Phillips Carbon Black Ltd - 155.00 Rs

Established in 1960, Phillips Carbon Black Ltd (PCBL), part of well known RPG group is the pioneer and largest manufacturer of carbon black in the country. Nearly 95% of carbon black production is consumed by rubber and tyre industry, while the rest find application in plastics, ink, paints and dry cells. Currently, PCBL is the undisputed leader with a capacity of 270,000 MTPA which is almost 47% of the total installed capacity of carbon black in India. It has also established a strong goodwill in the global market with more than 25% revenue coming from exports to over 15 countries including China, Japan, Indonesia, Iran, Sri Lanka, Vietnam, Turkey, Philippines, Australia, New Zealand and East African countries. Its top international clients include Bridgestone group, Goodyear, Trellebrog, Loadstar and Danang Rubber, whereas in domestic market it supplies to Apollo, MRF, Ceat, Birla & JK group. Out of the total export of this powdery substance from India, 70% is made by company alone and in the domestic market it has an overall share of more than 40%. Incidentally, it is the first carbon black company in the world to receive carbon credits and is an ISO 9001 & ISO 14001 certified company.

PCBL has three manufacturing units located in Durgapur (140,000 MT), Kochi (35,000 MT) & Baroda (95,000 MT) of which all are working at 100% capacity utilization. Under technical collaboration with big international players and equipped with latest equipments from world’s best manufacturers, company has a proven capability to produce 24 grades of carbon black. To compliment this it has captive power generation facility at each unit with a combined capacity of 18.50 MW. To cash on the buoyant economic condition, PCBL has chalked out massive 350 cr expansion plan to increase the capacity by 125,000 tonne i.e. by nearly 50%. It is putting up a greenfield project at Mundra, Gujarat to produce 75,000 MT of carbon black alongwith 14 MW captive power plant. It is also expanding its Kochi capacity by 50,000 MT and is adding 12 MW power generation facility. Both these projects are estimated to complete between Sept - Dec 2008. Meanwhile, to de-risk its revenue model, a 30 MW power generation plant from waste gas is being constructed in Durgapur with an investment of 115 cr. This is scheduled to become operational from March 2008. Hence post all expansion it will have carbon black capacity of 395,000 MTPA and power generation capacity of 74.50 MW. However the most important factor for company’s growth is that it has re-negotiated the pricing formula with the customers, so as to built-in escalation clause. Henceforth, the company would be able to pass on any increase in input cost and will be able to maintain its profit margin.

The momentum of growth in the economy coupled with expansion plans announced by various tyre companies in India to cater to increasing demand from OEMs as well as the replacement market would increase demand for carbon black. Secondly, all the international biggies are shifting to Asian region to make it a tyre manufacturing hub due to cost and other factors. This augurs well for PCBL as company is looking to increase its share in international market. To fund its growth plan company raised around 50 cr thru pref allotment of 75 lac shares @ 66 Rs in Nov 2006. It has recently issued another 30 lac warrants @ 149 Rs to mobilize 45 cr in future. Financially, it made a strong turnaround for FY07 with OPM improving considerably to 9% from 4% in FY06. It is further expected to move up to 12.50% in current fiscal. Accordingly it may register sales of 1050 cr and PAT of 65 cr which translates into EPS of 23 Rs on fully diluted equity of 28.25 cr. Off late, as the scrip has seen a smart rally, investors are recommended to buy at sharp declines for a price target of 225 Rs in 12`15 months. Besides, the major raw material for the company i.e. carbon black feedstock has close relationship with crude oil prices. Although, the revised pricing formula has adequate flexibility to respond to such changes but still the rising crude oil price is always a cause of concern.