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Phillips Carbon Black Q4FY14 results update

May 7, 2014, Wednesday, 05:32 GMT | 00:32 EST | 09:02 IST | 11:32 SGT
Contributed by Nirmal Bang

Phillips Carbon Black (PCB) reported poor results; which were once again below expectations. Aided by lower forex losses, the company reported profit after 3 consecutive quarters of loss. However, EBITDA margins witnessed decline both QoQ and YoY led by higher raw material costs and selling expenses. The company is in the process of replacing higher cost raw material CBFS by CBO which is expected to lead to improvement in margins going forward.

- Carbon Black increase in volumes both QoQ and YoY as domestic volumes and exports witnessed improvement. Exports contributed ~30% of the total volumes. Capacity utilization stood at ~63% vs 61% in Q3FY14 and 56% in Q4FY13. Management aims to maintain capacity utilization of Q4FY14 in FY15E.

- Commissioning of Kochin plant led to higher power consumption and thus the power volumes have gone down. Realisations in the power segment were impacted as the states of Gujarat and Kerala are not allowing open access for selling power outside at higher rates. PCB has applied for open access and expects that post election situation should improve thereby yielding in higher power realizations.

- PCB reported PAT of Rs 2.03 cr in Q4FY14 vs loss of Rs 15.5 cr in Q3FY14. For FY14 PCB reported loss of Rs 86.6 cr vs loss of Rs 20.6 cr in FY13.

FY14 was a challenging year for PCB with prolonged slowdown in the auto and auto ancillary industry which was further aggravated by volatility in rupee and higher crude prices. However, the company has been striving hard to improve its financials and have taken number of steps which include access to cheaper raw material, focus on increasing volumes etc.

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.

Anti dumping duty is valid till July 2014. Management is hopeful of extension, as there has been no substantial benefit till date from the imposition of the duty.

Revival in global and domestic demand, reduction in crude prices and stability in rupee holds the key for improvement in performance of PCB. We expect an improvement in FY15E over FY14 and expect the company to report sales growth of 5.5% and EBITDA margin of 7.1% and PAT margin of 2.3%. We expect PCB to report net profit of Rs 54 cr in FY15E as against loss of Rs 86.6 cr in FY14. We expect PCB to report RoE of 9.8% in FY15E.

At CMP, PCB is trading at P/E of 3.81x on FY15E EPS whereas on P/BV it is trading at 0.37x on FY15E. PCB is trading at EV/EBITDA of 7.19x FY15E. We recommend HOLD with a target price of Rs 71; an upside of 18.7% from current levels.