Phillip Carbon Black Limited (PCBL) BSE Code: 506590 NSE Id: PHILIPCARB

CMP (BSE): Rs. 200.75

CMP (NSE): Rs. 201.30

Industry: Carbon Black

Phillip Carbon Black Limited (PCBL) is a part of the RPG group. In India, it is the pioneer and the leading producer of carbon black, a key input for tyre industry. PCBL's present installed capacity is 270000 MTPA. PCBL is not only the largest exporter of carbon black from India but also one of the largest in Asia in its field. It has 4 plants in India that are strategically located, which facilitates it to optimize its logistics cost within India as well as exports to Europe.

Industry Overview:

Last year, the demand for carbon black dropped by 7.5%. The global capacity utilization of carbon black was just 71% in 2009, due to the low demand in USA, Europe and South East Asian markets. However in spite of the global meltdown, India and China witnessed growth due to strong domestic consumption. In India, there was a 29% growth in demand in 2009, it went up to 605000 MT from 470000 MT.

Opportunity:

• Recently one of the global player in the carbon black industry announced closure of its facility in India. With this, the total installed carbon black capacity in India stands at 700000 MT. Out of this, almost 58.5% of the installed capacity would be with PCBL by the end of FY11.
• Currently almost all tyre companies in India are executing green field/brown field expansion projects to meet increasing demand for tyres from replacement as well as OE segments, particularly for passenger radial tyres.
• A few major global automakers have announced significant investments in India which will raise the demand for carbon black in future.
• The thurst on infrastructure development, particularly roads, coupled with the rise in domestic disposable income should have favourable impact on demand for tyres and consequently carbon black.
• Launch of the smaller car during FY10 has paved the way for development of smaller cars by other players in the auto industry, which should push the four-wheeler population in India. The auto companies may also cater to demand for smaller car in overseas markets from their facilities in India resulting in higher demand for carbon black.

Threat:

• Countries such as China, Russia, Australia and Thialand dump their carbon black in India at a low price. This serves as a threat to the India carbon black players. In order to counter this Anti-dumping duty was imposed on the import of carbon black. Still, the carbon black imports increased by 30% during FY10. Thus this threat of dumping will continue to prevail as long as global carbon black capacity utilization remains lower than that in India.
• Expansion of carbon black manufacturing capacity simultaneously by the domestic competitors.
• The feedstock for carbon black is the residual oil obtained from the distillation process of crude and is subject to high volatility. However the price of carbon black is revised once a quater. If PCBL is unable to timely pass on the increased CBFS cost, it may have an impact on the its profit.

Expansion:

PCBL has commissioned its 90000 MT carbon black plant at Mundra during the first half of FY10. This brings the total capacity of PCBL to 360000 MT. In addition to this, PCBL moved up in the global ranking from 10th to 8th position. In addition to this, PCBL has further decided to expand its carbon black capacity at Mundra by setting up another 50000 MT plant, which is expected to be commissioned during 3rd quater of FY11. This will bring the total capacity to 410000 MT by end of FY11. Further statutory clearances for the proposed 65000 MT carbon black is awaited.

Power Business:

PCBL has a total of 46 MW of power generation capacity. It has a 30 MW co-generation power plant at Durgapur and 16 MW CPP at Mundra that was commissioned last year. In addition to this it is further expanding its power generation capacity. It is expanding it CPP capacity by 8 MW at Mundra. It is expected to be commissioned this year. Further, a 10 MW CPP is being set up at Kochi. This is expected to be commissioned by the end of this financial year. Another 12 MW CPP at Vietnam is being planned. However, PCBL is awaiting certain statutory clearances. With this the total installed capacity will increase to 68 MW in FY11 and to 78 MW by FY12. They are further expanding it by another 80 MW.

Now, power like in the sugar industry is a by-product for PCBL, but if you look at the bottom line contribution last year it is more than 60% to the bottom line because the entire gas that is getting generated from the carbon black business is a feed stop for the production of power which is just about 60 paise per unit cost and this power is sold at Rs.5 per unit. This means a clear 733% margin in its power business. Out of the total power that is produced by them, 30% is used by them whereas 70% is for merchant sell.

New Initiatives:

PCBL with its R&D activities launched special carbon black grades for non rubber applications. These new grades are well accepted by the domestic customers and are comparable with the imported products. The contribution of this special grade carbon black in the overall topline of PCBL was modest during FY10. It has even chalked out plans to ramp up sales from this segment in the coming years.

PCBL is quoting at 2 times its book value at the CMP. Its PE is 5.09. It is one of the major player in carbon black industry. The dividend yield is almost 2.5% at the CMP. Its sales is more than twice its market cap. For FY 2010, its EPS was Rs.43.43. In FY2009 it made a net loss of Rs 64.84 however in FY10 it made a net profit of Rs.122.69 due to the revival of the auto sector, the main user of carbon black. In addition to this it is even earning good amount of profits from its power business. All put together,with auto sector booming and cost benefit in power generation, PCBL has all chances of moving into higher space with around 160 cr profit and by next year around 200 crore plus profit.

The auto sector is humming and so is the tyre and tyre retrofits sector where carbon black is used. And in carbon black, PCBL is the largest player in India. With the huge growth in auto sector, the carbon black demand is bound to increase, which makes the prospects for PCBL more attractive.

Had this stock been bought 2 years back, it would already had become a MULTIBAGGER till now. However it still looks attractive to me with the capacity expansion in both carbon black business and power business. Right now, the markets are overpriced, thus wait for some time and buy when the market corrects it self. At lower market price, this stock would become more attractive.

Happy Investing.