Phillips Carbon Black Volumes to improve yoy; stock rallied; Hold :: Anand Rathi

Phillips Carbon Black
Volumes to improve yoy; stock rallied; Hold
Key takeaways
Slowdown in domestic market continues. We expect Phillips Carbon
Black to report 3QFY14 volumes have risen 1.2% qoq (11.7% yoy). Last
year’s quarter had a very low base due to demand in the domestic market
dropping and more imports by domestic clients. On account of the rise in
export volumes, we expect revenue to have grown 8.4% yoy. And the
contribution from power could have declined, by 11.2% yoy, to `180m.
Disappointment in carbon black. We expect a 5.6% EBITDA margin in
3QFY14 vs 2.7% in 3QFY13. This 290-bp improvement in OPM would be
due to the pass-through of raw material costs. Carbon black imports are
squeezing the company. Though we expect other expenditure to be up
132bps to 11.5% yoy, we expect the EBITDA margin to have improved
290bps due to substantially lower raw-material costs (as percent of sales).
Expected to report profit. We expect a `47m profit in 3QFY14, a steep
513% jump yoy. We expect the volume pickup to have pulled the profit up.
The company was struck by dumping by China and other countries. The
government has imposed a 30% safeguard duty on carbon-black imports
from China. Though this would help reduce imports over time, we do not see
any benefit in domestic volumes in 3Q.
Our take. Since the 30% safeguard duty was imposed in Oct’12 (till Oct’13)
and 25% on CB imports from China till 31 Dec’13, such imports have slid.
Imports, though, from Korea have now risen. The 50,000-ton Cochin plant CB
expansion was completed in May’13. An MoU has been signed with the Tamil
Nadu government to set up a new CB and power plant; environment clearances
are in progress. In view of global developments, project work at Vietnam is
under review. We value the stock at a target PE of 3.5x FY15e earnings. We
downgrade the stock to a Hold, with a target price of `49. Risks. A slowdown
with original equipment manufacturers and adverse forex movement.

DLF, Banks, L & T, , Philips Carbon Black, CESC, Selan, 3i Infotech, Ramky, PTC :: Reader Technical Queries:: Business Line

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Please discuss the prospects of DLF.

Jyoti Majhi

DLF (Rs 180): DLF could not really recover from the bludgeoning received in the previous market crash when it fell from Rs 1,225 to Rs 124.

The recovery that followed retraced about one-third of the decline only. This structural decline resumed from the peak of Rs 520 recorded in October 2009.

Year 2011 was also pretty difficult with the stock losing 36 per cent this year. It has closed below the critical medium-term support at Rs 275. Next long-term support for the stock is at Rs 140 and Rs 124.

Investors need to divest their holding in this stock if it declines below Rs 170.

Resistances in the months ahead would be at Rs 310 and Rs 392. But long-term outlook will turn positive only on close above Rs 545.

Subsequent targets are Rs 673 and Rs 807. The stock could remain in the zone between Rs 125 and Rs 550 over the next two years.

I would like to buy Bank Nifty. At what price should I buy it?

Ramanuj Marda

Benchmark Bank BEES (Rs 802.1): Exchange traded fund (ETF) on bank stocks is the best way for investors to take an exposure to this sector.

Benchmark Bank BEES is moving down since last October when it recorded the peak of Rs 1,484. This decline has pulled the ETF close to its critical medium-term support at Rs 780.

There are a couple of supports just below at Rs 700 and Rs 650.

Investors can buy the fund in declines as long as it trades above Rs 650.

If this level is penetrated, the slide can accelerate to pull the ETF to March 2009 trough at Rs 335.

There can be a rally to Rs 1,050 or Rs 1,220 in the months ahead. Investors with short to medium-term perspective can divest their holding at either of these hurdles.

Long-term view will turn positive once the ETF moves above the second resistance.

I would like to buy shares of Larsen & Toubro. Please advise on the price range to buy it?

Vishwanath Hadli

Larsen & Toubro (Rs 995.1): Larsen & Toubro was devastated in the September quarter with the stock losing 36 per cent in this period.

The stock is trading well below the key medium-term support at Rs 1,200.

It has also closed the gap that was formed in May 2009.

That said, the stock has psychological support at Rs 1,000.

This is also the floor of the gap formed after the 2009 elections.

Investors with a greater penchant for risk can buy the stock at current levels or in declines with stop at Rs 870.

Breach of this level can drag the stock to the 2009 low at Rs 556.

The short- as well as medium-term trends in the stock are currently down and it is not displaying any inclination to reverse higher.

Should there be an upward reversal from these levels, short-term resistances will be at Rs 1,266 and then Rs 1,450.

Investors with short- to medium-term perspective can divest their holding if the stock reverses lower from either of these levels.

Medium-term view will turn positive only on close above Rs 1,450.

Subsequent resistances are Rs 1,600 and Rs 1,745.

I am holding shares of Phillips Carbon Black purchased at Rs 140 and 3i Infotech at Rs 45. Please advise on future course of action.

Siva Prasad

Phillips Carbon Black (Rs 86.4): This stock is dropping like a stone since mid-November. This decline has pulled the stock well below the medium-term trend deciding level at Rs 109.

Next support on the charts is at Rs 56 and this can now act as stop-loss for investors who are still holding the stock. Next long-term support is way off at Rs 24.

Investors with lower risk appetite can sell the stock at this juncture and consider re-entry once it closes above Rs 107.

Key medium-term hurdle is however at Rs 160. Next targets are Rs 180 and Rs 250.

3i Infotech (Rs 11.7): 3i Infotech also took it on the chin in 2011, collapsing from Rs 60 to Rs 12, loss of 80 per cent. The stock has also declined below its long-term trough at Rs 25.

It is difficult to tell where this downward spiral will halt. Any rally from hereon will face strong hurdle at Rs 25. Investors can switch out of this stock and consider buying it again only on a firm weekly close above Rs 25.

Medium-term view will turn positive only on a close above Rs 52.

I would like to know the prospects of Ramky Infrastructure.

Chandrasekkar

Ramky Infrastructure (Rs 205.9): This stock does not have sufficient history to enable us to come to a conclusion on its long-term prospects. But it is currently trading close to its life-time low.

That the stock is unable to break the sequence of lower troughs and peaks since its listing also implies that the stock is in a long-term down trend.

There is no semblance of reversal in either short- or medium-term time-frames. Investors with lower risk appetite can switch out of this stock and consider re-investment on a weekly close above Rs 250.

Next hurdles for the stock are at Rs 330 and Rs 360.

Please discuss the medium- and long-term out look of PTC and Selan Exploration.

A Parameswaran

PTC India (Rs 38.8): The long-term trading band for PTC is between Rs 40 and Rs 200. The stock is vacillating in this band since 2004. The stock is currently near the floor of this long-term trading zone.

Its life-time low of Rs 31 recorded in April 2004 should serve as the next long-term support and the stop-loss for investors.

Investors can continue to hold on to the stock since a reversal from here has the potential to take the stock all the way back to Rs 150 or even Rs 200. Medium-term targets on an upward reversal are Rs 80 and Rs 108.

The ceiling between Rs 150 and Rs 200 will continue to act as an obstacle for long-term uptrends.

Selan Exploration Technology (Rs 229): Selan Exploration is also southward bound since the beginning of this year. The stock is currently ruling at its 52-week low. That said, the long-term trend in the stock continues to be up.

It is still trading above its long-term trend deciding level of Rs 216. Investors can continue to hold the stock as long as it trades above this level.

Breach of this level will drag the stock to Rs 140, Rs 118 or Rs 90. Medium-term resistances will be at Rs 300 and Rs 350. Key long-term resistance is at Rs 425.

What does the technical chart say about CESC? Can I enter at current level of 204?

Shankar Mayuram

CESC (Rs 203.4): The long-term uptrend that began from January 2008 peak continues to be in force in CESC.

The stock is currently nearing its long-term base at Rs 165 recorded in October 2008. Investors can continue to hold the stock as long as it holds above this level.

Resistances for the medium-term will be at Rs 276 and Rs 375. Long-term trend will however turn positive only on close above Rs 500.

Buy Phillips Carbon Black -Management meet note :: ShareKhan

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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.

Buy Phillips Carbon Black - Powering ahead; :: Anand Rathi

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Phillips Carbon Black
Powering ahead; maintain Buy
We maintain a Buy on Phillips Carbon Black, with a revised
target of `246 (from `261). We are upbeat about the company,
given its healthy volume growth and improving high-margin
power division. We expect a 23% net profit CAGR over FY11-13e.

Anand Rathi: buy Phillips Carbon Black Robust volume growth; target Rs 261

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Phillips Carbon Black
Robust volume growth; maintain Buy
Phillips Carbon Black (PCBL) registered robust 3QFY11 volume
growth of 20.4% yoy (7.6% qoq), in line with our estimate.
Exports were up 7% yoy and 18% qoq. These and better
realization helped PCBL clock-in a healthy 24.3% revenue
growth, despite lower contribution from the power segment.

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.

Philips Carbon Black -2QFY2011 Result Update: Angel Broking

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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.

Phillips Carbon Black- Continuing robust volume growth; Buy: Anand Rathi

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Phillips Carbon Black
Continuing robust volume growth; maintain Buy
 In line with estimate, revenue driven by better volumes.
Phillips Carbon Black (PCB) reported robust 2QFY11 volume
growth of 29.1% yoy (0.6% qoq), in line with our estimate, mainly
boosted by the 199.5% yoy rise in exports. This and better
realisation allowed it to clock a healthy 50.6% revenue growth,
despite the slightly lower contribution from the power segment.
 Power segment disappoints; 2QFY11 margin declines. PCB’s
12% 2QFY10 margin was considerably lower (by 18.6%), chiefly
due to the rise in raw material cost and the smaller contribution
from Power, down 12%. Employee cost jumped 76% yoy on
account of the bonus payout. At the EBIT level, contribution
from Power was down 20% yoy to `136m.
 Net profit slipped 25% yoy. The lower contribution from Power
dragged the net profit down 25% yoy to `242m, as the company
had made provision for a higher tax rate (33%; we expected 20%)
due to the lower power profits and higher deferred tax.
 Change in estimates. We lower our FY11 and FY12 EPS
estimates by 9.1% and 3% respectively due to the higher tax rate
and other adjustments.
 Valuation and risks. We maintain a Buy on PCB, with a revised
target price of `272 (earlier `278). The stock trades at 5.5x FY11e
and 4.3x FY12e earnings. We continue to value the stock at 1.3x
FY12e PBV, giving a target price of `272. We introduce FY13
estimates. Risks: Higher imports and lower exports of carbon
black; and lower-than-anticipated merchant power rate.

IIFL recommendations: top Buys and Sells