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Buy Phillips Carbon Black; target of Rs 1700: ICICI Direct

January 05
18:41 2018

ICICI Direct’s research report on Phillips Carbon Black

Phillips Carbon Black (PCBL) is the largest manufacturer of carbon black (market share ~40%), which is used as a reinforcement material in manufacturing tyres (constitutes ~23% by volume) PCBL has successfully turned around its operations & is now clocking healthy ~16% EBITDA margin with core return ratios (RoE, RoCE) in excess of 25% (FY18E-20E), thereby traversing into a different orbit altogether vs. perception of a commodity play in the past Demand prospects for carbon black are also robust amid healthy demand growth in automobile and, consequently, tyre industry space and supply constraints from China (largest player globally) The commentary of two leading carbon black manufacturers globally (Orion Carbon & Cabot Corp), suggests the good times will sustain for the carbon black industry for an elongated time period The recent rise in coking coal price globally and consequent rise in coal tar price is expected to limit the production from China. It is likely to result in further tightness of the demand & supply situation in favour of carbon black manufacturers, including PCBL

Outlook
PCBL has promptly de-risked its business model from the fluctuations of commodity price viz. crude with the company incorporating full variable cost pass through in contracts with all its key customers. This protects the company from fluctuating profitability as witnessed in the past and adds strength/moat to its business profile. Therefore, profitability of PCBL is not a determinant of crude price and is more sustainable in nature thereby ensuring robust profitability trend continues, going forward. On the balance sheet front, PCBL has reduced its debt in FY17 to the tune of ~Rs 350 crore with consequent debt: equity at 0.7x. On the back of robust profitability amid increasing carbon black demand and operational efficiencies, PCBL has successfully achieved a quality driven business profile with core RoE & RoCE in excess of 25% in FY18E-20E and commands better valuation. Given the current tightness in the carbon black market and positive commentary by industry players, we revise upward our estimates. We now value PCBL at Rs 1700 i.e. 17.5x P/E (1x PEG) on FY20E EPS of Rs 97.2 with a BUY recommendation on the stock. We have largely captured the stock rally since initiation (July 2016) with recorded returns of 630%. We still believe there is more upside leg room for healthy price appreciation in the counter.

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