Phillips Carbon Black – Angel Broking Research Report

Angel Broking have re initiated coverage on Phillips Carbon Black with a BUY rating. The investment rationale is as follows:

Phillips Carbon Black, part of the RPG Group, is the leading producer of carbon black in India, with ~48% of the total installed capacity in FY2010. Currently, with ~65% of the total carbon black production in the country being consumed by the tyre industry,Phillips Carbon Black is well poised to benefit from the rising demand for tyres going ahead. Moreover, we expect Phillips Carbon Black’s power segment to start contributing substantially to its bottom-line in FY2011 and FY2012 and provide stability to its earnings. We have valued Phillips Carbon Black on the sum-of- the parts valuation methodology and arrived at a Target Price of Rs270 wherein we have valued Phillips Carbon Black’s carbon black segment at Rs144//share (1x FY2012E P/BV) and the power segment at Rs126/share (NPV method). We Re-initiate Coverage on the stock with a Buy recommendation.

Volume growth backed by capacity expansions to drive carbon black revenues:

To capitalise on the rising demand for tyres Phillips Carbon Black has been on the expansion spree. Post commissioning of the 90,000MT green-field plant at Mundra in October 2009, Phillips Carbon Blacks current installed capacity stands at 360,000MT. Phillips Carbon Black plans to further increase its capacity to 410,000MT by setting up a brown-field plant of 50,000MT in Mundra, which is expected to be operational by 3QFY2011E. Thus, with additional capacities coming on stream, we expect volumes and revenues of the carbon black segment to register CAGR of 15.3% and 22.3% respectively over FY2010-12E.

Power segment- The game changer:

Phillips Carbon Black currently has in place 60.5MW of power generating capacity and with further capacities coming up, the same will be enhanced to 77.5MW by 3QFY2012E. Since Phillips Carbon Black utilises the off-gas generated during the manufacture of carbon black for producing power, Phillips Carbon Black has no raw material requirements. Hence, although the power revenues would contribute a mere ~7% to the company’s total top-line in FY2012E, on the bottom-line front it would contribute ~50% of total profit. Thus, a high proportion of the power revenues would percolate to the bottom-line and lend stability to Phillips Carbon Black’s earnings while significantly de-risking its business model.