CRISIL revises Phillips Carbon's fair value to Rs 212

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CRISIL revises Phillips Carbon's fair value to Rs 212

CRISIL Research has come out with its report on Phillips Carbon Black (PCBL). The research firm has maintained the fundamental grade of 4/5 to the company in its February 7, 2012 report.

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CRISIL Research has come out with its report on Phillips Carbon Black (PCBL). The research firm has maintained the fundamental grade of 4/5 to the company in its February 7, 2012 report.

Kolkata-based Phillips Carbon Black Ltd (PCBL), part of the RP-Sanjiv Goenka Group, is the largest domestic manufacturer of carbon black (~47% of total capacity). It also sells excess power from its captive plants to the grid. Though PCBL is expected to face pressure in carbon black due to demand slowdown in the short term, the power business will support its overall profitability. We maintain our fundamental grade of 4/5 given the long-term positive outlook on the end-user tyre industry.

Long-term story intact, some bumps in the short term
PCBL has increased its capacity in Mundra by 50,000 MT (April 2011), and is in the process of debottlenecking in Cochin and Durgapur to tap the potential demand for carbon black arising from the tyre industry. The Indian tyre industry is expected to grow at 8-9% in FY12, followed by a healthy CAGR of 10-12% over the next four years driven by higher OEM (original equipment manufacturer) offtake and increase in replacement demand.

Sale of excess power to help maintain margins
PCBL has continuously expanded its power generating capacity over the past three years. It sells excess power after meeting its requirement to the grid. The power segment contributed ~4.5% to top line and ~30% to EBITDA in FY11. We expect its contribution to EBITDA to rise to 35-40% in FY12 and FY13 due to weak profitability in the carbon black division.

Risks: Fortunes dependent on tyre industry and crude prices volatility
1) Despite diversifying into power, PCBL continues to be dependent on the tyre industry for its future growth and is likely to remain vulnerable to the cyclicality of the automobile sector. 2) Carbon black feedstock (CBFS) - the raw material used to produce carbon black - is a crude oil derivative. Any fluctuation in prices will negatively impact its EBIDTA margins.

Revenues to grow in FY12, to remain flat in FY13
FY12 revenues will be driven by higher realisation of carbon black due to higher raw material prices, while we expect revenues to remain flat in FY13 due to lower realisation. Margins are expected to contract to 10.6% in FY12 from 13% in FY11 and improve in FY13 to 11% driven by improved demand and rising share of the power division. EPS is expected to decline from Rs 32.9 in FY11 to Rs 29 in FY12 and improve to Rs 31.7 in FY13.

Valuation - the current market price has strong upside
We have valued PCBL by the discounted cash flow (DCF) method and revised our fair value to Rs 212 per share (from Rs 240) on account of downward revision in earnings estimates. At the current market price, the stock merits a valuation grade of 5/5. The company has been paying healthy dividend resulting in yield of 4% over past two years.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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