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For 2QFY2011, Philips Carbon Black (PCB) posted strong top-line growth of
51.1% yoy to `415cr (`275cr), driven mainly by a 29.0% increase in volumes.
This was in line with our estimate. However, the OPM for the quarter was
disappointing. OPM declined to 10.9% (18.9%), which was below our estimate of
15.0%, mainly due to lower margins in the power segment. However, interest
costs declined to `6.9cr. Consequently, PAT came in at `24cr (`32cr), 14% below
our estimate of `28cr. We remain positive on the company’s business outlook,
given the strong demand-supply scenario in the carbon black industry.
Exports led volumes growth: PCB posted a 200% yoy increase in export volumes,
leading to a 29.0% jump in overall volumes. This led to 51.1% sales growth,
despite a fall in the power segment’s revenue. Owing to the high-margin power
segment’s lower revenue contribution and declined margins, PCB reported a
166bp qoq and 795bp yoy decline in OPM. Consequently, net profit fell by
24.9% yoy to `24cr.
Outlook and valuation: We remain positive on the business outlook of PCB,
owing to a favourable demand-supply scenario in the carbon black industry, as
reflected in the volume growth in 2QFY2011. Besides, we expect sales
contribution from the power segment to increase going ahead, leading to margin
expansion, as margins in the power segment are exceptionally high. However,
given the lower-than-expected margins in this quarter, we downgrade our OPM
estimates for FY2011 and FY2012 to 15.3% and 15.8% from 16.1% and 16.2%,
respectively. Owing to the decrease in OPM estimates, we have revised our
Target Price downwards to `263 (`270). However, we continue to maintain Buy
on the stock.
Segment-wise performance
The carbon black segment reported strong revenue growth of 55.3% yoy and 6.1%
qoq to `399cr. The main reason for this strong growth was a 29.0% increase in
volumes. EBIT margin for the segment declined by 304bp yoy, but improved by
374bp qoq to 9.6%.
The power segment’s revenue declined by 2.4% yoy to `21cr during the quarter.
The sequential decline was much more pronounced at 34.9%. The primary reason
for this was the significantly lower short-term power rates during the quarter. As a
result of lower realisations, EBIT margin declined by 1,373bp yoy and 2,217bp
qoq to 65.6%.
Sales continue to show robust increase
PCB reported yet another quarter of strong sales growth, with top-line growth of
51.1% yoy. Post the turbulent FY2009, the company has been reporting strong
numbers on the back of improved demand from the tyre industry. Going ahead,
the company’s growth prospects look bright, given that the tyre industry is expected
to continue on its growth trajectory.
Margins decline on lower contribution from the power segment
PCB’s margin profile has closely resembled its sales profile for the past eight
quarters. After the crisis faced in FY2009, when margins were negative, OPM
improved to 18.9% in 2QFY2010. However, since then, OPM has been declining,
falling to 10.9% in 2QFY2011. However, going ahead, with increased contribution
from the power segment, we expect margins to strengthen again.
Profits fall on lower margins
Owing to the decline in margins, PAT declined by 24.9% yoy to `24cr during the
quarter. Sequentially, this is the second successive quarter after 1QFY2010, when
profits have declined. However, going ahead, the increase in top line and stronger
margins are expected to boost profits.
Management call - Key takeaways
Sales growth in the carbon black segment was mainly because of increased
volumes. The outlook for the segment continues to look positive on the back of
robust demand in the tyre industry.
During the quarter, net realisations in the power segment remained below
`3/unit. This was because of extremely low short-term power rates. However,
management is hopeful that these rates would increase going ahead, as they
are well below the long-term power rates.
The employee cost during the quarter increased abnormally, as there was a
bonus payment during the quarter.
Progress in the Vietnam plant is coming along well and the plant is expected
to be commissioned over the next 24 months. There has been a 2–3 month
delay in the carbon black plant being set up in Mundra; the plant would now
come on stream in 3QFY2011.
Investment arguments
Volume growth to drive the carbon black segment’s revenue: To capitalise on the
rising demand for tyres, PCB has been on the expansion spree. Post
commissioning of the 90,000MT greenfield plant at Mundra in October 2009, the
company’s current installed capacity stands at 360,000MT. PCB plans to further
increase its capacity to 410,000MT by setting up a brownfield plant of 50,000MT
in Mundra, which is expected to be operational by 3QFY2011E. Thus, with
additional capacities coming on stream, we expect volumes and revenue of the
carbon black segment to register CAGR of 15.3% and 22.3%, respectively, over
FY2010–12E.
Power segment – The game changer: PCB currently has in place 60.5MW of power
generating capacity. With further capacities coming up, the same will be enhanced
to 77.5MW by 3QFY2012E. Since PCB utilises the off-gas generated during the
manufacture of carbon black for producing power, the company has no
raw-material requirements. Hence, although the power segment’s revenue would
contribute a mere ~7% to the company’s total top line in FY2012E, on the
bottom-line front, it would contribute ~50% to total profit. Thus, a high proportion
of the power segment’s revenue would percolate to the bottom line and lend
stability to the company’s earnings, while significantly de-risking its
business model.
Outlook and valuation
Going ahead, we remain positive on the outlook of the company, given the
favourable demand-supply situation in the tyre industry. We expect sales to register
a 22.6% CAGR over FY2010–12 and reach `1,854cr by FY2012E. Further,
we expect margins to improve on the back of higher sales contribution from the
high-margin power segment. However, given the weak margins in 2QFY2011, we
have revised our margin estimates downwards to 15.3% and 15.8% from 16.1%
and 16.2% in FY2011 and FY2012, respectively. At the current market price, the
stock is trading at 5.0x its FY2012E EPS and 0.9x FY2012E BV. We maintain Buy
on the stock with a revised Target Price of `263 (`270).
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