PCBL_AK_IC

7/31/2019 PCBL_AK_IC

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1 18th April 20

Phillips Carbon Black Limited CMP 151Target Price 212

Potential Upside 40%Upcoming capacity to fuel growth

BUY Investment Rationale:

Capacity Addition to fuel growth

Backed by strong tyre demand, carbon black demand is expected grow at CAGR 11-12% in next two years. To cash in this rising deman

Phillips Carbon Black(PCBL) is expanding its carbon black capacity

Mundra by 50,000 MTPA. We expect Companys revenues from carbo

black business (India) to grow at CAGR 19% over FY2010-2013E.

Power business to provide stability

PCBL is expanding its power generating capacity by 18 MW by FY2013

which would likely to increase revenue contribution to 5% and EBITD

contribution to 34% in FY2013E. This is likely to provide stability

companys earnings from cyclicality of carbon black business and help

de risking its business model to some extent.

Vietnam Joint Venture to further escalate revenues

PCBL is setting up first carbon black manufacturing unit in the coun

through Joint Venture (80% share) in two phases. The first phase of 55,00

MTPA and co-generation power plant of 12 MW is expected to b

commissioned in 2HFY2013E. We expect Vietnam venture to contribute 5

and 4% to total revenues and EBITDA respectively in FY2013E.

Improving balance sheet condition

With strong operating cash flow (on account of capacity additio

increasing contribution from power business) and relatively less cape

company is likely to generate cumulative free cash flow of Rs.125 millio

over FY2011E-FY2013E period, which would help company to pursu

growth opportunities without much dependence on debt. Similarly, wexpect PCBLs debt to equity ratio to come down to 0.8x in FY2013E

compared to 1.7x in FY2010.

Outlook & Valuation

PCBL, largest producer of Carbon black in India, is set to ride growth

carbon black demand with its capacity addition plans and domina

position in Carbon black industry. Moreover, the companys pow

business is expected to contribute significantly to its profitability an

provide stability to the companys earnings.

We initiate coverage on PCBL with a BUY rating andtarget price of Rs2(based on EV/EBITDA exit multiple of 5.25x on 4 year perpetuity two-stag

model), which implies around 40% upside from current levels.

BSE 506590

NSE PHILIPCARB

Reuters PHIL.BO

Bloomberg PHCB IN

IndustryInorganicChemicals

Market Cap (Rs. Mn) 5216

Equity (Rs. Mn) 332.2

Face Value (Rs.) 10

52WkH/L 242.7/113.2

Sensex 19386

Nifty 5825

Shareholding Pattern

NIFTY v/s PCBL

(INR

million)

Net

Revenue

y-o-y

(%)EBITDA

EBITDA

(%)

Adj

PAT

y-o-y

(%)

EPS

(FD)

ROE

(%)

RoCE

(%)

P/B

(x)

Debt/

(FY2010A 12,325.74 6.0% 1,794.81 14.6% 1,222.33 - 36.80 45% 19% 1.32 1

FY2011E 16,577.59 34.5% 2,084.43 12.6% 1,073.77 -12.2% 32.32 25% 17% 0.96 1

FY2012E 19,432.40 17.2% 2,553.66 13.1% 1,315.81 22.5% 39.61 23% 19% 0.79 0

FY2013E 21,860.00 12.5% 2,877.46 13.2% 1,501.07 14.1% 43.55 21% 19% 0.67 0

Indian (Promoter & group)Non Promoter (Institution)Non Promoter (Non Institution)Public & Others

A. K. Stockmart Pvt. Ltd.


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2 18th April 20

About the company:

Overview:

Phillips Carbon Black Limited (PCBL), part of the RPG Group, pioneered the carb

black industry in India. It is now the leading producer of carbon black in the count

The company is not only the largest exporter of Carbon Black from India but also o

of the largest in Asia in its field.

PCBL started production from December 1962 by the oil furnace technology. T

company's present installed capacity is 360,000 MTPA (48% of total installed capac

in India as of FY2010). It currently has four manufacturing plants spread across Ind

Company is further expanding its capacity at Mundra by 50,000 MTPA.

Location Carbon Black (MTPA)

Durgapur (W.B) 140,000

Mundra (Gujarat) 90,000

Palej (Gujarat) 90,000

Cochin (Kerala) 40,000Total 360,000

Source: Company, AKS Research

Today, Company is the largest and 8th largest producer of carbon black in India a

world respectively.

Company Capacity(mn tn)

Cabot Corp 2.01

Evonik 1.45

Columbian Chem 1.13

Birla Group 0.79

CSRC & Continental 0.74

SID Richardson 0.45

Tokai Carbon 0.37

PCBL 0.36

Omsktechuglerod 0.35

Black Cat 0.29Source: Company, AKS Research

To take advantage of newly introduced Electricity Act of 2003, the company has s

up 12 MW co-generation power plant at its Baroda plant using the off gas generate

from production of carbon black.After meeting the internal demand for productiof carbon black, the surplus power of around 7 MW - 7.5 MW was sold to the GEB G

from end FY2005.

Encouraged by the success of the Baroda co-generation power plant, company h

subsequently set up co generation power plant at Mundra and Durgapur. With t

companys total installed power capacity stands at 58 MW at the end of FY20

Company further plans to expand its capacity at Mundra by 8 MW and Cochin by

MW, thus to have total capacity of 76 MW by FY2012E.


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Location Power (MW)

Durgapur (W.B) 30

Mundra (Gujarat) 16

Palej (Gujarat) 12

Total 58Source: Company, AKS Research

Power segment has contributed 4% to companys net revenue in FY2010. While its E

contribution stands at 27% in FY2010.



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4 18th April 20

Investment Rational

Capacity Addition to fuel growth

Demand for tyre expected to increase at CAGR 11%

The domestic tyre industry has grown by CAGR 10% over FY2005-FY2010 period led

strong automobile industry. The Automobile industry in India is one of the largest in t

world and one of the fastest growing globally. It has produced 14 mn vehicles

FY2010 which has grown at 5 year CAGR of 11%.

Source: ATMA, AKS Research

Similar growth has witnessed by tyre industry. India produced 97 mn tyres in FY20

which has grown at 5 year CAGR of 10%. Demand has further strengthened in FY20

Tyre production has increased by 28% in 1HFY2011 as compared to 1HFY2010.


In FY2011, auto sector has witnessed very strong growth with auto sales registeri

26.2% yoy volume growth.

Category

Growth in

FY2011 Outlook for FY2012E

Passenger Vehicles 29.6% 16%-18%

Commercial Vehicles 26.9% 14%-16%

Three Wheelers 25.8% 12%-14%

Two Wheelers 19.4% 9%-11%

Total 26.2% 12%-15%

Source: SIAM, AKS Research


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5 18th April 20

Automobile industry is expected to continue its healthy growth on account of stro

economic growth, rising income, favorable demographic profile and risi

disposable income, easy credit availability. As per Society of Indian AutomobManufacturers (SIAM), Auto industry is expected to grow by approximately 12-15%

o-y in FY2012E after taking into consideration higher interest rate scenario and rise

fuel costs.

The rise in Auto demand would increase the demand for tyres from OEMs and t

replacement market.The huge growth that has been witnessed in the last couple years would translate into the replacement market for Tyre manufacturers during t

next two years. Further, Indias growing importance as an automotive export hub

small cars is another key demand driver for tyres.

Based on these expectations, almost all major tyre companies have eith

announced or undertaken major greenfield/brownfield expansion projec

According to ICRA, tyre companies in India are expected to invest around Rs 175

in next 12 to 18 months to increase capacity by around 47%. This would translate in

strong demand growth for carbon black in India in next few years.

According to CRISIL estimates, The Indian tyre industry is expected to grow at a ra

of around 11-12% over FY2011E and FY2012E. Similary carban black industryexpected to grow by 11-12% by FY12E.

Volume growth to drive revenues

To cash in rising demand for Carbon Black, company is increasing its capacity in pa

few years. It has commissioned 90,000 MTPA carbon black capacity in Q3FY20

Further, the company is setting up Brownfield capacity of 50,000 MTPA at Mund

which is expected to come on stream by end Q1FY2012E.

With stabilizing of capacity started in FY2010 and new capacity coming on stream

FY2012E, we expect volumes to increase by 18%, 11% and 10% in FY2011E, FY201

and FY2013E respectively, registering CAGR growth of 13% over FY2010-FY201

period.


Considering PCBLs dominant position in Industry and oligopoly nature of the indus

realization is expected to increase with rising CBFS cost. Accordingly we expe

Companys revenues from carbon black business (India) to grow at CAGR 19% ov

FY2010-2013E.


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6 18th April 20


Power business to provide stability

The company has set up power plants at its existing facility in Durgapur, Mundra anpalej with total installed capacity of 58 MW. After meeting its internal requiremen

power is sold in open market. Further company is expanding its power capacity

Mundra and Cochin to reach total installed capacity of 76 MW by FY2012E.

With additional volumes from new capacity, we expect revenues from Pow

business (India) to increase by 25% CAGR over FY2010-FY2013E period. Similarly w

expect, power Businesss contribution to total revenue to increase to 5% in FY201

from 4% in FY2010.


There is no raw material cost for generating power as it is produced from off-g

generated from carbon black production. On other hand, currently power is sold

the open market at Rs.2.5-3/per unit, which translates into higher EBITDA margin of 8

88% for power segment. Additionally company plans to sell nearly half of its pow

through PPA from FY2012E, which would provide stability to realization from pow

business.

With increasing contribution of power business total revenue, we expect EBITD

contribution to increase to 34% in FY2013E as compared to around 22% in FY2010.

CAGR 19%

CAGR 25%


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7 18th April 20

Source: AKS Research

Increasing share of power business is likely to provide stability to companys earnin

from cyclicality of carbon black business and help in de risking its business model

some extent.

Vietnam Joint Venture to further escalate revenues

Vietnam is the worlds 4th largest rubber producer and has become an attracti

location for tyre manufacturers, but it does not have any carbon bla

manufacturing facility. Company estimates current carbon black demand of 100,0

MTPA in the country.

To capitalize on this opportunity, PCBL is setting up first carbon black manufacturin

unit in the country through Joint Venture (80% share) in two phases. The carbon bla

manufacturing capacity in the first phase will be 55,000 MTPA and co-generati

power plant will be 12 MW which is expected to be commissioned in 2HFY2013E. T

second phase of 60,000 MTPA plant and 6MW power plant is expected to

commissioned in FY2014E.

We expect Vietnam venture to contribute 5% and 4% to total revenues and EBITD

respectively in FY2013E.

Improving balance sheet condition

The company is likely to generate steady cash flow in coming years due to capac

addition, increasing contribution from power business. These expected cash flows a

sufficient to fund the companys capital expenditure and in addition likely

generate cumulative free cash flow of Rs.125 million over FY2011E-FY2013E period.


CAGR 85%


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This would help company to pursue growth opportunities without much dependenc

on debt, which would further enhance value for the shareholders of the compan

We expect PCBLs debt to equity ratio to come down to 0.8x in FY2013E as compar

to 1.7x in FY2010.



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9 18th April 20

Key Concerns

Slowdown in tyre industry

Demand for carbon black industry is largely dependent on growth in the tyre indust

Hence, any slowdown in the tyre industry may lead to lower demand and in tu

impact the companys earnings.

Rising Crude Oil prices

Carbon Black Feedstock (CBFS) is the main raw material used by the company whi

has to be imported. Being a derivative crude oil, its prices are directly linked

international crude oil price. Any sudden increase in oil prices could put pressure o

operating margins of the company.

To mitigate this risk, Company is considering setting up coal tar distillation pla

Carbon black oil(CBO) generated from this process can be used to produce Carb

black.

Delays in execution of upcoming capacities

PCBL is expanding its capacity in India and setting up new capacity in Vietnam. A

delays in timely execution of these capacities may affect the companperformance and our estimates.


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10 18th April 20

Peer Comparison

Trading at steep discount to global peers

On EV/EBITDA basis, the company is trading at 30%-45% discount to its global peers.

Price PE EV/EBITDA

FY2011E FY2012E FY2013E FY2011E FY2012E FY2013EPhillips

Carbon 151 4.7 3.8 3.5 4.3 3.3 3.1

CSRC* 30 16.5 9.4 NA NA NA NA

Black Cat* 15 34.3 NA NA NA NA NA

Tokai* 422 15.2 13.1 12.5 5.0 5.2 4.5

Cabot# 45 16.1 14.4 13.2 7.3 6.8 6.3*calendar year end, #Sep year end

Source: Bloomberg, AKS Research

Recently Aditya Birla Group entered into a definitive agreement to acqu

Columbian Chemicals Company (CCC) at an enterprise value of $875m. CCC h

installed carbon black capacity of 1.1 MTPA which values the company at around of Rs35,800/ton, whereas PCBL is currently trading at EV of Rs24,700/ton (3

discount) based on FY2011E estimates.


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11 18th April 20

Outlook and Valuation

PCBL, largest producer of Carbon black in India, is set to ride growth in carbon bla

demand with its capacity addition plans and dominant position in Carbon bla

industry. Moreover, the companys power business is expected to contribu

significantly to its profitability and provide stability to the companys earnings.

We have valued the company based on EV/EBITDA exit multiple of 5.25x on 4 ye

perpetuity two-stage model.

EV/EBIDTA exit Multiple

ROIC (Accounting figure) 22.60%

WACC (based on dynamic VaR) 13.50%

Maintenance Capital (Incrimental) 20.00%

Tax Rate 28.30%

Long Term Growth Rate(g) 1.50%

n' (modelled Growth Period) 4

Exit multiple for 'n' years 2.80

Exit multiple for Terminal years 4.74

EV/EBITDA (x) pre-tax & Mt. Cap. 7.54

Adj. for Maintenance Cap. (1-20%) 0.95

Adj. for Tax (1-28.3%) 1.34

Target EV/EBITDA (x) Exit multiple 5.25

Rs. Mn

EBITDA 2,084

Forward EV 10,951

Add: Cash 2,040

Less: Debt 5,953

Target EV 7,038

No of Shares(mn) 33.22

Target Price per share 212Source: AKS Research

We initiate coverage on PCBL with a BUY rating and target price of Rs212, whi

implies around 40% upside from current levels.

1 Year Forward PE Band 1 Year Forward EV/EBITDA Band

Source: AKS Research Source: AKS Research


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12 18th April 20

Economic Returns

PCBLs expected economic return of 24.6% is more than its cost of capital of 13.2%

FY2013E, which suggest company is able to create value for its shareholders.



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13 18th April 20

Industry Overview

Carbon black is essentially an oil by-product used as reinforcing agent in rubb

compounds.Carbon black is a general name for a variety of trade name produsuch as acetylene black, attrited black, channel black, flame black, furnace blac

lamp black, and thermal black. Primary user industry for carbon black is tyre (65

while rest is consumed by industrial rubber, inks. paints, belts & hoses.


Thus, carban black demand is largely driven by tyre demand which is in tu

dependent upon automobile demand. According to ATMA, Carban bla

constitutes 11% of the raw material cost of tyre companies and forms 20-25%

volume of the tyre.

Global Demand

As per company estimates, total installed capacity of carbon black in the world w

12.7 mn MTPA in CY2009, while demand was around 9 mn MTPA during the sam

period. According to research by Freedonia, world carban black demand

expected to reach 11.6 mn MTPA by 2013(6.4% CAGR over 2009-2013E).

Asia/Pacific region to post strongest gains in demand

The Asia/Pacific region, excluding Japan, is expected to report the strongest grow

in carbon black demand through 2013. Among these, China and India is likely to po

healthy growth due to a continuing rapid expansion in their automobile and ty

industries that will be driven by robust economic growth in both nations. China a

India saw the largest increases in new carbon black capacity among all countries

the world over the 2003 to 2008 period, and is expected to continue the same tren

through 2013.

Demand for carbon black in the developed parts of the world is expected continue to post below-average gains through 2013. Carbon black capac

utilization rates dropped significantly in developed countries in 2008 due to econom

slowdown. This situation was especially worst in the US, where capacity utilization rat

fell below 70 percent, resulting in several carbon black plants being closed. Sinthen demand for carbon black in US and Japan, has started picking up in 20

whereas demand in Europe may take a little longer to recover.

North America and Western Europe, which combined produced 48% of the worl

carbon black in 1998, is expected to account for just 23% of global output in 20

Conversely, the Asia/ Pacific region, which produced 36% of the worlds carb

black in 1998, is expected to account for a 57% share in 2013.


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14 18th April 20

Source: Freedonia, AKS Research

Domestic Demand

The domestic tyre industry has grown by CAGR 10% over FY2005-FY2010 period led

robust automobile demand. Domestic demand for caran black was 605,000 MTPA

FY2010 as against 470,000 MTPA in FY2009(growth of 29%).

(Mn Nos) FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 CAG

Tyre Production 60.08 66.03 73.55 81.10 82.11 97.14 10%Automobile Production 8.47 9.74 11.09 10.85 11.17 14.05 11%


Automobile companies are developing smaller cars for the domestic as well as t

overseas markets, which may see India emerge as an export hub for smaller ca

resulting in an exponential demand growth for tyres and carbon black after three

five years.

Almost all major tyre companies have either announced or undertaken ma

greenfield/brownfield expansion projects which are expected to start commerc

production during the next 12 to 18 months. Apart from this, strong industrial activity

expected to continue drive demand for industrial rubber, inks and paints.

According to CRISIL estimates, The Indian tyre industry is expected to grow at a ra

of around 11-12% over FY11E and FY12E driven by higher OEM (original equipme

manufacturer) offtake and increase in replacement demand. Similary carban bla

industry is expected to grow by 11-12% by FY12E.

Domestic Capacity

As of FY2010, total installed capacity of carban black stands at around 750,000 MTP

While, current installed capacity is around 700,000 MTPA(after closure of 50,000 MT

capacity by Cabot in June 2010). Indian market is dominated by two players PC

and Hi tech(division of Aditya Birla Nuvo) which controls around 84% of to

installed capacity in India. As per capacity expansion planned by companies, tocapacity is expected to grow at CAGR 8.4% by FY2012E.



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15 18th April 20

Financials(INR Million)

Income Statement (INR

Million)

2010A 2011E 2012E 2013E

Net Sales 12,326 16,578 19,432 21,860

Other Income 28 94 94 94Total Income 12,354 16,672 19,526 21,954

Total Expenditure 10,531 14,493 16,879 18,983Operating profit - Other

Income

1,795 2,084 2,554 2,877

EBITDA 1,823 2,178 2,648 2,971Interest 425 451 461 493

Depreciation &Amortization

311 338 365 390

Earnings Before Taxes 1,086 1,389 1,822 2,088Operating profit - other

income & Dep

1,483 1,746 2,189 2,488

Total Taxes -79 -424 -507 -587

Net Income After Taxes 1,007 965 1,316 1,501

Minority Interest - - - -

Share in associate - - - -

Extraordinary Items (214.84) (108.40) - -

Reported Net Income 1,222 1,074 1,316 1,501

Reported EPS (INR) 36.80 32.32 39.61 43.55Adjusted EPS (INR) 30.33 29.06 39.61 43.55

O/S Shares 33.2 33.2 33.2 34.5

Ratio Analysis 2010A 2011E 2012E 2013E

Liquidity Ratios

Current Ratio 1.3 1.7 1.7 1.7

Quick Ratio 0.9 1.4 1.3 1.4

Interest Coverage Ratio 3.5 3.9 4.8 5.0

Activity ratios

Asset Turnover Ratio 1.5 1.9 2.0 1.9

Collection ratio 4.2 4.1 4.1 4.2

Inventory Turnover Ratio 6.3 9.8 9.7 9.5

Financing Ratio

Debt/Equity 1.7 1.1 0.9 0.8

Debt/Asset 0.6 0.5 0.5 0.4

Performance Ratio

Book Value per share 114.7 157.1 191.1 226.9

EBITDA Per share 63.5 62.7 76.9 83.5

EPS (Reported) 36.8 32.3 39.6 43.5

EPS (Adjusted) 30.3 29.1 39.6 43.5

EBITDA margin(%) 14.6% 12.6% 13.1% 13.2%

PAT margin(%) 8.2% 5.8% 6.8% 6.9%

P/E 4.1 4.7 3.8 3.5Return on Networth 45% 25% 23% 21%

Return on Capital Employed 19% 17% 19% 19%Return on Assets 9% 7% 7% 7%

P/BV 1.3 1.0 0.8 0.7

Free Cash Flow Per Share (16.7) 1.0 4.1 (1.2)

Sales Per Share 371 499 585 634

Growth Ratio

Net Sales 6% 34% 17% 12%

EPS - -4% 36% 10%

Source: Company data , AKS Research

( INR Mil

Balance Sheet ( INR

Million)

2010A 2011E 2012E 2013

Cash 330 1,665 1,465 1,97

Receivables 2,950 3,997 4,685 5,21

Inventories 1,966 1,689 2,004 2,30

Other Current Assets 166 227 266 299

Loans and Advances 1,329 1,363 1,597 1,79

Total Current Assets 6,741 8,940 10,018 11,57

Gross Fixed Assets 8,279 8,879 9,964 11,56

Less:Depriciation 2,348 2,686 3,051 3,44

Net Fixed Assets 5,932 6,193 6,914 8,12

CWIP 923 923 923 923

Investments 375 375 375 375

Misc. Expenses - - - -Total Assets 13,971 16,432 18,229 20,99

Current Liabilities 4,878 4,963 5,780 6,50

Provisions 202 202 202 202

Current Liab & Provns 5,080 5,165 5,982 6,70

Total Debt 5,555 5,953 5,802 6,37

Equity Capital 283 332 332 345

Reserves 2,957 4,885 6,016 7,47

Deferred tax liability 96 96 96 96

Minority Interest - - - -Total Liabilities and

Equity 13,971 16,432 18,229 20,99

Capital Employed 8,890 11,266 12,247 14,29

Cash Flow Statement (INRMillion)

2010A 2011E 2012E 2013

Profit Before Tax 1,301 1,497 1,822 2,08Plus Depreciation 311 338 365 390

Others 148 (202) (94) (94Total Tax paid (245) (424) (507) (587

Changes in workingcapital

(1,093) (780) (460) (335

Cash Flow from

Operations

423 430 1,127 1,46

Capital expenditure (943) (600) (1,085) (1,59

Proceeds from Asset Sales 4 - - -Chg in investments 0.1 - - -Others (40) 202 94 94

Cash Flow from investing (978) (398) (991) (1,50

FCF from Operations (555) 32 136 (43

Proceeds from issue of

Equity/Warrants

- 1,055 0 184

Debt raised/(repaid) 1,311 398 (151) 575Others - - - -

Dividend (incl. tax) paid (0) (151) (185) (21

Interest Expenses (496) - - -

Cash Flow from Financing 814 1,302 (335) 548

Net Cash Flow 260 1,335 (200) 505

Beginning Cash Balance 71 330 1,665 1,46

Ending Cash Balance 331 1,665 1,465 1,97

Source: Company data , AKS Research


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Gaurav Oza

Sr. Research Analyst

Email:- [email protected]

Tel:- 91-22 67544783

Krupa Shah

Associate

Email:- [email protected]

Tel:- 91-22 67544781

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PCBL_AK_IC