PHILIPS CARBON BLACK – ShareKhan Research Report

ShareKhan have recommended a BUY on PHILIPS CARBON BLACK with the following investment rationale:

Timely expansion of capacities by PHILIPS CARBON BLACK

The Indian tyre industry is back to the boom phase with strong tyre consumption growth of 21% in FY2010 (see table “Domestic tyre consumption”). We believe that the demand for tyres would remain strong in the coming years because of the strong growth in the sale of automobiles especially commercial vehicles (see graph “Strong Y-o-Y growth in domestic auto sales volume”). Hence, the demand for carbon black (which accounts for 13% of the raw material cost of a tyre manufacturer) is also expected to remain buoyant.

PHILIPS CARBON BLACK is expanding its carbon black capacity by 50,000 tonne to 410,000 tonne in FY2011 to capitalise on the rising carbon black demand in India. PHILIPS CARBON BLACK also intends to foray into the Vietnamese market by setting up a plant of a capacity of 50,000 tonne.

Non-tyre demand also strong for PHILIPS CARBON BLACK

We believe that the demand for carbon black from the non-tyre segment would also remain strong, thanks to the rapidly rising industrial activities in India. Apart from tyres, carbon black is also used in industrial segments such as conveyor belts, auto ancillaries and printing ink.

Pricing to improve in domestic market for PHILIPS CARBON BLACK

Recently, PHILIPS CARBON BLACK successfully negotiated with domestic tyre manufacturers to hike its carbon black prices by 5% (in absolute terms, this turns out to be a substantial rise of Rs2,000 per tonne). This would positively affect PHILIPS CARBON BLACK’s carbon black earnings, which would get reflected in its Q2FY2011 results.

Outlook for PHILIPS CARBON BLACK

The strong demand environment coupled with the hike in the price of carbon black in the domestic market adds to our confidence about the strong growth in the earnings of PHILIPS CARBON BLACK in the future. However, a higher than expected price of