As part of our PL Mega Month series, we recently hosted investor meetings with Phillips Carbon Black (PCBL).
The company is setting up 90,000tpa carbon black facility and 16MW power plant at Mundra with a capital outlay of Rs2.2 billion, which is likely to be operational in Q2FY10.
In view of the global financial meltdown, the company is critically reviewing the Kochi and Vietnam projects.
PCBL’s 30-MW captive power plant at Durgapur at a capital outlay of Rs1.15 biilion, has started generating saleable power of 15MW since April 2009. The company would be selling power at Rs2.5 per unit.
Carbon black is primarily used to manufacture tyres. Supply- demand of carbon black largely depends on off take by Tyre manufacturers.
Indian tyre industry has reported decline in production by 11.9% (in tonnage terms) in April 09 (y-o-y).
The replacement segment posted moderate growth of 2.8% (y-o-y) but Original Equipment (OE) segment posted decline of 19.3%. Exports also declined by 30.6% (y-o-y).
However, the industry has witnessed month-on-month increase of 3%, 33% and 14% in off take in replacement, OE and exports segments, respectively.
Month-on Month increase in off take indicates improvement in business scenario, which would impact in positive way to Carbon black (CB) manufacturers.
Also, PCBL’s increase in production of CB from 10000T/ Month in December 08 to about 20500T/ Month in April 09 indicates the same.
With the improvement in business condition for tyre industry (both replacement as well as OEMs), we expect the environment for Carbon black also to improve. Thus there would be improvement in volumes as well realization per tonne of Carbon black.
Also, specifically with respect to PCBL, due to availability of Carbon credits, the revenue from power would contribute directly to the bottom-line of the company.
We expect Sales to grow at CAGR of 8.8% over period of two years. The bottomline is expected to improve from Loss of Rs 652mn in FY09 to net Profit of Rs 1.2bn in FY11. At CMP of Rs49, the stock is trading at 1.6x FY10E and 1.2x FY11E.
Due to improvement in macro condition, we change the rating from Sell to ACCUMULATE with revised target price of Rs76.