Phillips Carbon Black Q1FY17 Result Update Report By ICICI Direct

Growth momentum to sustain…

• Phillips Carbon Black (PCBL) reported a robust Q1FY17 performance; largely tracking our investment thesis. Net sales for the quarter were at | 430.6 crore, down 10% YoY

• EBITDA was at | 53.0 crore with corresponding EBITDA margins at 12.3%. PAT in Q1FY17 was at | 12.0 crore

• Carbon black sales volume in Q1FY17 was at 95,500 tonne, which includes domestic sales of 76400 tonne and export sales of 19,100 tonne. Corresponding EBITDA/tonne in Q1FY17 was at | 5548 tonne

Carbon black; critical tyre component!

Carbon black is used as a reinforcement material providing tensile strength to tyres. It is a critical component for manufacturing tyres and forms ~26% by volume of the tyre weight and ~10% by value of tyre costs. Total global capacity for manufacturing carbon black as of CY15 was at 16 million tonne (MT) with total demand at ~12 MT and is expected to grow at a CAGR of 4-5% in the next couple of years. In India, total capacity for manufacturing carbon black as of FY16 was at 1 MT with consumption at ~0.8 MT. PCBL with a capacity of 470 KT is the largest player domestically with market share in excess of 30%. Domestic demand is expected to grow at a CAGR of 6-7% in FY16-18E.

Decline in crude, anti dumping duty on Chinese imports; sweet spot!

Carbon black can be manufactured using two different processes, which either use coal tar or crude derivative i.e. carbon black feed stock (CBFS) as a raw material. Post a decline in crude prices, manufacturing of carbon black using CBFS has gained traction (more economic viable option), which benefits Indian players including PCBL. In a recent update, as of November 2015, for five years i.e. till November 2020, the Government of India has imposed an anti dumping duty on imports of carbon black from China into India to the tune of ~US$400/tonne (global realisations at ~US$600/tonne as of Q1FY17), which protects the interest of domestic carbon black manufacturer, including PCBL.

Increasing volume; operating leverage benefits to kick in!

With a positive outlook on the domestic automobile sector and consequent strong tyre demand, we expect PCBL to report strong volume growth, going forward. At PCB, we expect sales volume of carbon black to grow at 6.5% CAGR in FY18E-16 to 380 KT in FY18E (335 KT in FY16). Moreover, this sales volume growth will be led by domestic sales, which are indeed accretive in realisations and consequent margins. Domestic to exports sales volume mix is expected to improve to 80:20 in FY17E-18E vs. 72:28 in FY16. Thus, increasing capacity utilisations and its operating leverage benefits, sales tilted more in favour of domestic vis-à-vis exports and decline in key raw material prices (CBFS) will result in an expansion of EBITDA margins to the tune of 430 bps in FY16-18E.

Declining debt; strong earnings trajectory warrants re-rating!

By virtue of declining profitability and elongated working capital cycle, PCBL has accumulated huge debt with peak debt at | 1220 crore as of FY15. However, with enhanced profitability and working capital controls, debt has reduced to | 1021 crore in FY16. Going forward, however, with a strong operational performance led by 6.5% sales volume growth in FY16-18E and 430 bps EBITDA margin expansion, we expect PAT to quadruple at PCBL by FY18. This will improve the leverage profile with consequent D/E at 1.2x by FY18E. We expect PCB to report PAT of | 45.5 crore in FY17E & | 93 crore in FY18E. We value PCB at | 300, i.e. 11x P/E on FY18E EPS of | 27/share. We have a BUY rating on the stock.