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Phillips Carbon Black Q3FY13 results update

Contributed by Nirmal Bang

Phillips Carbon Black (PCB) results were better than expectation as the company reported profit of Rs 0.76 cr against expectation of loss. The company reported decline in volume by 5.2% YoY and 8.0% QoQ resulting from significant decline in export volume. Exports declined due to slowdown in Europe and very low export prices of China in South East Asian market.

Despite witnessing a decline in volumes, revenue from carbon black reported a growth of 6.4% YoY primarily due to higher realizations. Revenue from the power division increased 10.7% YoY and 1.1% QoQ as the tariffs were more or less flattish. The overall slowdown in the auto segment has resulted in many tyre companies to resort to production cuts thereby impacting performance of the company.

We believe that the prolonged slowdown in the auto industry has impacted the overall performance; however any revival from here on will lead to a recovery. Going forward, in Q4FY13E Management aims to maintain the current sales volume. Margins are expected to remain under pressure for Q4FY13 considering the lower capacity utilization and increase in crude prices from Q3FY13 levels. We believe that FY13E on a whole will remain a subdued year and positive development will happen only in FY14E due to lag effect.

Although the company’s near term outlook does not look encouraging, we believe that the current valuations largely factors all the concerns. With safeguard duty imposition and compelling valuations, the risk reward ratio turns favorable for PCB. We believe that the downside risk from these levels stands limited and any revival in the overall auto scenario from hereon can lead to a significant improvement in the performance. The current market cap of the company is only Rs 293 cr against Sales of Rs 2,500 cr on an annual basis. We have pruned our FY13E estimates to incorporate the 9MFY13 results and now expect the company to end FY13E at a loss on net level. However, we expect an improvement in FY14E over FY13E and expect the company to report sales growth of 13.1% and EBITDA margin of 9.5% and PAT margin of 3.5%.

At CMP, the stock is trading at P/E of 3.22x on FY14E earnings whereas on P/BV it is trading at 0.45x on FY14E. PCB is trading at EV/EBITDA of 7.64x FY13E and 3.86x FY14E. We expect PCB to report RoE of 13.9% in FY14E. We continue to maintain our BUY rating on the stock with a target price of Rs 110 indicating an upside of 29.1% from current levels.

- PCB reported net sales of Rs 544.2 cr up by 5.8% YoY & down by 6.5% QoQ.

- RM as % of sales increased to 81.8% in Q3FY13 as compared to 77.5% in Q3FY12. However, on QoQ basis the raw material cost witnessed a significant respite and declined from 87.6% to 81.8%.

- Decline in raw material cost coupled with control over employee and selling cost led to an improvement in EBITDA on sequential basis.