Phillips Carbon Black Research Reports By ICICI-Direct & IDBI Capital

Research report by ICICI-Direct

Improving operating matrix, re-rating to sustain, retain BUY

The operating matrix of PCBL is steadily on the uptrend with the company realising robust profitability at the P&L level in FY17. On the balance sheet side, the matrix is even more encouraging with PCBL generating ~Rs 358 crore as cash flow from operations and consequent retiring of debt to the tune of ~Rs 350 crore in FY17. It incorporates a steady improvement in net working cycle with net working capital (NWC) days coming in at 47 days in FY17 vs. 72 days in FY16. We expect the robust cash flow generation trend to continue with PCBL offering a cash flow yield of ~10% in FY17- 19E. On the return ratios front, PCBL clocked double digit return ratios in FY17 (first time in five year bloc of FY12-17) with RoE at 14% & RoCE at 16.5% (adjusted for revaluation reserve). We expect return ratios to further improve to ~25% at the RoE level and ~20% at the RoCE level over FY17-19E. Going forward, in FY17-19E, we expect sales to grow at 9.3% CAGR in FY17-19E while EBITDA is expected to grow at 14.0% CAGR in FY171-19E. Consequent EPS is expected at Rs 50/share in FY18E and Rs 55/share in FY19E. We value PCBL at Rs 825, i.e. 15.0x P/E on FY19E EPS of Rs 55.0/share. We maintain our BUY rating on the stock. We have been positive on the stock ever since our initiation under the Nano Nivesh brand (price level at Rs 175 levels). We believe there is a further leg up in the story with further upside potential in the stock.

Initiating research report by IDBI Capital

Product mix and efficiencies to drive profitability

Summary

– Phillips Carbon Black (PCB) is the largest manufacturer of carbon black in India (46% market share by capacity) and seventh largest in the world.

– Rising tyre demand in India alongside production curbs in China (lower supplies) provide strong visibility on volume growth/margins for PCB.

– We expect PCB’s sales/EBITDA/net profit to grow at a CAGR of 14.5%/30.5%/93.4% over FY17-19E. Its net debt to EBITDA to improve from 2.6x in FY17 to 1.3x by FY19; return on equity is likely to improve from 6.5% in FY17 to 18.5% in FY19. Given these factors, PCB’s stock is currently trading at an inexpensive valuation of 10.5x/8.9x FY18/FY19 EPS.

– We initiate coverage on the stock with a BUY, Target price – Rs911.

Key Highlights and Investment Rationale

– Brownfield expansion with modest capex

PCB is expanding carbon black capacity by 66k tonnes via brownfield expansion (current capacity – 472k tonnes) with a modest capex of Rs1,700 mn by Q2FY19. Further, PCB is doubling its high-margin specialty grade carbon to 24k tonnes with a capex of Rs700 mn by Q3FY18. We expect volumes to grow at a CAGR of 4.5% over FY17-FY19E.

– EBITDA/tonne to expand on better product mix, efficiencies and volumes

We expect PCB’s EBITDA margin to expand on the back of improving operating efficiencies, higher volumes and better product mix in favour of non-rubber products. We expect EBITDA/tonne to increase from Rs7,438 in FY17 to Rs11,056 in FY19E.

– Initiate coverage with BUY; TP of Rs911

We believe PCB is in a sweet spot currently given rising tyre demand in India, competitive position in the international markets and improving product mix in favour of non-rubber products. The company’s credit profile is also likely to strengthen with higher free cash flows and falling net debt. The stock is currently trading at an inexpensive valuation of 10.5x/8.9x FY18/FY19 EPS. We assign a PE multiple of 12.0x to our FY19E EPS and derive a target price of Rs911.”