STOCK PICKS
Phillips Carbon Black Ltd.
CMP: Rs 115 Rating: BUY
Company Information
BSE Code
NSE Code
Bloomberg Code
ISIN
Market Cap (Rs. Cr)
Outstanding shares(Cr)
52-wk Hi/Lo (Rs.)
Avg. daily volume (1yr. on NSE)
Face Value(Rs.)
Book Value (Rs)
Company overview
Phillips Carbon Black Ltd (PCBL)
is a part of RPG Group and largest
carbon black manufacturers in India
by capacity and 7th largest carbon
black company globally.Company
aims to be 6th largest in the World
by 2023 after commissioning of its
upcoming projects (32,000 mtpa of
specialty carbon black and 1,50,000
mtpa of Carbon black). PCBL is the
largest carbon black exporter from
India having presence in 37 countries.
Currently, export accounts nearly
30% of revenue and 70% from domes-
tic market. Company is currently
focusing on value added products
(specialty chemical segment) and has
40 grades of product as of date.
Share holding pattern as on June 2020 (%)
Target: Rs 151
506590
PHILIPCARB
PHCB IN
INE602A01023
1991
17.23
147.4/54.2
1176830
2.0
98.29
Investment Rationale
Replacement demand remained
strong
Replacement market is main for
Tyre industry as the industry derives
around 30% of its demand from the
OEM market and rest 70% from the
replacement market, which is steady
state and recurrent in nature.73%
of carbon black globally is used in
tyres, 20% in other rubber products
and remaining 7% used in specialty
carbon black used in non-rubber
applications such as automotive,
plastics, inks dyes, pigments etc.
The demand for carbon black is
more dependent on tyre usage and
that is dependent on movement of
goods and people as well as general
17 INSIGHT
Promoters, 53.56% FIIs, 10.46%
DIIs, 2.70% Others, 33.28%
economic activity. With economic
activity recovering post relaxation of
nationwide lockdown amid Covid-19
outbreak, the replacement market
is expected to reach the pre-COVID
level much faster and will support
the overall industry growth and
consequently support carbon black
sales. PCBL, being the market leader
in carbon black segment, is going to
get the benefit from the trend. As per
management, FY21E volume will be
hit due 1.5 months of shutdown due
to COVID-19 pandemic. In Q1FY21,
company reported only 50% of its
sales. However, in July the operation
reached to its pre-COVID level
andthey are running almost closer
to full capacity. From third quarter
September 2020
the business will be at optimal level
and better than last year considering
the demand momentum which the
company is witnessing.
Focusing on Specialty Carbon
black segment
PCBL is focusing on moving up the
value chain and producing more
value-added products where the
margins are comparatively higher
and also to mitigate the competition
from China & Russia. It continues to
expand its product portfolio of high
performance high-margin grades
for both rubber and specialty black
applications. With the enhanced
demand for packaging material and
engineered plastic goods, specialty
black sales volume stood at 3,825
MT in Q1FY21, representing 7.5% of
total sales volume. In FY20, company
reported sales volume of 20,000 tone
which is expected to reach 26,000
tone in FY21, will grow at slow rate
because of 1.5 months of shutdown in
wake of COVID-19 outbreak.In long
run, management aim to increase the
share of specialty black in total vol-
umes in order to further strengthen
its margin. Specialty segment is
high margin business with average
EBITDA per tonne of Rs 40,000
which is much higher than ordinary
carbon black average EBITDA of Rs
12,000- 15,000. In last 2 years, PCBL
has been investing in R&D centers
in intent to improve the process and
PCBL 3 year Price Chart
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September 2020
machine technology, yield Improve-
ment, feedstock efficiency, custom-
ization of grades and new product
development. Currently in specialty
segment, company has 40 grades of
products. The demand for specialty
carbon is high from export market,
thus in order to meet the demand
company is setting up 2 new lines
which is going to be commercialized
in October and December of 2020.
Currently the installed capacity of
specialty carbon is 40,000 tonne and
after expansion of another 32,000
tonne, the total capacity in this
segment will reach to 72,000 tonne by
the end of FY21.
Expansion to drive growth
Globally the demand for carbon black
is growing at 4-5% annually. Globally
auto is a large-scale industry with
market size of around USD 2 trillion
dollar and major demand for carbon
black comes from replacement mar-
ket in comparison to OEM market.
Replacement market is at steady state
and recurrent in nature thus was
least affected from auto slowdown
and COVID crisis. In order to cater to
the domestic demand PGBL need to
expand its capacity. Currently PGBL
has 571,000tonne installed capacity in
Carbon black division and planning
for greenfield expansions of 150,000
mtpa of carbon black plant in other
parts of country which is expected
to be commercialized by 2022-23.
INSIGHT 18
Company is also doing a brown
field expansion of 32,000 tonne in
specialty carbon division in Palej at
Gujarat which is going to commence
operation from December 2020. The
capex will be funded through internal
accruals. Company has total Rs 500
crore debt in balance sheet (Long-
term+short-term) and there was a
fall in working capital by Rs 200 crore
on the back of cost saving initiatives.
This reflected its prudent working
capital management and healthy bal-
ance sheet which can fund the capex
without taking additional leverage.
PCBL has shown strong performance
over the years by doubling its Fixed
assets and reducing its borrowings
by 50%. The quarterly production
capacity for PCBL is at 117000 tonne
running at 90% utilization. In 1QFY21,
company reported sales volume of
51,000 tonne and in next 3 quarters
management expects sales volume to
reach over 1,00,000 tonne quarterly
and will recover 1st quarter decline.
Further, prudent cost measures &
captive power help the company to
sustain the margins. Company has
captive power capacity of 76 MW
and it is setting up additional 22 MW
co-generation power plant, taking
the total capacity to 88 MW. Of the
total power generated, company
used 40%captive and 60% it sales to
external. In West Bengal it sellspower
to its group company CESC.Thus,
once the COVID crisis will be over
and everything will start normalizing
the benefit of additional capex will
start reflecting on the earnings going
ahead.
Govt’s effort to reduce import to
benefit PGBL
In order to safeguard domestic
industry, government has imposed
anti-dumping duty on import of
carbon black from China into India to
the tune of USD 393/tonne which will
set to revise on November 2020. It is
this anti dumping duty as govern-
ment is emphasizing on boosting up
domestic manufacturing sector and
reducing import dependency and to
make India self-reliant (Atmanir-
bhar). The current international price
of Carbon black is USD 900/tonne of
which USD 400/tonne is duty, thus
there is no price differential between
domestic and international prices.
Hence, import of carbon black is no
longer cheaper for domestic tyre
industry and thus mostly depends on
domestic supply. In another develop-
ment, Directorate-General of Foreign
Trade (DGFT) issued a notification
putting imports of tyres for cars,
trucks and heavy vehicles under
the restricted list from the free list
to curb their shipments into India.
Placing tyre imports under restricted
list means that importers will have to
get each consignment of tyres cleared
by the DGFT rather than importing
them without any cap till now and
that will tighten the imports into the
country and will benefit the domestic
tyre manufacturers. The move to
put import of tyres in the restricted
list will benefit a slew of manufac-
turing industries starting from tyre
manufacturers to producers of raw
materials such as carbon black,
synthetic rubber, nylon cord, and
steel cord makers and PGBL, being
the market leader will be benefited
from this development.
Key risks
Company’s business is raw material
intensive business, thus any volatility
in Carbon black feed stock which
accounts nearly 80-85% of raw
material cost could affect its margins,
Particulars (in Rs Cr)
Revenue
Growth (%)
EBITDA
EBITDA Margin (%)
Net profit
Net Profit Margin (%)
EPS (Rs)
Source: Ashika Research
though any changes in raw material
prices company used to pass on to
the customers.
Longer than expected economic
slowdown due to local lockdowns
and weak economic sentiment in
the wake of COVID outbreak could
adversely impact near to medium
term demand outlook for tyre both in
OEM and Replacement market.
Valuation
In last 5 years, PGBL has done a
remarkable job in removing the
cyclicality from the business with a
slew of structural policy changes and
is reflected in their historical track
record. PGBL is the 7th largest carbon
black manufacturers in India having
strong presence both in domestic and
export market. In order to insulate
from domestic slowdown company
has increased its focus on export
market and in next 5 years company
aims to increase the export share in
revenue from 30% to 40-45%. Prudent
cost measures and better efficiency
helped PGBL to navigate the tough
times efficiently starting from the
beginning of FY21 when the outbreak
of COVID-19 brought the entire world
under grinding halt. Post COVID era,
PGBL is expected to benefit from
shift towards personal mobility and
pent up demand. Since, May, the
demand in replacement market has
been good and a well distributed
monsoon would negate the current
headwinds in theautomotive supply
chain caused by the COVID-19
outbreak. Company continues to
FY19 FY20
3,528.6 3,243.5
37.9%
620.7
17.6%
383.1
10.9%
22.2
19 INSIGHT
expand its product portfolio of
high-performance high-margin
grades for bothrubber and specialty
black applications. Company identi-
fies Specialty Carbon the next growth
driver thus expanding its capacity to
meet the demand and also to sustain
higher margins. PGBL follows a good
price mechanism where any change
in its costs can pass on to its end
users, thus insulating its EBITDA
margin from any kind of raw material
price volatility. Further, due to its
strong focus & improvement in
process technologies, the Company
has been able toidentify ways to
enhance generation of power by
around 15-20% and is therefore
adding 22MWof additional generation
capacity and this will meet up its
captive power requirement at lower
cost. Government’s increasing focus
on domestic manufacturing sector
by reducing import dependency is
another positive catalyst for PGBL
in long run. Thus, we believe PGBL
will ramp up its business to optimal
level faster than anticipated and the
first quarter marks the bottom of
its earnings and we will see positive
momentum in earnings going ahead
which will re-rate the stock. We have
a positive view on PGBL, given its
attractive valuation and recommend
our investors to BUY the scrip with
target price of Rs 151 from 12 months
investment perspective. At CMP, the
scrip is valued at P/E multiple of 5.9x
on FY22E EPS of Rs 19.9, which is a
steep discount to its 5 year average
P/E valuation.
FY21E FY22E
2,490.0 3,001.8
-8.1% -23.2% 20.6%
464.9 401.0 549.6
14.3% 16.1% 18.3%
277.3 234.8 342.9
8.5% 9.4% 11.4%
16.1 13.6 19.9
September 2020
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65 INSIGHT September 2020