PHILLIPS CARBON BLACK LTD

PHILLIPS CARBON BLACK LTD

4 Recommendation BUY Worst is priced in!!! Multiple triggers for revival CMP (25/09/2012) Rs. 93 Target Price Rs. 138 Sector Stock Details Carbon Black BSE Code 506590 NSE Code Bloomberg Code PHILIPCARB PHCB IN Market Cap (Rs crs) 322 Free Float (%) 47.74% 52- wk Hi/Lo (Rs) 158/77 Avg. volume BSE (Quarterly) 34,702 Face Value (Rs) 10 Dividend (FY12) 40% Shares o/s (Crs) 3.4 Relative Performance 1Mth 3Mth 1Yr PCB -3.8% -2.5% -35.4% Sensex 5.6% 10.6% 16.3% Phillips Carbon Black (PCB) s profitability had been impacted in the recent past owing to various reasons like slowdown in auto industry, rising crude prices and significant increasing in dumping by China at lower prices. This has led to the decline in price of PCB stock and the valuation has come near to the bottom of the cycle. We believe that there are multiple trigger for the revival of business of PCB: Imposition of safeguard duty by government Improvement in auto/tyre industry scenario in India Improvement in auto/tyre industry scenario in China Decline in crude oil prices Any of the above mentioned points can change the fortune of PCB. Moreover, the continuous efforts being made by the company to expand its power business which is a high margin yielding business and focus on exports will also help the company to report better performance. The current prices reflect the ongoing challenges prevailing in the industry and we believe that the current valuations seem propelling for the company. At CMP, the stock is trading at P/E of 8.12x FY13E and 2.75x FY14E earnings whereas on P/BV it is trading at 0.5x and 0.44x FY13E and FY14E respectively. PCB is trading at EV/EBITDA of 5.4x FY13E and 3.43x FY14E which we believe are very attractive. We expect PCB to report RoE of 6.2% in FY13E before improving to 15.9% in FY14E. We assign an EV/EBITDA of 4.0x on our FY14E and arrive at a target price of Rs 138 indicating an upside of 48% from current levels. Shareholding Pattern 30 th June 12 Promoters Holding 52.26% Institutional (Incl. FII) 18.09% Corporate Bodies 12.22% Public & others 17.43% Silky Jain- Research Analyst 022-3926 8178 silky.jain@nirmalbang.com Sunil Jain HOR Retail 022-39268196 sunil.jain@nirmalbang.com Year Net Sales (Rs crs) Growth (%) EBITDA (Rs crs) Q2FY13 results expected to remain under pressure As the current scenario has not shown any signs of improvement, we believe that the company s Q2FY13 results will continue to remain under pressure. We feel that some signs of revival may be witnessed by the company from 2HFY13E onwards with revival in auto demand. For FY13E we expect the company to report a minimal 2.6% growth in sales and expect PAT to show a decline 54.7% YoY in FY13E before witnessing an improvement in FY14E. EBITDA margins to witness a decline in FY13E before improving in FY14E Resulting from an improvement in the company s carbon black business and increasing contribution from the company s power business, we believe that EBITDA margins are expected to improve going forward. However, considering the current environment where the crude prices are high and PCB not being able to pass on the higher cost to its customers, we believe that the margins will be under pressure for FY13E. Nevertheless we expect PCB to report an improvement in margins in FY14E. We expect EBITDA margins to be at 8.2% for FY13E and then improve to 10.7%. Margin (%) PAT (Rs crs) Margin (%) EPS (Rs.) P/E (x) EV/Sales FY11 1,690 37.3% 218 12.9% 109 6.4% 32.7 2.75 0.44 3.41 EV/ EBITD A FY12 2,181 29.0% 234 10.7% 87 4.0% 25.3 3.56 0.47 4.34 FY13E 2,238 2.6% 184 8.2% 39 1.8% 11.5 7.86 0.44 5.40 FY14E 2,512 12.3% 270 10.7% 117 4.6% 33.9 2.66 0.37 3.43 1 P a g e

Investment Rationale Valuations are at the trough (bottom) of the cycle: Similar case as in FY09 We believe PCB is currently trading near its historical lower valuation. Our belief is further strengthened by the following points: Price to book value at lower end 350.0 P/BV forward (10 years) 300.0 250.0 200.0 150.0 100.0 50.0 0.0 CMP 0.5x 0.8x 1.0x 1.2x 1.4x Replacement value higher than the enterprise value. The cost for the company is setting up a new plant is Rs 2 cr per 1000 tonne which means for a plant of capacity 50,000 tonne with a 8 MW power plant comes to ~Rs 150 cr. Ideally the enterprise value of the company comes to Rs 465 cr in FY12 whereas the cost of setting up a new plant comes to ~Rs 1300 cr which is much higher than the value of the company. We believe that the current mismatch is owing to the overall sentiment of the industry which has impacted the performance of the company as a whole. We believe that the company should command a higher value against the current value and this affirms our belief that PCB is attractively placed and will bounce back once the environment becomes favorable. 2 P a g e

Looking at the above arguments we believe that the overall industry and thereby PCB is bound to rise from the lower valuations with some improvement in the sentiments. Carbon black business: Some Revival expected in FY14E Current scenario - Lot of issues have impacted the performance Currently, the domestic carbon black industry is impacted due to (1) slowdown in the automobile industry both in India and China, (2) tyre industry witnessing demand pressure (3) Increasing dumping of carbon black by China (4) Increase in price of carbon black feed stock which is highly dependent on crude oil. As a result, domestic sales of carbon black were impacted and almost all carbon black companies faced the brunt of it by resorting to production cuts during the second half of the year with PCB being no exception. Trend in production 350,000 21.8% 300,000 18.4% 250,000 200,000 3.5% 150,000-3.6% 100,000 50,000-15.4% 0 FY09 FY10 FY11 FY12 Q1FY13 Production (MT) % change 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Slowdown in the automobile industry The auto industry had registered phenomenal growth with production of vehicles growing by more than ~25%, particularly in FY10 and FY11 driven by firm economic growth. However reflecting weaker economic scenario, auto sales has slowed down considerably since July 2011. As a result production increased at moderate pace of 14% in FY12 and expected to be further lower at ~10% in FY13E (according to SIAM). This has somewhat impacted the demand for tyres and thereby carbon black. 25 20 15 10 5 0 Trend in automobile production 27.5% 25.8% 13.9% 15.0% 13.3% -2.2% 2.9% 2006 2007 2008 2009 2010 2011 2012 Automobile production % change 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0%, ATMA 3 P a g e

Tyre industry witnessing demand pressure Resulting from the slowdown in the overall auto industry, tyre manufacturers saw significant decline in demand. Further increase in natural rubber prices forced tyre manufacturers to resort to cheaper source of carbon black. This resulted in increase in carbon black imports from China and decline in demand for carbon black from local players. Nonetheless, we expect demand for tyres to increase from replacement market in 2HFY13E and FY14E on the back of strong OEMs sales in FY10 and FY11. Almost 70% of the overall tyre industry is replacement market which is expected to drive the demand for tyre industry and in turn carbon black. 140 120 100 80 60 40 20 0 9.9% 11.4% Trend in tyre production 10.3% 1.2% 18.3% 21.6% 4.0% 2006 2007 2008 2009 2010 2011 2012 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Tyre production % change Increasing dumping of carbon black by China Carbon black feed stock- raw material for manufacturing of carbon black can be obtained via two sources: Through refineries linked to crude oil Through coal tar distillation - Coal tar is a by-product generated through the processing of coking coal into coke for use in iron and steel manufacturing. Coal tar is then distilled to derive a variety of intermediate chemical products. Creosote oil is used as feed stock by carbon black manufacturers - Coal tar pitch ( CTP ) c.52% Creosote oil c.30% Naphthalene c.8% Other oils c.8% Process loss 2% The decline in coking coal prices has led to decline in coal tar prices in China which in turn has resulted into lower cost of production and lower prices for carbon black in China. In India, carbon black is mainly manufactured from carbon black feedstock derived from oil refinery and increase in price of crude oil has resulted into increase in price of CBFS. 4 P a g e

800 700 600 500 400 300 200 100 0 421.5 277.8 China steel and coke production 625.7 567.1 488.5 499.1 327.6 322 347.9 384 684.3 426.2 417.9 260.6 CY06 CY07 CY08 CY09 CY10 CY11 CY12 (till July) Steel production Coke production In addition, the demand for carbon black in China was relatively sluggish in FY12, which when combined with continued capacity expansion activity in steel and coke, left the industry with significant excess supplies of coal tar and creosote oil. All these factors led China to dump the excess production of carbon black at lower prices than the domestic competitors. (Current price differential in landed cost 8-10%) The increasing dumping of carbon black by the Chinese producers at significant lower rates than the domestic prices impacted the capacity utilization of the domestic manufacturers of carbon black in FY12. According to Department of Chemicals and Petrochemicals (DGCIS) import data, the imports from China have increased phenomenally from 13,994 MT in 2008-09 to 70,193 MT in 2011-12 reflecting a CAGR growth of 71.2% over the period. Increase in price of CBFS which is highly dependent on crude oil 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. The crude prices increased significantly which increased the raw material cost of the company taking the total RM % of total sales to 75.8% in FY12 from 70.4% in FY10 and 73.1% in FY11 which also impacted the EBITDA margins of the company. EBITDA margins declined to 10.7% from 13.7% in FY10 and 12.9% in FY11. 160 Brent crude 140 120 100 80 60 40 Source: Bloomberg, Nirmal Bang Research 5 P a g e

Steps taken by the company to overcome the problems PCB along with the other industry player (like Hi Tech Carbon) have proposed for safeguard duty to protect the interest of the domestic players. The Director-General (Safeguards) has recommended imposition of specific safeguard duty on carbon black imports into the country. In the first year, the rate of safeguard duty should be 30% ad-valorem less antidumping duty payable, 25% for second year and 20% for third year has been recommended. Although, the final verdict is not yet out; Management is hopeful of some meaningful decision to come in order to protect the industry from the Chinese imports. However, some opposition on this decision is likely to happen from the tyre manufacturers as the duty will increase their cost of production in the form of higher carbon black prices and thus impact their margins. Nonetheless, we believe that at some point of time, the tyre manufacturers will shift base preference more towards domestic carbon black manufacturers as the carrying cost and the warehousing cost of importing carbon black will be higher than the price purchase from domestic players. Tyre companies have to import one shipment of carbon black which contains around 30,000 tonnes of carbon black. Journey forward: We believe that multiple triggers are at the helm for a revival in the overall industry and particularly PCB. However, we believe that the company may witness some pressure in its financial performance in FY13E before witnessing an improvement in FY14E. Nonetheless any of the below mentioned triggers can post a drastic improvement in the company s financial performance. Safeguard duty imposition can revive the profitability of the company very quickly Revival in the demand for auto in China and increase in the demand for tyres and carbon black can reduce dumping in India. Revival of auto demand in India can lead to higher demand for tyres by OEM (Original Equipment Manufacturers) and in turn lead to higher demand for Carbon Black. Increase in demand from replacement market for tyre industry can lead to higher demand for Carbon Black. Currently Brent crude prices are hovering around $115 mark. Any decline in the crude prices below $100 mark can make the company s product more competitive against Chinese product. Improvement in the overall global demand for carbon black Going forward, the overall global demand for carbon black continues to be robust with the global demand expected to grow at a CAGR of 4.6% from 2010 to 2015. Expansion plans of all tyre manufacturers in India as well as a few global majors are on track and are expected to be completed within FY13-FY14. Domestic demand for carbon black is expected to grow @ 7-8% during FY13. Demand for carbon black in overseas markets, particularly the US and Japan, have started picking up in the recent past, with China, India, and Central and Eastern Europe showing much higher demand, whereas demand in Europe may take a little longer to recover. (Source: Company Annual report) 6 P a g e

Other avenues to aid volume growth In addition we believe that other avenues of income (apart from the tyre industry carbon black is also used for ink, plastics and the paint industry) will also help the company to report good volume growth in the long run. Currently the company generates 95% of revenue from tyre industry and a mere 5% from other industries. Going forward, the company is targeting to increase its presence in other segments. For the same the company is making extensive research. Capacity Addition to drive growth The company is expanding it Brownfield capacity by 50,000 MTPA at Kochi which is expected to be completed by Q2FY13 taking the total capacity to 471,000 MT. Along with this, the 8 MW power plant at Mundra has been recently completed in Q1FY13. Going forward, the company is planning to set up a Greenfield plant in Chennai (Tamil Nadu) of 140,000 MT along with 25 MW power plant. The project is still at initial stages and the major capex is expected to be made in FY14E. Along with this the company is also planning for backward integration in the form of a carbo chemical plant in Orissa which is at a very initial stage and is expected to be completed by FY14. We believe that with new capacities coming on stream towards the end of FY14E, volumes are set to increase in the long run. Moreover, once the environment improves, the company will be able to derive benefit from the recent expansion which has been undertaken. Moreover, as the current scenario is not viable with a poor demand scenario, the company has kept its expansion plan of Tamil Nadu and Joint Venture In Vietnam under review till improvement is visible. We believe that the company has adopted a prudent decision considering the current scenario. Expansion plans of Customers to add to revenue Apollo, MRF, CEAT, Bridgestone, JK etc are some of the renowned clients of the company who have now embarked on a massive expansion plan. Historically, tyre manufacturers have increased capacity at most plants through Brownfield expansions to cater to the demand of automobiles industry. On account of increasing demand for radial tyres, mainly in the truck and bus category, most of the current expansion plans of players are for radial tyres for TBR and PCR segments. In order to expand their capacity, players have announced a capital expenditure of Rs 50-55 bn over the next 2-3 years. This capital expenditure also includes expansion in the niche category - off the road (OTR), to the tune of Rs 12-13 bn. Company Location Investment (Bn) Completion by Apollo Tyres 21 Mar-12 Balkrishna Industries Bhuj, Gujarat 12 Jun-12 Bridgestone India Chakan, Pune 26 Jan-13 3 Aug-13 Falcon Tyres Ltd Haridwar, Uttarakand 6 Mar-12 JK Tyres and Industries Tamil Nadu 15 Oct-12 Kesoram Industries Haridwar, Uttarakand 10 Dec-12 MRF Ltd Pondicherry 18 Dec-12 Michelin Chennai 40 Early 2013 7 P a g e

Diversification in the form of Power business: To provide stability While manufacturing Carbon Black, the production process generates waste gas which can be burnt to generate steam and in turn power. As such there is no fuel cost for power generation in carbon black manufacturing process. PCB has set up 76 MW of power generating capacity which is used partially for own consumption of carbon black plant and the balance is sold to the grids. Currently power is sold in the open market at Rs.2.5-3/per unit, which translates into higher EBITDA margin of 85-88% for power segment.. At present about 40% of the power produced are used for their own captive consumption balance is sold to the grid. Going forward, company plans to sell nearly half of its power through Power Purchase Agreement, which in our view would provide stability to realization from power business. Power generation process from waste gas Incineration Internal Plant Requirement Waste Gas Waste gas cogeneration plant Electricity Waste gas generated at the plant Surplus power The company has set up power plants at its existing facility in Durgapur, Mundra, Palej and Kochi with total installed capacity of 76 MW. After meeting its internal requirements, power is sold in open market. Of the total capacity of 76 MW, 8 MW has been recently completed in June 2012. There could be some dip in the power revenues in FY13 as the utilization rates have declined. With additional volumes from new capacity, we expect revenues from Power business (India) to increase at 30.2% CAGR over FY12-FY14E period. Similarly we expect Power Business s contribution to total revenue to increase to 5.2% in FY14E from 3.5% in FY12. 8 P a g e

160 140 120 100 80 60 40 20 0 Revenues from power business 251.5% 3.8% 39.5% 10.1% 25.1% 34.0% FY09 FY10 FY11 FY12 FY13E FY14E 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% Revenues % increase 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. Better performance by customers to improve company s working capital Tyre companies went through tough times in FY11 and FY12. The impact of that was clearly visible on the company s working capital. Increase in rubber prices for tyre companies significantly increased their cost of raw materials thereby impacting the margins. This resulted in significant increase in working capital for tyre companies. This effect flowed down into the books of carbon black manufacturers as well. However marked improvement in performance by tyre companies will help the company to improve its balance sheet. Higher free cash flows will enable the company to reduce its debts and thereby lower its interest expenses in FY14. This will not only improve the company s balance sheet but also enhance its profitability. 2.5 Debt /Equity Ratio 2 1.5 2.0 1.7 1 1.2 1.0 1.2 1.1 0.9 0.5 0 FY08 FY09 FY10 FY11 FY12 FY13E FY14E 9 P a g e

Cash flow from operations 250.0 200.0 150.0 100.0 50.0 0.0-50.0-100.0-150.0 186.6-92.5 159.0 217.4 FY11 FY12 FY13E FY14E Continued focus on exports Historically, PCB had always been an exporter of carbon black with exports contributing 20-25% of total sales. However, in FY12, the company reported significant increase in exports and exports contributed 31.85% of the total sales. The significant increase in dumping by China led to the company to export more. The company enjoys lower margin in export business as compared to domestic business. Break up of sales 31.80% 68.20% Domestic Exports The company s exports are mainly based in the SAARC region and off late the company has been focusing on exports to the European region. PCB has made significant forays into overseas markets such as South East Asia and US. Going forward, with the various capacity expansions in place we believe that the company will continue to focus more on exports. The company will continue to place emphasis on exports during FY13E to mitigate any possible situation of excess supply in domestic markets 10 P a g e

110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 Exports 45.9% 66.7% 20.6% -19.7% FY09 FY10 FY11 FY12 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% Export (MT) % increase Backward integration in the form of Coal Tar Distillation Carbon Black Feed stock (CBFS) is the main raw materials used by the company at present which has to be imported. It is a residual oil which is obtained from distillation process of crude and is subject to frequent volatility The price is directly linked to the international crude oil prices. 140 Correlation between CBFS and Brent crude 120 100 80 60 40 20 CBFS Brent crude An increase in the crude price can put pressure on the operating margins of the company. In order to overcome the risk the company has planned backward integration in the form of coal tar project. PCB has planned 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. This will help the company to meet almost 30% of the demand for carbon black through internal production, thereby being less dependent on imports. The capacity of the plant is 210000 MT with an investment of Rs 180 cr and is expected to commission in FY14E. 11 P a g e

Q1 FY13 Result analysis Particulars Q1FY13 Q1FY12 YoY Q4FY12 QoQ Net sales 620.0 567.4 9.3% 539.6 14.9% Other operating income 1.0 0.3 230.0% 0.8 19.3% Total income 621.0 567.7 9.4% 540.5 14.9% RM cost 499.1 427.6 16.7% 401.0 24.5% RM cost % of sales 80.4% 75.3% 74.2% Employee cost 13.0 13.3-1.9% 8.2 59.9% Selling and admin cost 15.6 14.3 9.4% 15.4 1.6% Other exp 45.5 38.9 17.0% 69.2-34.3% Total expenditure 573.3 494.0 16.0% 493.7 16.1% EBITDA 47.7 73.6-35.2% 46.8 2.0% EBITDA margin 7.7% 13.0% (530 bps) 8.7% (100 bps) Other income 2.8 1.4 107.4% 6.6-57.2% Interest 18.9 10.6 78.7% 21.2-10.7% Depreciation 11.5 11.8-2.4% 12.8-10.3% Loss on forex transactions -12.0 3.4 N/A -13.4-10.4% PBT 8.2 56.0-85.4% 6.0 35.7% Tax 1.6 13.5-88.2% 1.0 68.4% Tax rate 19.6% 24.1% -19.0% 15.8% 24.2% PAT 6.6 42.5-84.5% 5.1 29.5% PAT margin 1.1% 7.5% (640 bps) 0.9% 20 bps EPS 1.9 12.8-85.1% 1.5 29.5% In Q1FY13, PCB reported net sales of Rs 621 cr, up by 9.4% YoY & 14.9% QoQ. Revenue from carbon black (CB) segment having ~96% revenue contribution stood at Rs 593.3 cr, up by 8.9% YoY & 14.5% QoQ. Revenue from power segment stood at Rs 26.7 cr, up by 17.1% YoY & 23.5% QoQ. RM as % of sales increased to 80.4% in Q1FY13 from 75.3% in Q1FY12 and 74.2% in Q4FY12. The increase in RM cost 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 EBITDA declined 35.2% YoY and 2.0% QoQ to Rs 47.7 cr. EBITDA margins at 7.7% contracted by 530 bps YoY & 100 bps QoQ due to higher input costs. The company reported forex loss of Rs 12 cr in Q1FY13 as compared to profit of Rs 3.4 cr in Q1FY12. PAT stood at Rs 6.6 cr down by 84.5% YoY. However, on QoQ basis the company reported 29.5% increase in PAT. The company reported EPS of Rs 1.9 as compared to Rs 1.5 in Q4FY12. 12 P a g e

Company overview Phillips Carbon Black Limited (PCBL) is a part of the RP Sanjay Goenka Group, which pioneered the carbon black industry in India. PCBL is the leading producer of carbon black in the country and the 7 th largest producer in the world. The market share of the company stands at around 44% Market share 16.0% 44.0% 40.0% PCBL Hi Tech Others The company has the largest Carbon Black Capacity of 4,22,000 MT p.a. across four locations in India with a Co Generation Green Power Plant at each location. Current installed capacity Locations Carbon Black (MT) Co Generation Power Plant Durgapur (West Bengal) 152,000 30.0 Mundra (Gujarat) 140,000 24.0 Palej (Gujarat) 90,000 12.0 Kochi (Kerala) 40,000 10.0 Total 422,000 76.0 The company s plants are strategically located to cater to the tyre demands of the respective regions, thereby reducing the cost of freight. World ranking Company Rank Capacity 2012 Birla Columbian, India 1 2.06 Cabot Corporation 2 2.04 Evonik, Germany 3 1.35 CSRC, Taiwan 4 0.76 Black Cat, China 5 0.77 Sid Rich, USA 6 0.44 Phillips Carbon Black, India 7 0.47 Tokai, Japan 8 0.47 OMSK, Russia 9 0.36 OCI, South Korea 10 0.27 13 P a g e

The company set up its first 12 MW co-generation power plant at Palej in Gujarat using the off gas generated from production of carbon black. Encouraged by the success of the Palej co-generation power plant, company has subsequently set up co generation power plant at Mundra, Durgapur and Kochi thus taking total capacity to 76.0 MW by FY12. Power segment has contributed 4% to company s net revenue in FY12. While its EBIT contribution stands at 23% in FY12. Revenue break-up (FY12) 4.0% 96.0% EBIT break up (FY12) 23% 77% Carbon black Power Carbon black Power Industry Overview: Carbon black is a key raw material used in manufacturing automotive tyres. More than 60% of the demand for carbon black comes from the tyres segment. It is used as a reinforcing agent in rubber products such as tyres, tubes, conveyer belts, cables and other mechanical rubber goods. Besides tyres, carbon black is also used in industries such as automotive parts, construction and consumer products. It also has applications in printing inks, coatings, electrical cables, plastic films, pipes and sealants. According to ATMA, Carbon black constitutes 11% of the raw material cost of tyre companies and forms 20-25% of volume of the tyre. 14 P a g e

Global demand for carbon black rose by 5.8% during 2011 from 10.2 mn MT to 10.8 mn MT. However, installed capacity for carbon black stood at 13.9 mn MT indicating supply is greater than demand. The capacity utilization was 77% in CY11. The demand growth was led by North America (9.0%), European Union (11.0%) and Eastern Europe (14.7%), while Asia (excluding China) saw a modest growth of 5.2% compared to last year YoY growth of 18%. In India, the demand for carbon black during FY12 was 657,000 MT vs 641,000 MT in FY11, i.e., a growth of 2.5%. Total production during FY12 was 694,000 MT, which is at the same level as FY11. The total capacity of the Indian carbon black industry stood at 935,000 MT, with a capacity utilization of 74%. The Indian carbon black industry has more than enough capacity to meet the country s domestic demand and in fact is a net exporter of carbon black. (Source: Annual report) In the last one year, Chinese imports of carbon black into the United States and other countries have increased tremendously (in US almost more than 3,000% in 2011). As per a news article, Chinese import volumes increased from 701 tonnes in 2010 to 22,344 tonnes in 2011. In 2011 China ranked as the world s largest volume exporter of carbon black, up from third place in 2010 (behind Russia and Egypt). In addition to its exports to the US, China increased its exports to India, Thailand, Indonesia, Japan, Korea, and Vietnam. Risks and Concerns Demand for carbon black industry is largely dependent on growth in the tyre industry. Any further slowdown in the tyre industry may impact PCB s earnings. Safeguard duty not being imposed will result in continued imports from China posing a threat to the pricing power of the company. A sharp increase in the crude oil prices can impact our estimates and thus the operating margins of the company. Valuation and Recommendation 300 250 200 150 100 50 0-50 -100-150 -200 P/E forward Close Price PER - 2 PER - 3 PER - 4 PER - 5 PER - 6 15 P a g e

3000 EV/EBITDA forward 2500 2000 1500 1000 500 0 EV 2x 4x 6x 8x 10x PCB s profitability has been impacted in the recent past owing to various reasons like slowdown in auto industry, rising crude prices and significant dumping by China. This has led to the decline in price of PCB stock and the valuation has come near to the bottom of the cycle. We believe that there are multiple trigger for the revival of business of PCB: Imposition of safeguard duty by government Improvement in auto/tyre industry scenario in India Improvement in auto/tyre industry scenario in China Decline in crude oil prices Any of the above mentioned points can change the fortune of PCB Moreover, the continuous efforts being made by the company to expand its power business which is a high margin yielding business and the focus on exports will also help the company to report better performance. The current prices reflect the ongoing challenges prevailing in the industry and we believe that the current valuations seem propelling for the company. At CMP, the stock is trading at P/E of 8.12x FY13E and 2.75x FY14E earnings whereas on P/BV it is trading at 0.5x and 0.44x FY13E and FY14E respectively. PCB is trading at EV/EBITDA of 5.4x FY13E and 3.43x FY14E which we believe are very attractive. We expect PCB to report RoE of 6.2% in FY13E before improving to 15.9% in FY14E. We assign an EV/EBITDA of 4.0x on our FY14E and arrive at a target price of Rs 138 indicating an upside of 48% from current levels. 16 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 2,238 2,512 Share Capital 33 34 34 34 Other op income 6 6 7 8 Reserves & Surplus 489 577 601 701 Total Income 1,696 2,187 2,244 2,520 Share Holder's Funds 522 612 635 736 Total Cost 1,478 1,953 2,060 2,250 Deferred Tax Liab 57 73 73 73 EBITDA 218 234 184 270 Long Term Loans 271 226 216 206 Dep 39 49 55 63 Short Term Loans 230 485 475 425 Op Income 180 185 129 207 Other Long Term Liab 4 4 6 6 Interest 44 68 73 66 Total Liabilities 1,085 1,400 1,405 1,446 Other Income 7 10 15 15 Net Fixed Assets 758 812 819 836 Extraordinary 13-25 -22 0 Total Investments 58 72 72 72 PBT 157 103 49 156 Current Assets 814 1,086 1,133 1,195 Tax 48 16 10 39 Sundry Debtors 363 547 566 594 PAT (reported) 109 87 39 117 Cash & Bank 66 15 17 27 Adj PAT 109 87 39 117 Loans & Advances & Others 130 164 180 199 Shares o/s ( No. in Cr.) 3.3 3.4 3.4 3.4 Inventories 255 360 371 375 EPS 33 25 11 34 Current Liabilities & Provision 638 691 741 784 Adj EPS 33 25 11 34 Net Current Assets 177 395 392 411 Adj Cash EPS 44 39 28 52 Other Long Term 93 121 122 126 Quarterly (Rs. In Cr) Sep.11 Dec.11 Mar.12 June.12 Total Assets 1,085 1,400 1,405 1,446 Net Sales 564 515 540 621 Cash Flow (Rs. In Cr) FY11A FY12A FY13E FY14E EBITDA 60 54 47 48 Operating income 218 234 184 270 Dep 12 12 13 11 Change in WC (21) (278) 7 (13) Op Income 48 42 34 36 Taxes paid (24) (20) (10) (39) Interest 17 19 21 19 Other Adjustment 14 (27) (22) 0 Other Inc. 1 1 7 3 CF from Operation 187 (91) 159 217 Forex gain/loss -10-5 -13-12 Capex (155) (94) (62) (80) PBT 21 20 6 8 Investment (incl interest) 6 6 15 15 Tax 1 0 1 2 Total Investment (148) (88) (47) (65) PAT 20 20 5 7 Dividend Paid (19) (19) (16) (16) Performance Ratio FY11A FY12A FY13E FY14E Share Capital 12 2 0 0 Sales growth (%) 37.3% 29.0% 2.6% 12.3% Premium/Reserves 97 18 0 0 EBITDA margin (%) 12.9% 10.7% 8.2% 10.7% Borrowing (52) 187 (20) (60) Adj.PAT margin (%) 6.4% 4.0% 1.8% 4.6% Interest (44) (60) (73) (66) ROE (%) 20.8% 14.2% 6.2% 15.9% Total Financing (6) 129 (109) (142) ROCE (%) 17.5% 14.0% 9.7% 15.1% Net Chg. in Cash 32 (50) 3 10 Valuation Ratio FY11A FY12A FY13E FY14E Cash at beginning 34 65 13 17 Price Earnings (x) 2.85 3.68 8.12 2.75 Cash at end 66 15 17 27 Price / Book Value (x) 0.59 0.52 0.50 0.44 Per Share Data FY11A FY12A FY13E FY14E EV / Sales 0.44 0.47 0.44 0.37 Reported EPS 32.69 25.28 11.46 33.85 EV / EBIDTA 3.41 4.34 5.40 3.43 Adjusted EPS 32.69 25.28 11.46 33.85 EV / Total Assets 0.69 0.73 0.71 0.64 BV per share 157.2 177.5 184.3 213.4 Dividend Yield 5.4% 4.3% 4.3% 4.3% 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 69,321 73,415 Debtor Days 78 91 92 86 Cost per tonne 47,881 62,123 63,630 65,559 Inventory Days 72 77 75 70 EBITDA per tonne 7,067 7,443 5,691 7,855 Creditor Days 158 130 132 128 17 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 18 P a g e