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Recommendations India

Phillips Carbon Black Q3FY14 results update

February 21, 2014, Friday, 15:50 GMT | 11:50 EST | 21:20 IST | 23:50 SGT
Contributed by Nirmal Bang

Phillips Carbon Black (PCB) results were below expectations. The company continued to report loss; however at EBITDA levels it witnessed marginal improvement which is primarily due to lower raw material cost. The company replaced 10-15% of its raw material by cheaper imported raw material which aided in some improvement in margins in this quarter despite lower volumes.

- Carbon Black volumes witnessed decline sequentially as domestic volumes continued to hurt the company. Slowdown in the domestic demand was marginally offset by export volumes. Capacity utilization stood at ~68% vs 69% in Q2FY14 and 71% in Q3FY13. Management aims to improve domestic volumes by 5000 MT in Q4FY14 as January has seen some uptick in volumes.

- Lower capacity utilization rates resulted in lower power volumes; however this was offset by higher realisation rates in the segment resulting in flattish growth in power segment.

- PCB reported net loss of Rs 15.5 cr in Q3FY14; mainly due to forex loss of Rs 22 cr (rupee volatility impact).

The prolonged slowdown in the auto and auto ancillary industry coupled with volatility in rupee and higher crude prices impacted financials of PCB. In Q2FY14 and Q3FY14, we have seen that the realizations have improved for PCBL and this has also been indicated by various tyre manufacturers.

Safeguard duty has expired in Dec 13; however anti dumping duty is still there till July 2014. Management is hoping that this should get further extended, as there has been no substantial benefit till date from the imposition of the duty.

In our view, PCB’s efforts to tap export markets and focus on improving volumes may mitigate some risk associated with safeguard duty. We believe that increased focus on exports will help PCB to bring back the capacity utilization rates to above 70%. An increase in capacity utilization will also enhance the power volumes and contribute to profitability.

Revival in global and domestic demand, reduction in crude prices leading to favorable movement in CBFS (raw material for carbon black) and stability in rupee holds the key for improvement in performance of PCB. Near term the performance may not improve significantly although we expect the quantum of loss to gradually decline. We expect PCB to report net loss of Rs 95 cr in FY14E. The current market cap of the company is only Rs 166 cr against Sales of Rs ~2,400 cr on an annual basis. We expect an improvement in FY15E over FY14 and expect the company to report sales growth of 10.9% and EBITDA margin of 6.3% and PAT margin of 1.5%.

At CMP, PCB is trading at P/E of 4.28x on FY15E EPS whereas on P/BV it is trading at 0.32x on FY15E. PCB is trading at EV/EBITDA of 6.35x FY15E. We expect PCB to report RoE of 7.4% in FY15E. We recommend HOLD with a target price of Rs 55; an upside of 12.2% from current levels.