Buy Philips Carbon Black – 3QFY2011 Result; Target Rs. 254 - Angel Broking

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  Philips Carbon Black – 3QFY2011 Result Update

Angel Broking maintains a Buy on Philips Carbon Black with a Target Price of Rs. 254.

For 3QFY2011, Philips Carbon Black (PCBL) reported robust top-line growth of
24.4%, to `432cr (`347cr), which was in-line with our estimates. OPM also
expanded yoy to 14.0% (13.8%) though coming in below our estimate of 16.0%.
PAT for the quarter declined by 10.7% yoy to `30cr (`34cr), despite higher
top-line and OPM, mainly because of lower-than-normal tax rate in 3QFY2010.
We remain positive on the company, given the strong supply-demand scenario in
the carbon black industry. However, we have revised our OPM estimates for
FY2011 and FY2012 downwards to 15.0% and 15.6% from 15.3% and 15.8%,
respectively. We maintain a Buy on the stock.

Growth spread evenly across segments: Both segments of the company reported
strong growth rates, with the carbon black segment posting 24.9% yoy growth to
`416cr, and the power segment recording 24.6% yoy growth to `22cr. However,
margins declined by 127bp and 57bp in the carbon black and power segments
to 10.8% and 70.0%, respectively. Overall, demand for the company’s products
was robust during the quarter.


Outlook and Valuation: We remain positive on the business outlook of PCB,
owing to the favourable demand-supply scenario in the carbon black segment,
which was reflected in the strong 20.3% growth in volumes during the quarter.
Besides, we expect sales contribution from the power segment to increase going
ahead leading to margin expansion, as the margins in the power segment are
exceptionally high. At the current market price, the stock is trading at 2.7x
FY2012E EPS and 0.6x FY2012E BV. Owing to revision in OPM estimates, we
have revised our Target Price to `254 (`263). We maintain a Buy on the stock.

Other developments

􀂄 Carbon black segment sales rose mainly on the back of volumes, which

increased 20.4% yoy. We believe that robust demand from the tyre industry

bodes well for the segment.

􀂄 Net realisations of the power segment stood at `2.5/unit for the quarter, which

was a slight improvement over 2QFY2011.

􀂄 The company has obtained all necessary approvals and the land acquisition

for the Vietnam plant. Construction at the site is expected to start by March

2011.

􀂄 Commissioning of the extended capacity at the Mundra plant is expected to be

completed in 1QFY2012 now, further delayed from earlier expectations of

3QFY2011.

Investment Arguments

Volume growth backed by capacity expansions to drive carbon black revenues: To

capitalise on the rising demand for tyres, PCBL has been on an expansion spree.

Post commissioning of the 90,000MT green-field plant at Mundra in October

2009, the company’s current installed capacity stands at 360,000MT. PCBL plans

to further increase capacity to 410,000MT by setting up a brown-field plant of

50,000MT in Mundra, which is expected to be operational by 1QFY2012. Thus,

with additional capacities coming on stream, we expect volumes and revenues of

the carbon black segment to register CAGR of 15.3% and 21.4% respectively, over

FY2010-12.

Power segment- The game changer: PCBL currently has in place 60.5MW of

power generating capacity and with further capacities coming up the same will

stand enhanced at 78.5MW by 3QFY2012. Since PCBL 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 revenues

would contribute a mere ~7% to the company’s total top-line in FY2012E, it would

contribute ~50% of total profit. Thus, a high proportion of power revenues would

percolate to the bottom-line and lend stability to the company’s earnings while

significantly de-risking its business model.

Outlook and Valuation

We remain positive on the business outlook of PCB, owing to a favourable

demand-supply scenario in the carbon black segment. We expect sales to rise at a

CAGR of 22.6% over FY2010-12 to `1,854cr. However, we have revised

downwards our OPM estimates for FY2011 and FY2012 to 15.0% and 15.6%

from 15.3% and 15.8% respectively, to reflect the below-expectation OPM in

3QFY2011. At the current market price, the stock is trading at 2.7x FY2012E EPS

and 0.6x FY2012E BV. We maintain a Buy on the stock, with a revised Target Price

of `254 (`263).