- At present about 96% of the total revenues accrue from sale of carbon black while the rest is come sale of surplus power to the grid. Of the total revenues 85% comes through domestic sales while 15% is through exports. Last 5 Years Revenues 1500 1123 1165 1200 1344 In Rs Cr 1000 500 825 0 FY06 FY07 FY08 FY09 FY10 Financial Years Projects Under Implementation Growth In power revenues The company took full advantage of the Electricity Act of 2003 and began to generate power through the waste gases produced from the production of carbon black. After meeting its internal requirements, the surplus power is sold to the grid. Power revenues of the company have grown at a CAGR of 85% through FY06-10 since the commissioning of its power plants In Mn 600 500 400 300 200 100 0 Growth in Power Revenues 545 149 155 106 46 FY06 FY07 FY08 FY09 FY10 Financial Years SKP Securities Ltd www.skpmoneywise.com Page 6 of 14
Vietnam Joint Venture:- The company has began work on its Vietnam project in a JV with 3 local companies where it would be having 80% share. The project is to be funded through a debt equity ratio of 2:1. The total cost of the project is estimated to be about Rs 450 Cr. Particulars Phase-I Phase-II Carbon Black(MT) 60000 55000 CPP(MW) 12 6 Investment($Mn) 63 21 Commissioning 2012 2013 Revenue at 90% capacity utilization($mn) 60 53 Investment Rationale Growth in the tyre segment to be the main growth driver In '000 2500 2000 1500 1000 500 0 1264 363 1473 Automobile Production 1713 Source:- SKP Research Strategic locations of all its plants 1846 Commercial Vehicles 2166 547 540 486 466 2005 2006 2007 2008 2009 Years Passenger Cars The auto industry in India is one of the largest in the world. It produces about 11 million 2 and 4 wheeled vehicles and exports about 1.50 million vehicles every year. By 2050 the country is expected to top the world in car volumes with approximately 611 million vehicles on the roads. This in turn is expected to drive the tyre industry forward thus paving the way for the company to grow at a CAGR growth of about 10%-12% anually. Since the company holds a dominant position in the carbon black market, it is expected to gain significantly with the growth in the automobile segment and subsequently an increase in the demand for tyres. The company s 4 plants are strategically located to cater to the tyre demands of the respective regions, thereby reducing the cost of freight. It is also on the look out to buy further land to set up a new carbon black facility in southern India to cater to the upcoming auto hub. The company is in talks with the governments of Tamil Nadu and Andhra Pradesh for this and the deal is expected to be finalized soon. Plant Tyre Companies Kochi Apollo,JK,Michelin,MRF Palej Bridgestone Mundra Ceat SKP Securities Ltd www.skpmoneywise.com Page 7 of 14
Vietnam venture to enhance the fortunes of the company The country is known to be the fourth largest producer of rubber but unfortunately does not have a single carbon black facility. All the demands are met through imports. It is estimated that the current demand for carbon black, which at present stands around 60,000 MT is expected to reach at least 100,000 MT in two years time. Apart from the expansion of local tyre companies many foreign players are also looking to set up shop there. The company presently has a 40% market share in Vietnam. Exports to be stronger in the times to come Source:- SKP Research Currently the exports constitute about 16%-17% of the top line growth. Now with the various capacity expansions in place and the foray into Vietnam the exports are likely to go up to 20%-22% of the total sales of the company. Power segment to increase revenues and improve margins At present about 5% of the revenues accrue from the sale of power. With the increase in the power generation capacity from 60.5 MW to 76 MW by Sep 2011, the share of revenues from power sale is expected to increase to 6%-7% over the next 2 years. At present about 15%-20% of the power produced are used for their own captive consumption and about 35%-40% of it is sold to the grid. The cost incurred to generate power is about 70p/unit while it can be sold to the grid at about Rs2-3/unit. In the absence of raw material cost the power business has got EBIDTA margins of about 90%. Power Projects lead to carbon credits The Palej power plant of the company has been registered with UNCDM(Clean Development Mechanism) board and have subsequently sold the same and added to the topline. The company plans to register other power plants too with UNCDM, but the process is a lengthy one and can take at least a couple of years. However, the Palej power plant is expected to generate carbon credits till FY15. Backward integration in the form of Coal Tar Distillation Carbon Black Feed stock is the main raw materials used by the company at present which has to be imported. The price of these is directly linked to the international crude oil prices. An increase in those can put some severe pressure on the operating margins of the company. To mitigate the risk the company plans to start using coal tar in future as its raw material. Coal Tar is a by product generated through the processing of coal into coke for use in steel manufacturing. The process of putting the plans into action has started and this can take effect in another 2-3 years. The company plans to go into long term contracts with domestic steel manufacturers in this regard. SKP Securities Ltd www.skpmoneywise.com Page 8 of 14
Financial Performance FY11 and FY12 to post strong top line growth, SKP Research With the automobile sector showing a strong growth on a YoY basis and the subsequent increase in the demand for tyres we expect the company to post a healthy top line till FY12. Though the increase in the raw material prices is going to put pressure on the margins, yet we believe that the company can be in a position to increase the price of its product, given the fact that it is the number one player in the Indian market and having its customer base among the renowned tyre makers. The increase in revenues from the power business too shall be aiding the growth in the top line. FY 08-09 was a tough year for the company. A volatility in the price of crude oil lead to an increase in the price of its main raw material that is Carbon Black Feed Stock(CBFS) and its average cost per MT was about Rs 24000(At present about Rs19500). To offset the increase the company increased the prices of its product to about Rs 56000 per MT.(At present around Rs 51000) Bottom line to come under pressure in FY11 before posting a growth again in FY12. With the prices of the raw material CBFS increasing, the bottom line is expected to report a de growth for the current financial year before moving up again in FY12. The main raw material of the company is Carbon Black Feed stock(cbfs), which is imported from the USA on a quarterly contract basis and its cost is linked to the price of international crude oil prices, at present which is hovering around the $80 a barrel mark. With the commissioning of its Mundra plant and improvement in capacity utilization, the company shall post a better performance in FY12., SKP Research Improvement in capacity utilization With the timely commissioning of its carbon black projects under execution, and with a production to dispatch ratio of more than 99% all through the last 5-6 financial years, the capacity utilization is expected to improve from the current level of an average of 72%-75% to about 85% by the end of FY12. SKP Securities Ltd www.skpmoneywise.com Page 9 of 14
Amt in MT 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 Increase in capacity utlization Capacity Production 410000 410000 360000 348500 270000 258000 295200 212150 FY09 FY10 FY11E FY12E Financial Years, SKP Research Increase in realization price Sales In MT in '000' 400 350 300 250 200 150 100 50 0 Sales Quantity and Realization Price 56 326 345 256 215 51 50.5 50.5 FY09 FY10 FY11E FY12E Sales Realization 57 56 55 54 53 52 51 50 49 48 47 Realization Price MT in '000' The company is expected to increase its realization price gradually over the next few years with increase in sales quantity. With the price of the raw material and other manufacturing expenses expected to increase over a period of time, the company will be bound to increase the realization price to offset the increase in manufacturing costs. Financial Years, SKP Research Operating margins expected to increase Amt In Rs Cr 350 300 250 200 150 100 50 Operating Profit Operating Profit OPM(%) 20 15 10 5 In % With the increase in the realization price along with an increase in the sales volume, the operating margins are expected to show an increase from the current levels of about 16% in FY11 to about 18% in FY12. An increase in contribution from power sales too shall aid the growth as it has got higher margins. 0 0, SKP Research SKP Securities Ltd www.skpmoneywise.com Page 10 of 14
ROCE and RONW to show a decrease in FY11 Due to the ongoing capacity expansion plans the RONW and ROCE shall decline in FY11, after which they are expected to stabilize in FY12., SKP Research Risks and Concerns Highly dependent on the performance of the tyre industry The company derives its maximum revenues from the tyre industry which in turn is dependent on the fortunes of the auto sector. Any adverse happening in the auto industry is going to have a negative effect on the company. It had faced a similar situation in FY09 due to the effect of the global financial crisis. Volatility in the prices of its raw materials Carbon Black Feed Stock(CBFS), the main raw material of the company is imported from the USA and is dependent on the prices of international oil prices. An increase in that is going to put pressure on the margins of the company. To mitigate this risk, the company has initiated the process of replacing CBFS with coal tar pitch which is a byproduct from the steel manufacturing process. It has already started discussions with some major steel manufacturers in this regard. However, it shall take another 2 years time to actually put that into practice. Delay in project execution will increase cost and hamper earnings The company is at present executing a 50000MT carbon black facility in Mundra along with a 10MW power project and a 8MW power facility in Kochi. A delay in executing these projects could affect company s earnings. The Vietnam project also has not yet achieved financial closure. Any delay in that is also going to be prove detrimental to the company. Threat of cheap imports Though an anti dumping duty is in place, yet a threat of cheap imports always remain high which may prove detrimental to the interest of the company. SKP Securities Ltd www.skpmoneywise.com Page 11 of 14
Valuations and Outlook We have valued the company by applying the Discounted Cash Flow method by taking a WACC of 12.45% from FY11E to FY15E and a terminal growth rate of 2% thereafter and have arrived at a fair value price of Rs 254 implying a upside of 40% from current levels to be achieved in 15 months time. However, we have not factored in the Vietnam Project as of now, since it is in a preliminary stage and yet to achieve financial closure. PV of Projected Cash Flows 307 PV of Terminal Value 537 Fair Value 844 No of Shares Outstanding 3.32 Fair Value Per Share 254 We firmly believe that the company is going to reap the benefits of the automobile growth story as depicted in the YoY sales increases of all the auto majors which includes two wheelers, four wheelers and commercial vehicles. Being the No1 choice of all the major tyre manufacturers of the country as well as some renowned ones outside, it is going to put up a good performance in the times to come. This shall further be aided by the timely and successful commissioning of the projects under implementation. The Vietnam project is expected to be completed fully by the end of FY14 and this shall be the focal point of supplying its products to the South East Asian region thereby decreasing the shipping and transportation costs of the company which till now is being sent from India. The company is expected to sell all its surplus power after meeting all its own requirements which till now is just about 20%-25% of the total power generated. Volatility of raw materials mainly the CBFS remains a key concern of dragging the margins down. However, the company has already started to look at using coal tar pitch instead and is in talks with some major steel producers. Though things are still on paper, yet it is expected to start taking effect slowly after 2 years time. This shall reduce the company s dependency on CBFS gradually. FY13 to FY15 shall be the consolidation phase for the company. On the domestic side, it is expected to achieve 100% capacity utilization and the Vietnam project is also expected to become operational by then. New capacity expansions in the form of a new carbon black facility in South India along with diversification into carbon chemicals manufacturing are in the pipeline. SKP Securities Ltd www.skpmoneywise.com Page 12 of 14
Consolidated Financials in Rs. Crores Income Statement Particulars FY09 FY10 FY11E FY12E Net sales 1076 1233 1407 1783 Growth (%) 4% 15% 14% 27% Other Income 14 24 28 45 Stock Adjustments 10 15 17 255 Total Income 1100 1272 1452 1849 Raw Material Consumed 940 884 1016 1231 Power and Fuel Cost 6 14 15 18 Employee Cost 33 35 40 50 Other Mfg Expenses 38 49 56 78 Selling and Admn Expenses 43 50 58 79 Misc Expenses 32 36 42 62 Total Expenditure 1091 1068 1228 1517 Operating Profit 9 204 224 332 OPM(%) 0.84% 16.57% 15.95% 18.63% Interest 87 43 45 50 Depreciation 20 31 38 44 PBT -97 131 142 238 Tax 33 8 35 60 PAT -65 123 106 179 Growth in PAT -173% 289% -14% 69% EPS 0.00 43 32 52 NPM(%) 0.00 9.90% 7.53% 10.03% Dividend Per Sh. (Rs.) 0.00 5.00 5.00 5.00 Balance Sheet Particulars FY09 FY10 FY11E FY12E Equity Capital 28 28 33 35 Reserves 190 296 485 719 Share Warrants 0.00 0.00 0.12 0.00 Net worth 218 324 519 754 Secured Loan 413 496 447 405 Unsecured Loan 13 60 50 45 Total Liabilities 644 880 1016 1204 Net Fixed Assets 228 593 661 717 Capital WIP 383 92 112 135 Investments 38 38 46 40 Inventories 121 197 225 357 Accounts receivable 181 295 338 446 Cash & Bank 7 33 32 28 Loan & Advances 84 149 86 40 Current Assets 393 674 681 871 Current Liab. 395 448 457 517 Provisions 2 20 17 21 Total Curr. liab. & prov. 397 508 474 538 Net Current Assets -4 166 207 332 Net Deferred Tax -2-10 -10-20 Total Assets 644 880 1016 1204 Cash Flow Statement Particulars FY09 FY10 FY11E FY12E Profit before Tax -97 131 142 238 Add: Depreciation, Int. & Other Expenses 41 57 75 84 Net changes in WC, tax interest 169-139 -63-120 Cash flow from operating activities 113 49 153 202 Cash flow from investing activities -232-97 -133-117 Cash flow from financing activities 111 74-21 -89 Net Increase/Decrease in Cash & Cash Equivalents -8 26-1 -4 Opening Cash Balance 15 7 33 32 Closing Cash Balance 7 33 32 28 Key Ratios Particulars FY09 FY10 FY11E FY12E Valuation Ratios P/E 0.00 4.51 5.62 3.46 P/BV 0.42 1.69 1.11 0.86 EV/EBIDTA 56.76 5.25 4.78 3.22 Mkp/Sales 0.08 0.41 0.42 0.33 Earnings Ratios OPM 0.84% 16.57% 15.95% 18.63% NPM 0.00% 9.95% 7.55% 10.02% ROCE -1.81% 22.73% 18.00% 28.00% RONW -28.13% 45.22% 20.00% 24.00% Balance Sheet Ratios Current Ratio 0.97 0.93 1.43 1.62 Debt/Equity 1.55 1.81 0.96 0.63 Debtor days 67 69 81 79 Inventory Days 49 58 62 69 SKP Securities Ltd www.skpmoneywise.com Page 13 of 14
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