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May 30, 2012, 09.51 AM IST
Phillips Carbon Black has potential upside of 60-70%, says Aashish Tater, Fort Share Broking.
Tater told CNBC-TV18, "If you see the numbers that has been reported by Phillips Carbon Black yesterday, there have been a substantial fall in profit but still the company managed an EPS of close to Rs 25 odd mark. We maintain a similar view that if what we have given for many other industries and areas that when you try to plant a new capacity at much higher cost then the stock, which are existing players, they would definitely get rerated to the RCV value or at least 10-15% discount that is max. So on that basis, let me take you through what has happened into global perspective. For a 55,000 metric tonne plant, companies have shelled out almost USD 67-80 million in US terms and for this particular company, the next year capacity would be somewhere around 4,72,000 metric tonne and the company would be paying a dividend of Rs 4 roughly working out at 4% dividend yield. So if I take that arbitrage call, the fair value of the stock roughly works out to be at Rs 168-169."
He further added, "The second call that I am going to take is from the raw material perspective. The basic component of raw material is going to get at its peak level during the first quarter itself. We feel that carbon black feed stock prices would be peak out sometime in the June end and thus that would be much better for the companies. If someone try to take a positional call from next six-eight months perspective that would be the second key trigger for the stock."
"The third, most interesting key trigger is there is a huge consolidation that is going into the carbon black space. We saw last year only how Aditya Birla Novo bought out the third largest producer becoming one of the largest producer in the world. So if I take all these things into picture, though there is some pressure from China, there is some less of demand from the tyre industry, that is the user end industry of carbon black."
"We feel the worst case scenario for this particular stock is down at Rs 95-94 on average terms but there is a potential upside of almost 60-70% because if there is a re-rating in terms of EPS expansion, which we are working right now is Rs 32 and if our feed stock prices gets corrected to the expected levels, the EPS will shoot to at least Rs 37-38. This will be very big trigger for the company and even the company trades at 5-6 P/E multiple at that point of time, the targets would be realistic from next six-eight months perspective."
Disclosure: It is safe to assume that the stocks discussed have been recommended to clients.
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