Buy Phillips Carbon Black; target of Rs 360: ICICI Direct


ICICI Direct’s research report on Phillips Carbon Black

Phillips Carbon Black (PCBL) reported a steady Q4FY18 performance amid rising crude price and a consequent increment in raw material and end product realisations Net sales in Q4FY18 were at Rs 753.0 crore, incorporating 5% YoY volume growth with carbon black (CB) sales volume at 103 KT Carbon black realisations for Q4FY18 were at US$1087/tonne ( Rs 70.6/kg) vs. US$805/tonne ( Rs 54.0/kg) in Q4FY17 EBITDA in Q4FY18 was at Rs 102.0 crore with corresponding EBITDA margins at 13.5%. EBITDA/tonne in Q4FY18 was at Rs 9903/tonne Margins came in a tad lower primarily tracking the managements accounting approach of expensing out the de-bottlenecking exercise expenditure (worth ~ Rs 20 crore) instead of capitalising the same Adjusted for same and other one-offs, normalised EBITDA/tonne for the quarter was at ~ Rs 12,500/tonne. It was also supported by highest ever quarterly sales volume of speciality grade carbon black at 6,000 tonne with total speciality grade CB sales volume at ~16 KT in FY18 PAT in Q4FY18 was at Rs 74.3 crore vs. Rs 28.1 crore in Q4FY17. Higher PAT for the quarter was also supported by a lower effective tax rate, which came in at ~15%, with full year FY18 tax rate at 24.4%.


Outlook

PCBL has overcome its commodity tag status in the past to a more structural sound manufacturing set up producing key material for the tyre, paints, plastics and ink industry. With capacity expansion in place, we expect PCBL to clock CB sales volume CAGR of 9.4% in FY18-20 with consequent increase in sales at 19.0% CAGR over the aforesaid period. With increasing share of speciality grade CB and brownfield nature of expansion plan, conservatively, we build in EBITDA/tonne of ~ Rs 11,450/tonne for FY19 & ~ Rs 12,200/tonne for FY20E vs. ~ Rs 9,600/tonne for FY18. At the PAT level, we expect earnings CAGR of 26.0% in FY18-20E. We value PCBL at Rs 360 i.e. 17x P/E on FY20E EPS of Rs 21.2 and retain our BUY rating on the stock. We also derive comfort from higher double digit return ratios matrix (20%+) at PCBL and CFO yield of ~9% in FY18-20E. We have a BUY rating on the stock since Rs 35 levels and still believe it has more upside leg room given the robust product demand, sound financials and prudent management pedigree.


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