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We recently met the management of Phillips Carbon Black Ltd (PCBL) to learn
about the company’s business prospects. We present below the key take-away
from our meeting.
Organic growth will continue to drive future prospect
The company’s business is volume driven so the management continues to focus
on capacity addition to drive its growth. After adding 90,000 tonne of fresh capacity
in FY2010, the company is at the final stage of adding another 50,000 tonne of
carbon black capacity in Mundra with a captive power plant (CPP) of 8MW. We
believe this plant will get operational in Q1FY2012. In the first year of its operations
the 50,000-tonne capacity will naturally boost the volume in FY2012; however, we
believe healthy utilisation can be achieved in FY2013 only. Hence, PCBL is expected
to witness a significant volume growth in both FY2012 and FY2013. Also, the
company is adding 10MW of power capacity at Cochin and this plant should go on
stream in Q1FY2012.
Vietnam expansion plan, as next growth trigger, is on track
PCBL’s next focus is on expansion of its business in Vietnam. It plans to add 50,000
tonne of capacity along with a 12MW CPP in Vietnam. For the project the company
has joined hands with Vietnam National Chemical Corporation (VINACHEM) and
has an 80% stake in the joint venture. Moreover, PCBL has signed a joint venture
agreement with three Vietnamese government-owned tyre companies, Casumina,
Da Nang Rubber and Sao Rubber. This additional capacity is expected to come on
stream in FY2014. The Rs450-crore project will be set up on a 2:1 debt-equity
contribution basis. It will set up 55,000 tonne of capacity in the first phase of the
project, which will be completed in two years, at an expected capital expenditure
(capex) of Rs100 crore.
PCBL has also chalked out a plan to increase its domestic capacity in Orissa and in
south India. The Orissa project has already been finalised; however, the plan to
expand its capacity in south India has yet to be finalised.
Power to drive profitability
The power business has been a high-margin business for
PCBL as it generates power from waste heat. Hence, the
power generation cost for PCBL is around Rs0.5 per unit
on a sales realisation of about Rs3 per unit, indicating an
e a r n i n g s b e f o r e i n t e r e s t , t a x , d e p r e c i a t i o n a n d
amortisation (EBITDA) margin of more than 80%. With the
ongoing expansion at the power plant in Cochin its total
power generation capacity would reach 76MW. We believe
the power business will continue to add cream to its
margin and profitability. Currently, the power division
generates about one-third of its profit and should continue
to do so for the next few years.
Near-term concerns could affect the stock price
Carbon black feed stock (CBFS) is the major raw material
used to manufacture carbon black. CBFS prices have shot
up recently in line with the rise in crude oil prices. On
the other hand, it seems difficult to pass on the entire
increase in the raw material cost to tyre manufacturers.
Hence, we expect the company to witness margin pressure
in the near term which would affect its Q4FY2011 and
Q1FY2012 numbers too. As a result, its stock could also
face pressure in the near term.
Valuation and view
We are positive about the expansion move of the company
and its impressive share in the carbon black market, both
in India and across the globe. However, the recent spike
in its raw material cost led by a rise in crude oil prices
could pressurise its margin for some time, as it seems
difficult to pass on the hike to the tyre manufacturers in
the near term. These near-term concerns could affect
the stock’s performance in the days ahead. We have
factored in a CBFS rate of $420 per tonne, as CBFS prices
have gone above the $400 level and even touched $450
for a while. We retain our estimates for now and will
revise our CBFS price assumption if CBFS surges further
and stabilises at a higher level.
At the current market price, the PCBL stock trades at
attractive valuations of 3.2x FY2012E earnings and 3x
FY2012E enterprise value (EV)/EBITDA. We maintain our
Buy recommendation on the stock with a price target of
Rs212, based on 4x EV/EBITDA of FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently met the management of Phillips Carbon Black Ltd (PCBL) to learn
about the company’s business prospects. We present below the key take-away
from our meeting.
Organic growth will continue to drive future prospect
The company’s business is volume driven so the management continues to focus
on capacity addition to drive its growth. After adding 90,000 tonne of fresh capacity
in FY2010, the company is at the final stage of adding another 50,000 tonne of
carbon black capacity in Mundra with a captive power plant (CPP) of 8MW. We
believe this plant will get operational in Q1FY2012. In the first year of its operations
the 50,000-tonne capacity will naturally boost the volume in FY2012; however, we
believe healthy utilisation can be achieved in FY2013 only. Hence, PCBL is expected
to witness a significant volume growth in both FY2012 and FY2013. Also, the
company is adding 10MW of power capacity at Cochin and this plant should go on
stream in Q1FY2012.
Vietnam expansion plan, as next growth trigger, is on track
PCBL’s next focus is on expansion of its business in Vietnam. It plans to add 50,000
tonne of capacity along with a 12MW CPP in Vietnam. For the project the company
has joined hands with Vietnam National Chemical Corporation (VINACHEM) and
has an 80% stake in the joint venture. Moreover, PCBL has signed a joint venture
agreement with three Vietnamese government-owned tyre companies, Casumina,
Da Nang Rubber and Sao Rubber. This additional capacity is expected to come on
stream in FY2014. The Rs450-crore project will be set up on a 2:1 debt-equity
contribution basis. It will set up 55,000 tonne of capacity in the first phase of the
project, which will be completed in two years, at an expected capital expenditure
(capex) of Rs100 crore.
PCBL has also chalked out a plan to increase its domestic capacity in Orissa and in
south India. The Orissa project has already been finalised; however, the plan to
expand its capacity in south India has yet to be finalised.
Power to drive profitability
The power business has been a high-margin business for
PCBL as it generates power from waste heat. Hence, the
power generation cost for PCBL is around Rs0.5 per unit
on a sales realisation of about Rs3 per unit, indicating an
e a r n i n g s b e f o r e i n t e r e s t , t a x , d e p r e c i a t i o n a n d
amortisation (EBITDA) margin of more than 80%. With the
ongoing expansion at the power plant in Cochin its total
power generation capacity would reach 76MW. We believe
the power business will continue to add cream to its
margin and profitability. Currently, the power division
generates about one-third of its profit and should continue
to do so for the next few years.
Near-term concerns could affect the stock price
Carbon black feed stock (CBFS) is the major raw material
used to manufacture carbon black. CBFS prices have shot
up recently in line with the rise in crude oil prices. On
the other hand, it seems difficult to pass on the entire
increase in the raw material cost to tyre manufacturers.
Hence, we expect the company to witness margin pressure
in the near term which would affect its Q4FY2011 and
Q1FY2012 numbers too. As a result, its stock could also
face pressure in the near term.
Valuation and view
We are positive about the expansion move of the company
and its impressive share in the carbon black market, both
in India and across the globe. However, the recent spike
in its raw material cost led by a rise in crude oil prices
could pressurise its margin for some time, as it seems
difficult to pass on the hike to the tyre manufacturers in
the near term. These near-term concerns could affect
the stock’s performance in the days ahead. We have
factored in a CBFS rate of $420 per tonne, as CBFS prices
have gone above the $400 level and even touched $450
for a while. We retain our estimates for now and will
revise our CBFS price assumption if CBFS surges further
and stabilises at a higher level.
At the current market price, the PCBL stock trades at
attractive valuations of 3.2x FY2012E earnings and 3x
FY2012E enterprise value (EV)/EBITDA. We maintain our
Buy recommendation on the stock with a price target of
Rs212, based on 4x EV/EBITDA of FY2012E.
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