Phillips Carbon Black’s enviable ascent
Even after a 5% correction last Friday, the Phillips Carbon Black Ltd stock is still up about four times in the last one year. The stock surged as the company steered a sharp improvement in profitability. Earnings per share jumped from Rs4.60 in fiscal year 2016 (FY16) to Rs19.60 in FY17, as the business environment turned in the industry’s favour.
Ebitda (earnings before interest, tax, depreciation and amortization) margins, which indicate profitability, rose from around 8% in FY16 to 13% in FY17. Profitability got a boost from better utilization, realizations, and reduced competitive intensity thanks to the drop in crude oil prices and imposition of anti-dumping duty on Chinese products.
The company is a large manufacturer of carbon black in India, used for manufacturing tyres. With supplies remaining tight and demand rising steadily, analysts expect Phillips Carbon to maintain profitability, helping it report strong earnings.
“The industry margin will remain firm over the medium term as domestic players would continue to enjoy better pricing power due to structural improvement in the global industry fundamentals, improved geographical mix (exports share is expected to decline which entails 3-5% discount over domestic realization) and benefits of operating leverage,” CARE Ratings said in a note on the domestic carbon black industry.
Apart from new capacities, the rising share of value-added products in total business is expected to aid profitability and earnings growth. “The company targets non-rubber (including speciality) volumes to contribute 20% of total volumes and contribute 40% to EBITDA by FY20. These products enjoy very high margins,” IDBI Capital Markets and Securities Ltd said in a note.
ICICI Securities Ltd estimates sales and operating profit to expand at an average annual pace of 9% and 14%, respectively till 2018-19. The broking firm expects the higher earnings to improve return ratios further. This, along with reduction in debt and stronger balance sheet, are expected to aid stock valuations.
Tracking these cues, investors have rewarded the stock. Even then, the encouraging outlook means some analysts expect the stock to continue to do well. While valuation at around 12 times one-year forward earnings estimate has seen a notable expansion, the key, as Antique Stock Broking Ltd pointed in a note last March, is that the company should deliver on the execution-capacity additions and plans to raise the share of high- value business in overall revenues. Crude oil prices, carbon black demand in China and the rest of the world, which influence international rates, are other factors investors will have to keep tabs on.