4 Recommendation BUY Snail Pace Recovery CMP (06/02/2013) Rs. 85 Target Price Rs. 110 Sector Stock Details Carbon Black BSE Code 506590 NSE Code Bloomberg Code PHILIPCARB PHCB IN Market Cap (Rs crs) 293 Free Float (%) 47.74% 52- wk Hi/Lo (Rs) 121.95/83 Avg. volume BSE (Quarterly) 11738 Face Value (Rs) 10 Dividend (FY12) 40% Shares o/s (Crs) 3.4 Relative Performance 1Mth 3Mth 1Yr PCB -9.1% -13.3% -12.1% Sensex -0.6% 4.8% 11.0% 120 110 100 90 80 Shareholding Pattern 31 st Dec 12 Promoters Holding 52.26% Institutional (Incl. FII) 16.40% Corporate Bodies 11.79% Public & others 19.55% Silky Jain- Research Analyst 022-3926 8178 silky.jain@nirmalbang.com Year Net Sales (Rs crs) Growth (%) EBITDA (Rs crs) Phillips Carbon Black (PCB) results were better than expectation as the company reported profit of Rs 0.76 cr against expectation of loss. The company reported decline in volume by 5.2% YoY and 8.0% QoQ resulting from significant decline in export volume. Exports declined due to slowdown in Europe and very low export prices of China in South East Asian market. Despite witnessing a decline in volumes, revenue from carbon black reported a growth of 6.4% YoY primarily due to higher realizations. Revenue from the power division increased 10.7% YoY and 1.1% QoQ as the tariffs were more or less flattish. The overall slowdown in the auto segment has resulted in many tyre companies to resort to production cuts thereby impacting performance of the company. We believe that the prolonged slowdown in the auto industry has impacted the overall performance; however any revival from here on will lead to a recovery. Going forward, in Q4FY13E Management aims to maintain the current sales volume. Margins are expected to remain under pressure for Q4FY13 considering the lower capacity utilization and increase in crude prices from Q3FY13 levels. We believe that FY13E on a whole will remain a subdued year and positive development will happen only in FY14E due to lag effect. Although the company s near term outlook does not look encouraging, we believe that the current valuations largely factors all the concerns. With safeguard duty imposition and compelling valuations, the risk reward ratio turns favorable for PCB. We believe that the downside risk from these levels stands limited and any revival in the overall auto scenario from hereon can lead to a significant improvement in the performance. The current market cap of the company is only Rs 293 cr against Sales of Rs 2,500 cr on an annual basis. We have pruned our FY13E estimates to incorporate the 9MFY13 results and now expect the company to end FY13E at a loss on net level. However, we expect an improvement in FY14E over FY13E and expect the company to report sales growth of 13.1% and EBITDA margin of 9.5% and PAT margin of 3.5%. At CMP, the stock is trading at P/E of 3.22x on FY14E earnings whereas on P/BV it is trading at 0.45x on FY14E. PCB is trading at EV/EBITDA of 7.64x FY13E and 3.86x FY14E. We expect PCB to report RoE of 13.9% in FY14E. We continue to maintain our BUY rating on the stock with a target price of Rs 110 indicating an upside of 29.1% from current levels. PCB reported net sales of Rs 544.2 cr up by 5.8% YoY & down by 6.5% QoQ. RM as % of sales increased to 81.8% in Q3FY13 as compared to 77.5% in Q3FY12. However, on QoQ basis the raw material cost witnessed a significant respite and declined from 87.6% to 81.8%. Decline in raw material cost coupled with control over employee and selling cost led to an improvement in EBITDA on sequential basis. Margin (%) PAT (Rs crs) Margin (%) EPS (Rs.) P/E (x) EV/Sales EV/ EBITDA FY11 1,690 37.3% 218 12.9% 109 6.4% 32.7 2.60 0.42 3.29 FY12 2,181 29.0% 234 10.7% 87 4.0% 25.3 3.36 0.45 4.23 FY13E 2,265 3.9% 128 5.7% -17-0.8% -5.0 N/A 0.43 7.64 FY14E 2,562 13.1% 243 9.5% 91 3.5% 26.4 3.22 0.37 3.86 1 P a g e
Q3FY13 Result analysis Particulars Q3FY13 Q3FY12 YoY Q2FY13 QoQ Net sales 544.2 514.3 5.8% 582.1 (6.5%) Other operating income 1.3 0.6 131.6% 1.0 26.9% Total income 545.5 514.9 5.9% 583.1 (6.5%) RM cost 446.3 399.0 11.9% 510.6 (12.6%) RM cost % of sales 81.8% 77.5% 87.6% Employee cost 14.1 13.3 6.4% 18.7 (24.2%) Selling and admin cost 14.8 12.2 21.0% 17.4 (14.9%) Other exp 39.4 36.6 7.6% 36.7 7.2% Total expenditure 514.6 461.1 11.6% 583.3 (11.8%) EBITDA 30.8 53.8 (42.7%) (0.2) N/A EBITDA margin 5.7% 10.5% 0.0% Other income 2.2 1.4 57.4% 2.2 2.8% Interest 17.4 18.5 (5.9%) 18.2 (4.3%) Depreciation 13.8 12.0 15.3% 12.9 6.7% Loss on forex transactions (16.3) (4.7) N/A (6.0) N/A PBT (14.5) 20.1 N/A (35.2) N/A Tax (15.2) 0.4 N/A (2.3) N/A Tax rate N/A 2.1% N/A PAT 0.8 19.6 (96.1%) (32.9) N/A PAT margin 0.1% 3.8% -5.6% EPS 0.2 5.7 (96.1%) (9.5) N/A In Q3FY13, PCB reported net sales of Rs 544.2 cr, up by 5.8% YoY & down by 6.5% QoQ. There is a steep drop in export volume due to slowdown in Europe and very low export prices of China in South East Asian market which made exports to S.E Asia market economically not viable. Most of the tyre companies have resorted to production cuts which have also impacted the sales of the company. RM as % of sales increased to 81.8% in Q3FY13 as compared to 77.5% in Q3FY12. However, on QoQ basis the raw material cost witnessed a significant respite and declined from 87.6% to 81.8%. The increase in RM cost on YoY basis is on account of inability to pass on high raw material prices due to lower off-take in the domestic market and higher imports of carbon black from China and other countries. EBITDA declined from Rs 53.8 cr in Q3FY12 to 30.8 cr reflecting a decline of 42.7%. In Q2FY13 the company had reported negative EBITDA of Rs 0.2 cr. Decline in raw material cost coupled with control over employee and selling cost led to an improvement in EBITDA on sequential basis. The company reported forex loss of Rs 16.3 cr in Q3FY13 as compared to loss of Rs 4.7 cr in Q3FY12 and Rs 6 cr in Q2FY13. The company returned back to profitability with the help of reversal in tax and reported a profit of Rs 0.8 cr vs loss of Rs 35.2 cr in the last quarter. However, on YoY basis the company reported 96.1% decline in profitability. The 50,000 MT Carbon Black expansion at Cochin plant is expected to be completed by Q4FY13. This suggests that Management is optimistic about demand in FY14E and thus is planning for capacity expansion. 2 P a g e
Segmental Performance Revenue from carbon black (CB) segment having ~96% revenue contribution stood at Rs 525.2 cr whereas revenue from power segment contributing ~4% to total revenue stood at Rs 32.6 cr. EBIT margin in CB segment stood at negative 2.4% vs 6.1% in Q3FY12 and negative EBIT of 4.5% in Q2FY13. EBIT margin in power business stood at 72.4% (an improvement both QoQ and YoY) vs 68.7% in Q3FY12 and 69.6% in Q2FY13. Segmental performance Q3FY13 Q3FY12 YoY Q2FY13 QoQ Revenue from Carbon Black 525.2 493.7 6.4% 560.2 (6.2%) Revenue from Power 32.6 29.5 10.7% 32.3 1.1% Less: Intersegmental Revenue 12.3 8.3 48.9% 9.4 31.7% Net sales from operations 545 515 5.9% 583 (6.5%) EBIT Carbon Black (12.8) 30.2 N/A (25.2) N/A Margin (2.4%) 6.1% (4.5%) Power 23.6 20.2 16.8% 22.5 5.2% Margin 72.4% 68.7% 69.6% Total 10.8 50.4 (78.5%) (2.8) N/A Margin 2.0% 9.8% (0.5%) PBT (14.5) 20.1 N/A (35.2) N/A Carbon Black segment net realizations were at Rs 77,174/MT in Q3FY13, up by 12.2% YoY & 1.9% QoQ. Volumes in the quarter declined by 8.0% YoY & 5.2% QoQ to 68,054 MT. Out of this, exports were at 18,727 MT, down by 15.4% YoY & 14.2% QoQ. Net realizations in power segment stood at Rs 2.92/unit vs Rs 3.03/unit in Q3FY12. The company has not been able to capitalize completely on its power business as the increasing dumping from China had led to production cut in the company s carbon black business which also impacted the company s power business marginally. Going forward, however, we believe that the company will be able to witness an improvement in the power revenues and will be able to reduce the risk of cyclicality of carbon black business Particulars Q3FY13 Q3FY12 YoY Q2FY13 QoQ Carbon Black Volumes (MT) 68,054 71,761 (5.2%) 73,954 (8.0%) Domestic (MT) 49,327 49,628 (0.6%) 52,140 (5.4%) Export (MT) 18,727 22,133 (15.4%) 21,814 (14.2%) Carbon Black Realization 77,174 68,803 12.2% 75,750 1.9% Power volumes 66 67.1-2.1% 73 (9.4%) Power realization 2.92 3.03 (3.6%) 2.90 0.7% 3 P a g e
Valuation and Recommendation Phillips Carbon Black (PCB) results were better than expectation as the company reported profit of Rs 0.76 cr against expectation of loss. The company reported decline in volume by 5.2% YoY and 8.0% QoQ resulting from significant decline in export volume. Exports declined due to slowdown in Europe and very low export prices of China in South East Asian market. Despite witnessing a decline in volumes, revenue from carbon black reported a growth of 6.4% YoY primarily due to higher realizations. Revenue from the power division increased 10.7% YoY and 1.1% QoQ as the tariffs were more or less flattish. The overall slowdown in the auto segment has resulted in many tyre companies to resort to production cuts thereby impacting performance of the company. We believe that the prolonged slowdown in the auto industry has impacted the overall performance; however any revival from here on will lead to a recovery. Going forward, in Q4FY13E Management aims to maintain the current sales volume. Margins are expected to remain under pressure for Q4FY13 considering the lower capacity utilization and increase in crude prices from Q3FY13 levels. We believe that FY13E on a whole will remain a subdued year and positive development will happen only in FY14E due to lag effect. Although the company s near term outlook does not look encouraging, we believe that the current valuations largely factors all the concerns. With safeguard duty imposition and compelling valuations, the risk reward ratio turns favorable for PCB. We believe that the downside risk from these levels stands limited and any revival in the overall auto scenario from hereon can lead to a significant improvement in the performance. The current market cap of the company is only Rs 293 cr against Sales of Rs 2,500 cr on an annual basis. We have pruned our FY13E estimates to incorporate the 9MFY13 results and now expect the company to end FY13E at a loss on net level. However, we expect an improvement in FY14E over FY13E and expect the company to report sales growth of 13.1% and EBITDA margin of 9.5% and PAT margin of 3.5%. At CMP, the stock is trading at P/E of 3.22x on FY14E earnings whereas on P/BV it is trading at 0.45x on FY14E. PCB is trading at EV/EBITDA of 7.64x FY13E and 3.86x FY14E. We expect PCB to report RoE of 13.9% in FY14E. We continue to maintain our BUY rating on the stock with a target price of Rs 110 indicating an upside of 29.1% from current levels. 4 P a g e
Financials Profitability (Rs. In Cr) FY11A FY12A FY13E FY14E Balance sheet (Rs. In Cr) FY11A FY12A FY13E FY14E Net Sales 1,690 2,181 2,265 2,562 Share Capital 33 34 34 34 Other op income 6 6 7 9 Reserves & Surplus 489 577 544 619 Total Income 1,696 2,187 2,273 2,571 Share Holder's Funds 522 612 578 653 Total Cost 1,478 1,953 2,144 2,328 Deferred Tax Liab 57 73 73 73 EBITDA 218 234 128 243 Long Term Loans 271 226 221 213 Dep 39 49 55 63 Short Term Loans 230 485 480 455 Op Income 180 185 73 180 Other Long Term Liab 4 4 6 6 Interest 44 68 74 77 Total Liabilities 1,085 1,400 1,359 1,400 Other Income 7 10 12 18 Net Fixed Assets 758 812 819 836 Extraordinary 13-25 -34 0 Total Investments 58 72 72 72 PBT 157 103-23 121 Current Assets 814 1,086 1,142 1,197 Tax 48 16-6 30 Sundry Debtors 363 547 573 606 PAT (reported) 109 87-17 91 Cash & Bank 66 15 13 23 Adj PAT 109 87-17 91 Loans & Advances & Others 130 164 170 180 Shares o/s ( No. in Cr.) 3.3 3.4 3.4 3.4 Inventories 255 360 386 388 EPS 33 25-5 26 Current Liabilities & Provision 638 691 797 831 Adj EPS 33 25-5 26 Net Current Assets 177 395 345 366 Adj Cash EPS 44 39 11 45 Other Long Term 93 121 122 126 Quarterly (Rs. In Cr) Mar.12 June.12 Sept.12 Dec.12 Total Assets 1,085 1,400 1,359 1,400 Net Sales 540 621 583 545 Cash Flow (Rs. In Cr) FY11A FY12A FY13E FY14E EBITDA 47 48-0.2 30.8 Operating income 218 234 128 243 Dep 13 11 13 14 Change in WC (21) (278) 50 (15) Op Income 34 36-13 17 Taxes paid (24) (20) 6 (30) Interest 21 19 18 17 Other Adjustment 14 (27) (34) 0 Other Inc. 7 3 2 2 CF from Operation 187 (91) 150 198 Forex gain/loss -13-12 -6-16 Capex (155) (94) (62) (80) PBT 6 8-35 -14 Investment (incl interest) 6 6 12 18 Tax 1 2-2 -15 Total Investment (148) (88) (50) (62) PAT 5 7-33 1 Dividend Paid (19) (19) (16) (16) Performance Ratio FY11A FY12A FY13E FY14E Share Capital 12 2 0 0 Sales growth (%) 37.3% 29.0% 3.9% 13.1% Premium/Reserves 97 18 0 0 EBITDA margin (%) 12.9% 10.7% 5.7% 9.5% Borrowing (52) 187 (10) (33) Adj.PAT margin (%) 6.4% 4.0% -0.8% 3.5% Interest (44) (60) (74) (77) ROE (%) 20.8% 14.2% -3.0% 13.9% Total Financing (6) 129 (100) (126) ROCE (%) 17.5% 14.0% 5.7% 13.6% Net Chg. in Cash 32 (50) (0) 10 Valuation Ratio FY11A FY12A FY13E FY14E Cash at beginning 34 65 13 13 Price Earnings (x) 2.60 3.36 N/A 3.22 Cash at end 66 15 13 23 Price / Book Value (x) 0.54 0.48 0.51 0.45 Per Share Data FY11A FY12A FY13E FY14E EV / Sales 0.42 0.45 0.43 0.37 Reported EPS 32.69 25.28-4.98 26.41 EV / EBIDTA 3.29 4.23 7.64 3.86 Adjusted EPS 32.69 25.28-4.98 26.41 EV / Total Assets 0.66 0.71 0.72 0.67 BV per share 157.2 177.5 167.8 189.5 Dividend Yield 5.9% 4.7% 4.7% 4.7% Dividend per share 5.0 4.0 4.0 4.0 Per tonne analysis FY11A FY12A FY13E FY14E Turnover Ratios FY11A FY12A FY13E FY14E Sales per tonne 54,947 69,566 70,877 74,937 Debtor Days 78 91 92 86 Cost per tonne 47,881 62,123 66,873 67,856 Inventory Days 72 77 75 70 EBITDA per tonne 7,067 7,443 4,005 7,082 Creditor Days 158 130 132 128 5 P a g e
NOTES Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research 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, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. 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-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 6 P a g e