Company Update Rating matrix Rating : Buy Target : 3 Target Period : 12-18 months Potential Upside : 25% What s changed? Target Changed from 24 to 3 EPS FY17E Changed from 14.4 to 13.2 EPS FY18E Unchanged at 27. Rating Unchanged Key financials Net Sales 247.2 1894.7 1711.3 185.1 EBITDA 152.3 165. 217.4 24.6 Net Profit 12.6 22.7 45.5 93. EPS 3.7 6.6 13.2 27. Valuation summary P/E 65.6 36.1 18.2 8.9 Target P/E 82. 45.2 22.7 11.1 EV / EBITDA 13.4 1.3 7.4 6.3 P/BV 1.6 1.6 1.5 1.3 RoNW 2.5 4.4 8.2 14.7 RoCE 6.2 8. 12.1 13.7 ROIC 5.8 8.4 12.5 14.3 Stock data Stock Data Market Capitalization 827 Total Debt (FY16) 121 Cash and Cash Equivalent (FY16) 149. Enterprise Value 17. 52 week H/L 247 / 8 Equity Capital 34.5 Face Value 1 MF Holding (%). FII Holding (%) 6.5 Stock data 1M 3M 6M 12M Phillips Carbon Black 29 15 182 19 Oriental Carbon (OCCL) 21 64 85 23 Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia, CFA shashank.kanodia@icicisecurities.com Growth momentum to sustain... August 26, 216 Phillips Carbon Black (PHICAR) 24 Phillips Carbon Black (PCBL) reported a robust Q1FY17 performance; largely tracking our investment thesis. Net sales for the quarter were at 43.6 crore, down 1% YoY EBITDA was at 53. crore with corresponding EBITDA margins at 12.3%. PAT in Q1FY17 was at 12. crore Carbon black sales volume in Q1FY17 was at 95,5 tonne, which includes domestic sales of 764 tonne and export sales of 19,1 tonne. Corresponding EBITDA/tonne in Q1FY17 was at 5548 tonne Carbon black; critical tyre component! Carbon black is used as a reinforcement material providing tensile strength to tyres. It is a critical component for manufacturing tyres and forms ~26% by volume of the tyre weight and ~1% by value of tyre costs. Total global capacity for manufacturing carbon black as of CY15 was at 16 million tonne (MT) with total demand at ~12 MT and is expected to grow at a CAGR of 4-5% in the next couple of years. In India, total capacity for manufacturing carbon black as of FY16 was at 1 MT with consumption at ~.8 MT. PCBL with a capacity of 47 KT is the largest player domestically with market share in excess of 3%. Domestic demand is expected to grow at a CAGR of 6-7% in FY16-18E. Decline in crude, anti dumping duty on Chinese imports; sweet spot! Carbon black can be manufactured using two different processes, which either use coal tar or crude derivative i.e. carbon black feed stock (CBFS) as a raw material. Post a decline in crude prices, manufacturing of carbon black using CBFS has gained traction (more economic viable option), which benefits Indian players including PCBL. In a recent update, as of November 215, for five years i.e. till November 22, the Government of India has imposed an anti dumping duty on imports of carbon black from China into India to the tune of ~US$4/tonne (global realisations at ~US$6/tonne as of Q1FY17), which protects the interest of domestic carbon black manufacturer, including PCBL. Increasing volume; operating leverage benefits to kick in! With a positive outlook on the domestic automobile sector and consequent strong tyre demand, we expect PCBL to report strong volume growth, going forward. At PCB, we expect sales volume of carbon black to grow at 6.5% CAGR in FY18E-16 to 38 KT in FY18E (335 KT in FY16). Moreover, this sales volume growth will be led by domestic sales, which are indeed accretive in realisations and consequent margins. Domestic to exports sales volume mix is expected to improve to 8:2 in FY17E-18E vs. 72:28 in FY16. Thus, increasing capacity utilisations and its operating leverage benefits, sales tilted more in favour of domestic vis-à-vis exports and decline in key raw material prices (CBFS) will result in an expansion of EBITDA margins to the tune of 43 bps in FY16-18E. Declining debt; strong earnings trajectory warrants re-rating! 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 121 crore in FY16. Going forward, however, with a strong operational performance led by 6.5% sales volume growth in FY16-18E and 43 bps EBITDA margin expansion, we expect PAT to quadruple at PCBL by FY18. This will improve the leverage profile with consequent D/E at 1.2x by FY18E. We expect PCB to report PAT of 45.5 crore in FY17E & 93 crore in FY18E. We value PCB at 3, i.e. 11x P/E on FY18E EPS of 27/share. We have a BUY rating on the stock. ICICI Securities Ltd Retail Equity Research
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 1962. 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 - capacity utilisation inching upwards! PCBL has an effective installed capacity of 411 kilo tonne (KT) for carbon black (name plate capacity at 472 KT). In FY16, PCB operated at 81% capacity utilisation levels with carbon black sales at 335 KT. Going forward, on the back of a pick-up in tyre demand domestically & imposition of anti dumping duty, PCBL is witnessing robust demand. Capacity utilisation is expected to augment to 93% in FY18E with corresponding carbon black sales at 38 KT in FY18E, implying sales volume CAGR of 6.5% in FY16-18E. 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 FY16 was at 5 KT (2.5 KT in FY15). Going forward, the speciality grade sales volume is expected at 7.2 KT in FY17E & 1 KT in FY18E, which will further drive profitability tonne 5 4 3 2 1 411 76 311823 411 81 33238 411 88 36168 411 93 38175 1 8 6 4 2 % Capacity Production Capacity Utilization Levels Exhibit 2: Sales volume & realisation Exhibit 3: Sales mix in favour of domestic sales tonne 5 4 3 2 1 76571 313562 335146 54257 36168 4543 38175 1 46368 8 6 4 2 /tonne % 1 8 6 4 2 28 28 72 72 2 2 8 8 Sales Volume Realization ( /tonne) Domestic Sales Volume Export Sales Volume Realisations of carbon black largely follow crude prices. Hence, there was a steep correction in FY16 over FY15. Going forward, we have largely assumed realisations to be flat over FY17E & FY18E Moreover, this sales volume growth will be led by domestic sales, which are indeed accretive in realisations and margins. Domestic to exports mix is expected to improve to 8:2 in FY17E-18E vs. 72:28 in FY16. ICICI Securities Ltd Retail Equity Research Page 2
Exhibit 4: Domestic sales volume & realisation Realisation of carbon black in export markets (US$642/tonne in FY16) is lower than that in domestic market (US$887/tonne) primarily on account of freight and selling expense incurred by PCBL for exports. Exports will, however, continue to provide balanced earning profile, with PCBL supplying carbon black to all major tyre manufacturers outside India. Exhibit 5: Export sales volume & realisation tonne 3 2 1 4746 79484 5876 4614 1 8 22715 242621 289344 3414 6 4 2 Domestic Sales Volume Domestic Realization /tonne tonne 1 75 5 25 65397 4235 48 42 1 8 6 86412 92525 72336 7635 4 2 Exports Sales Volume Exports Realization /tonne Net sales to largely remain flat; tracking muted realisations Sales growth, however, is expected to be flat in FY16-18E despite volume growth due to steep correction in realisations in FY17E (blended realisations assumed at US$674/tonne vs. FY16 at US$828/tonne) largely tracking the decline in crude price. Exhibit 6: Net sales trend 3 25 2 2467 1893 171 1848 We expect PCBL to record net sales of 171 crore in FY17E & 1848 crore in FY18E 15 1 5 Exhibit 7: Sales break-up PCBL generates power out of the 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 healthy ~5% of total sales at PCBL and drives operational efficiencies at PCBL 3 25 2 15 1 5 2398 1816 1629 1763 69 76 81 86 Carbon Black Sales Power Sales ICICI Securities Ltd Retail Equity Research Page 3
Margin expansion to drive EBITDA & PAT, going forward Operating leverage benefits, sales tilted in favour of domestic vis-à-vis exports, increasing share of specialty grade sales and decline in raw material price will result in expansion of EBITDA margins to the tune of 43 bps in FY16-18E. We expect PCBL to clock EBITDA margins of 12.7% in FY17E & 13% in FY18E vs. 8.7% in FY16. EBITDA/tonne is expected at 611/tonne in FY17E & 6328/tonne (including hedging costs) in FY18E ( 4926/tonne in FY16). Exhibit 8: EBITDA & EBITDA margins trend Exhibit 9: PAT & EPS trend 3 12.7 13. 14 1 27. 3 25 2 15 1 5 8.7 6.2 152.3 165. 217.4 24.6 EBITDA EBITDA Margin 12 1 8 6 4 2 % 8 6 4 2 6.6 3.7 12.6 22.7 13.2 45.5 93. PAT EPS ( ) 25 2 15 1 5 /share Exhibit 1: Return ratios profile In FY16-18E, on account of sales volume growth (6.5% CAGR), expansion in EBITDA margins (43 bps) and reducing interest costs, we expect PAT to quadruple at PCBL to 93 crore in FY18 vs. 23 crore in FY16. Corresponding EPS is expected at 13.2 in FY17E & 27 in FY18E. Increasing profitability to result in improved return ratio profile Return ratios were subdued in the past due to subdued profitability. However, with a robust performance in FY16-18E, the same has improved with RoE & RoCE expected at ~14% by FY18E. Exhibit 11: Debt : Equity trend % 16. 14. 12. 1. 8. 6. 4. 2.. 14.7 12.1 13.7 8. 8.2 6.2 4.4 2.5 1,4 1,2 1, 8 6 4 2 2.4 2. 1,219.7 51.2 1,21.4 522.7 871.4 1.6 1.2 555.8 771.4 632.3 3. 2.5 2. 1.5 1..5. x RoE RoCE Debt Equity Debt:Equity Debt gearing set to improve!! By virtue of declining profitability and an elongated working capital cycle, PCBL has accumulated huge debt with peak debt at 122 crore as of FY15 (debt: equity at 2.4x). However, with enhanced profitability and working capital controls, debt has reduced to 121 crore as of FY16 (debt : equity at 2.x). Going forward, however, with a strong operational performance and consequent cash flow generation, we expect leverage to further improve with FY18E debt expected at 771 crore with consequent debt: equity at 1.2x. ICICI Securities Ltd Retail Equity Research Page 4
Outlook and valuation PCBL is the manufacturer of carbon black, which is primarily used as a reinforcement material in tyres and other industrial rubber goods. PCBL is the largest manufacturer of carbon black in India with a market share of 31%. With the robust auto sector outlook, a steep correction in crude price (raw material a crude derivative) and operational efficiencies, PCBL is on a strong footing with robust prospects, going forward. By virtue of declining profitability (6.2% EBITDA margins in FY15) and an elongated working capital cycle (93 days in FY15) PCBL has accumulated huge debt with peak debt at 122 crore as of FY15. However, with the tide now turning in favour of PCBL and working capital controls, debt has reduced to 121 crore as of FY16 with consequent debt: equity at 2.x. Going forward, with a strong operational performance, we expect PCBL to generate healthy CFO annually to the tune of ~ 19 crore (FCF to the tune of ~ 17 crore annually). This will further reduce debt, with consequent debt: equity at 1.2x by FY18E. Going forward, in FY16-18E, on account of sales volume growth (6.5% CAGR), expansion in EBITDA margins (43 bps) and reducing interest costs, we expect PAT to quadruple to 93 crore in FY18 vs. 23 crore in FY16. We value PCBL at 3, i.e. 11x P/E on FY18E EPS of 27/share. We have a BUY recommendation on the stock. The key risk to our call is the inherent volatility associated with the carbon black price, which is largely crude linked and high forex exposure of PCBL (net importer) resulting in high hedging costs. Exhibit 12: What s changed? Particulars FY17E FY18E Old New % Change Old New % Change Revenue 1,74.4 1711.3 (1.7) 1,88.6 185.1 (1.6) EBITDA 23.5 217.4 (5.7) 249.2 24.6 (3.5) EBITDA Margin % 13.2 12.7-54 bps 13.3 13. -25 bps PAT 49.5 45.5 (8.1) 92.9 93..2 EPS 14.4 13.2 (8.4) 27. 27.. Exhibit 13: Valuation Summary Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY15 2467.3 8.5 3.7-114.6 65.6 13.4 2.5 6.2 FY16 1892.7-23.3 6.6 81.4 36.1 1.3 4.4 8. FY17E 179.7-9.7 13.2 98.7 18.2 7.4 8.2 12.1 FY18E 1848.3 8.1 27. 14.6 8.9 6.3 14.7 13.7 ICICI Securities Ltd Retail Equity Research Page 5
es Recommendation history vs. consensus estimate 3 1 ( ) 2 1 8 6 4 2 (%) Oct-14 Dec-14 Mar-15 May-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Price Idirect target Consensus Target Mean % Consensus with Hold Source: Bloomberg, Company, ICICIdirect.com 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 4 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, Kerela (9 KT, 1 MW). It is currently headed by Mr. Sanjiv Goenka (Chairman), CEO Mr. Kaushik Roy and CFO Mr. Raj Kumar Gupta. In FY16, PCB distributed dividend of 2.5/share (EPS - 6.6/share) Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Position Change (m) 1 RPG Enterprises 3-Jun-16 5. 17.2. 2 Dotex Merchandise Pvt. Ltd. 3-Jun-16 3.4 1.2. 3 Jupiter Asset Management Ltd. 3-Jun-16 2.9 1. -.3 4 Elara Capital Plc 3-Jun-16 2.2.8 -.1 5 Kerala State Industrial Development Co., Ltd 3-Jun-16 1.4.5. 6 Lodha (Chandra Singh) 3-Jun-16 1.1.4. 7 BNP Paribas Investment Partners Asia Ltd. 31-Mar-16... 8 BNP Paribas Investment Partners Netherlan 31-Dec-15... Shareholding Pattern (in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Promoter 53.6 53.6 53.6 53.6 53.6 FII 6.3 6.4 6.7 6.9 6.5 DII 1.6 1.6 1.6.. Others 38.6 38.4 38.1 39.6 39.9 Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares BNP Paribas Investment Partners Netherlands N.V... Jupiter Asset Management Ltd. -.72M -.3M Elara Capital Plc -.32M -.13M Lodha (Chandra Singh) -.M -.M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6
Financial summary (Standalone) Profit and loss statement Crore (Year-end March) Net Sales 2467.3 1892.7 179.7 1848.3 Other Operating Income 3. 2.1 1.7 1.8 Total Operating Income 247.2 1894.7 1711.3 185.1 Growth (%) 8.5-23.3-9.7 8.1 Raw Material Expenses 1,94.4 1,344.6 1,124.1 1,221.1 Employee Expenses 7.2 73.4 83.5 83.3 Selling Expense 73.3 68.7 68.7 73.9 Other Operating Expense 234.1 243.2 217.6 231.3 Total Operating Expenditure 2,318. 1,729.8 1,493.9 1,69.5 EBITDA 152.3 165. 217.4 24.6 Growth (%) 496.9 8.3 31.8 1.7 Depreciation 57.5 55. 56.6 58.4 Interest 94.8 7.9 66.2 57.5 Other Income 14.4 18. 18.1 16.7 PBT 14.3 57. 112.6 141.3 Exceptional Item.... Total Tax 1.7 34.3 67.2 48.3 PAT 12.6 22.7 45.5 93. Growth (%) -114.6 8.3 1.1 14.6 EPS ( ) 3.7 6.6 13.2 27. Cash flow statement Crore (Year-end March) Profit after Tax 12.6 22.7 45.5 93. Add: Depreciation 57.5 55. 56.6 58.4 (Inc)/dec in Current Assets 129.4 15.4 75.3-49.8 Inc/(dec) in CL and Provisions -296.6 13.1-51.3 28.6 Others 94.8 7.9 66.2 57.5 CF from operating activities -2.3 429.1 192.4 187.7 (Inc)/dec in Investments. -98. 6. 2. (Inc)/dec in Fixed Assets -26.4-33.9-23.5-25. Others -2.1 21.3.. CF from investing activities -28.5-11.6 36.5-5. Issue/(Buy back) of Equity.... Inc/(dec) in loan funds 133.1-198.3-15. -1. Interest & Dividend paid -98.9-81.3-78.7-74. Inc/(dec) in Share Cap.... Others -.7... CF from financing activities 33.4-279.6-228.7-174. Net Cash flow 2.6 39..2 8.7 Opening Cash 8.9 11.5 5.6 5.9 Closing Cash 11.5 5.6 5.9 59.6 Balance sheet Crore (Year-end March) Liabilities Equity Capital 34.5 34.5 34.5 34.5 Reserve and Surplus 475.8 488.3 521.3 597.8 Total Shareholders funds 51.2 522.7 555.8 632.3 Total Debt 1,219.7 1,21.4 871.4 771.4 Deferred Tax Liability 27.8 49.1 49.1 49.1 Minority Interest / Others.6.6.6.6 Total Liabilities 1,758.3 1,593.8 1,476.9 1,453.4 Assets Gross Block 1,291.4 1,323.8 1,372.2 1,397.2 Less: Acc Depreciation 471. 524.4 582.5 641. Net Block 82.5 799.4 789.7 756.2 Capital WIP 73.5 73.4 5. 5. Total Fixed Assets 893.9 872.8 839.7 86.2 Investments 72.4 17.4 11.4 9.4 Inventory 296.8 244.2 21.8 227.9 Debtors 521.4 439. 398.1 43.4 Loans and Advances 97.1 9. 88.9 88.7 Other Current Assets 15.9 7.6 7.7 8.3 Cash 11.5 5.6 5.9 59.6 Total Current Assets 942.7 831.4 756.4 814.9 Current Liabilities 188.5 31.4 257.6 278.5 Provisions 16. 24.3 25.8 33.4 Current Liabilities & Prov 24.5 334.7 283.4 311.9 Net Current Assets 738.2 496.8 473.1 53. Others Assets 53.9 53.9 53.9 53.9 Application of Funds 1,758.3 1,593.8 1,476.9 1,453.4 Key ratios (Year-end March) Per share data ( ) EPS 3.7 6.6 13.2 27. Cash EPS 2.4 22.5 29.6 44. BV 148.1 151.7 161.3 183.5 DPS 1. 2.5 3. 4. Cash Per Share (Incl Invst) 24.3 64.1 46.8 43.5 Operating Ratios (%) EBITDA Margin 6.2 8.7 12.7 13. PAT Margin.5 1.2 2.7 5. Inventory days 43.9 47.1 45. 45. Debtor days 77.1 84.7 85. 85. Creditor days 27.9 59.9 55. 55. Return Ratios (%) RoE 2.5 4.4 8.2 14.7 RoCE 6.2 8. 12.1 13.7 RoIC 5.8 8.4 12.5 14.3 Valuation Ratios (x) P/E 65.6 36.1 18.2 8.9 EV / EBITDA 13.4 1.3 7.4 6.3 EV / Net Sales.8.9.9.8 Market Cap / Sales.3.4.5.4 Price to Book Value 1.6 1.6 1.5 1.3 Solvency Ratios Debt/EBITDA 8. 6.2 4. 3.2 Debt / Equity 2.4 2. 1.6 1.2 Current Ratio 4.6 2.3 2.5 2.4 Quick Ratio 3.1 1.6 1.7 1.7 ICICI Securities Ltd Retail Equity Research Page 7
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com 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 ICICIdirect.com 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
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