Long Term Recommendation: Phillips Carbon Black … GWM market share) and the seventh largest...

1 GWM

Edelweiss Investment Research

Long Term Recommendation: Phillips Carbon Black Ltd

Brownfield expansion to drive growth

Phillips Carbon Black Limited (PCBL) is the largest producer of carbon black in India (37%

market share) and the seventh largest worldwide. The company is expected to be a major

beneficiary of tyre investments in India which is likely to keep utilisation levels high for rubber

carbon black. Margin per ton is likely to also increase driven by mix shift towards specialty

black. We initiate coverage with a BUY rating, anchored by: 1) Global and domestic supply

tightness in the carbon black market; 2) Higher coal tar prices that make crude-based CBFS

more competitive than CBO; 3) Shift in mix towards specialty black, which is likely to improve

margins; and 4) Protection from Chinese imports due to antidumping duty on rubber carbon

black.

Global supply tightness, high tyre investments to keep utilisation levels high

World carbon black utilisation levels are likely to increase from the current levels of 82% to 86%

by FY21 as demand is likely to outstrip supply additions over the next four years. Moreover,

significant tyre investments in the Asia-Pacific region (APAC; 46% of worldwide tyre

investments of USD22 bn) are likely to keep utilisation levels high for rubber carbon black

producers in the region; India alone is expected to need an incremental 180 kilo tonnes per

annum (KTPA) of rubber carbon black over 2016–21. We expect PCBL’s rubber carbon black

utilisation levels to remain above 90% over the next three years, even after brownfield

capacity additions of 48,000 metric tonnes per annum (MTPA) in H2FY19.

Higher coal tar prices make other crude-based CBFS more competitive

Carbon black production in China (41% of global production) largely relies on coal tar as

feedstock. Chinese coal tar prices fell until 2016, driving down floor prices for carbon black

and pulling down realisations and profitability of carbon black producers worldwide that used

local/US Decant oil as feedstock. After five years of volatility, Chinese coal tar prices rallied in

2017, almost tripling since November 2016 making other crude-based carbon black feed

stock (CBFS) competitive vis-à-vis carbon black oil (CBO). With pollution concerns in China

likely to remain elevated, we expect coal tar prices to remain high in the future, resulting in

absolute rupee margins for rubber carbon black to remain near the levels seen in H1FY18.

Mix change towards specialty carbon black to bring better EBITDA/tonne

Specialty black, used as black pigment and as an additive to enhance material

performance, is a niche, high-value sub-segment of the carbon black industry with gross

margin per tonne four to five times over that of rubber carbon black. The Indian specialty

black market of 49,000 MTPA is majorly served (92%) by imports. PCBL expects to increase its

high-end specialty black capacity by 32,000 MTPA to capture this domestic market while also

increasing its exports of specialty black. The increased contribution of specialty black in the

sales mix coupled with cost efficiencies is likely to increase PCBL’s EBITDA by ~INR 2,500/tonne

during FY18–20.

Outlook and valuations: Attractive prospects, limited downside; Initiate with BUY

Improved capacity utilisation levels of rubber carbon black, a shift in mix towards specialty

black, and operating efficiencies due to brownfield expansions are likely to drive growth in

the bottom line at a CAGR of 27% over FY18–20 with RoACE expected to improve by ~400

bps. The stock is currently trading at 16.4x and 13.6x FY19E and FY20E earnings, respectively.

We value the stock at 18x FY20E EPS of INR 93.6, resulting in a price target of INR 1,685 and

implying a 35% upside from the current levels.

Year to March FY16 FY17 FY18E FY19E FY20E

Revenues (INR Cr) 1,894 1,927 2,325 2,621 2,896

Rev growth (%) (23) 2 21 13 10

EBITDA (INR Cr) 165 258 372 477 572

Net Profit (INR Cr) 15 67 201 267 323

P/E (x) 65.0 21.8 16.5 13.6

EV/EBITDA (x) 19.8 13.7 10.6 9.1

RoACE (%) 5.2 9.1 14.2 17.2 18.3

RoAE (%) 2.1 6.3 16.6 19.1 19.7

CMP INR: 1,272

Rating: BUY

Target Price INR: 1,685

Upside: 35%

Jigar Jani

Research Analyst

[email protected]

Bloomberg: PHCB:IN

52-week

range (INR): 1,594.00 / 253.60

Share in issue (cr): 3.4

M cap (INR cr): 4,385

Avg. Daily Vol.

BSE/NSE :(‘000): 120

Promoter

Holding (%) 53.56

Date: 29th January 2018

Phillips Carbon Black Ltd

2 GWM

PCBL is expected to improve its RoACE by ~400 bps over FY18-20E while growing its bottomline at 27% CAGR over the same period largely driven

by the shift in mix towards specialty carbon black and consistently high utilization levels in its rubber carbon black segment due to supply tightness

PCBL’s profitability is likely

to improve as the share of

specialty carbon black in

its sales mix increases

PCBL’s RoACE / RoAE

profile is likely to improve

by ~410/ 310 bps over

FY18E-20E

We value PCBL at 18x

FY20E EPS of 93.6

considering the bottomline

growth and RoACE

improvement

FY16 FY17 FY18E FY19E FY20E

Sales 1,894 1,927 2,325 2,621 2,896

EBITDA 165 258 372 477 572

PAT 16 69 201 267 323

At CMP, FY20E P/E is

13.7x

At Target Price,

FY20E P/E is 18x

Upside of

35%

FY20E RoAE of

19.7% and Core

RoACE of 18.3%

FY16 FY17 FY18E FY19E FY20E

RoACE (%) 5.2 9.1 14.2 17.2 18.3

RoAE (%) 2.1 6.3 16.6 19.1 19.7

PE Multiple FY20E EPS CMP / Target

14x (CMP) 93.6 1272

18x (Target) 93.6 1685


3 GWM

Price Target 1,685 Our price target is based on our base case scenario mentioned below and

applying an 18x multiple to the FY20E EPS of INR 93.6.

Bull

20x 2020E EPS of

INR 105.6

2,111

Assuming almost full utilisation of the brownfield rubber black capacity of

48,000 MT and of the specialty carbon black capacity would result in an EPS of

INR 106 for FY20E. Applying a 20x multiple to our bull case of FY20E EPS, we

arrive at a price target of INR 2,111/share.

Base

18x 2020E EPS of

INR 93.6

1,685

Assuming almost full utilisation of the brownfield rubber black capacity of

48,000 MT and 71% utilisation of the specialty carbon black capacity would

result in an EPS of INR 93.6 for FY20E. Applying an 18x multiple to our base case

multiple of 18x to the FY20E EPS, we arrive at a price target of INR 1,685/share.

Bear

15x 2020E EPS of

INR 69

1,035

Assuming 90% utilisation of the brownfield rubber black capacity of 48,000 MT

and 61% utilisation of the specialty carbon black capacity would result in an

EPS of INR 69.0 for FY20E. Applying a 15x multiple to our bear case multiple of

15x to the FY20E EPS, we arrive at a price target of INR 1,035/share.


4 GWM

Average Daily Turnover (INR cr) Stock Price (CAGR) Relative to Sensex, CAGR (%)

3 months 6 months 1 year 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years

107 77 47 471% 104% 69% 23% 442% 96% 56% 15%

Bu

sin

ess

Va

lue

Driv

ers

Nature of Industry

The carbon black industry is dominated by rubber carbon black used in tyres as reinforcing material.

Rubber carbon black markets are largely regional oligopolies. Specialty carbon black and non-tyre

carbon black are smaller markets, both in terms of tonnage and value, but significantly more

profitable than tyre rubber carbon black. The carbon black industry is fairly consolidated; the top 10

players account for 62% of capacity globally. The Indian carbon black market is highly consolidated,

hosting just four players.

Opportunity Size The global carbon black market was worth INR 82,000 cr as of 2016. Tyre rubber black is the largest

segment of this market at ~INR 58,000 cr; the non-tyre rubber goods segment is worth ~INR 15,000

cr; the specialty carbon black market is worth ~INR 9,000 cr.

Capital Allocation

PCBL is currently in the midst of a brownfield expansion of INR 320 cr to increase its specialty black

capacity by 32,000 MT and rubber carbon black by 48,000 MT. Another greenfield expansion worth

INR 480 cr is planned to set up incremental rubber carbon black capacity of 120,000 MT in either

Tamil Nadu or Andhra Pradesh.

Predictability

Gross profit per tonne is based on a fixed rupee/tonne margin over the raw material price

changes, which are passed through for rubber carbon black depending on a pricing ratio fixed at

the start of every year. The specialty carbon black market is priced by grades and enjoys 4–5x

higher profitability per tonne vis-à-vis rubber carbon black.

Sustainability

It is difficult to dislodge clients due to the high switching costs of tyre rubber carbon black (quality

checks and sourcing are line-based as each line that supplies to a tyre manufacturer has to be

approved). Consistency of supply in terms of volumes and the scope to expand globally would

ensure sustainability. The Indian specialty black market is currently served almost entirely through

imports, which presents enough scope for import substitution.

Disproportionate

Future

Expansion into specialty blacks is likely to increase gross profit per tonne sustainably, while the

imbalanced global-demand supply scenario is likely to ensure sustainability of volumes for rubber

carbon black.

Business Strategy &

Planned Initiatives The current focus is on shifting a mix towards specialty blacks and improving manufacturing

efficiencies.

Near-Term Visibility There is strong visibility for a 27% CAGR in the bottom line over FY18–20E.

Long-Term Visibility Greenfield expansion provides earnings visibility beyond FY20.


5 GWM

Focus Charts – Story in a Nutshell

Largest Player in Domestic Carbon Black Industry (KTPA) Demand-Supply Scenario to Tighten Globally

Tyre Investments to be Concentrated in APAC and China Higher Coal Tar Prices Make Crude based CBFS

Competitive against CBO

PCBL to Raise High-end Specialty Black Capacity by > 4x Specialty Black and Operating Efficiences to Spur

EBITDA/Tonne

Source: Edelweiss Investment Research

502

315

12085

PCBL SKI India Himadri CCIL

77%79%

82%

85%86%

86%85%

77%

79%

81%

83%

85%

87%

8000

10000

12000

14000

16000

18000

2015 2016 2017f 2018f 2019f 2020f 2021f

KTP

A

Production (LHS) Capacity (LHS) Utilization (RHS)

China,

19%

North

Americ

a, 27%South

Americ

a, 1%

Europe

, 17%

Af/ME,

9%

Asia

excl.

China,

27%

$22 Billion in Total Investments in Tire

Industry between 2016-21Vietna

m,

19%

Indon

esia,

9%Bangl

adesh

, 6%Korea

, 5%Taiwa

n, 5%Others

, 5%

Thaila

nd,

29%

India,

22%

$5.9 Billion to be invested in Asia

Pacific excl. China

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

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l-12

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Ma

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Ju

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Ma

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4

Ma

r-1

5

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r-1

6

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l-16

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v-1

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Ma

r-1

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Ju

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v-1

7

GC 3% Sulphur LO ($/MT) CBO ($/MT)

12000

12000

12000

20000

56000

0

10000

20000

30000

40000

50000

60000

Super Specialty

Black Capacity

FY17

Palej

Debottlenecking

New line by Sept

2018

New line by Mar

2019

Super Specialty

Black Capacity

FY20

MTP

A 6,663

9,211

10,645

11,699

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY17 FY18E FY19E FY20E

INR


6 GWM

I. Largest rubber carbon black and high-end specialty black producer in India

The Indian carbon black industry is highly consolidated; capacity is concentrated with four

players that together account for ~1,022 KTPA worth of capacity. Globally, the industry is

fairly consolidated; the top 10 players account for 62% of global capacity.

PCBL is India’s largest carbon black producer (37% market share) and the seventh largest

worldwide, present in the carbon black market for over 55 years.

PCBL had a nameplate capacity of 472 KTPA as of FY17. It added another 30,000 MT by

debottlenecking capacity by December 2017, bringing total capacity to 502 KTPA. Out of

this, 478 KTPA is fungible capacity that can be used across rubber tyre black, MRG black

and low-end specialty black; the remaining 24 KTPA is on separate lines used for high-end

specialty black.

PCBL produces around 56 grades of carbon black spread across tyre rubber black, non-

tyre rubber black and specialty black, which require process switches. This leads to a peak

utilisation rate of 88% of the nameplate capacity.

PCBL has been steadily increasing its share in the overall carbon black production in India,

thus indicating market share gains, while export volumes vary at 24–31% of its total sales.

Current Carbon Black Capacity - India (KTPA) PCBL’s Current Plant-Wise Capacity

Source: Edelweiss Investment Research, PCBL

Global Carbon Black Capacity (KTPA) Domestic Market Share Rises for PCBL (KTPA)

Source: Edelweiss Investment Research, Notch Consulting

502

315

12085

PCBL SKI India Himadri CCIL

2,1332,010

1,2851,145

810

525 502 495 451 445

0

500

1,000

1,500

2,000

2,500

Ca

bo

t

Birla

Ca

rbo

n

OEC

Bla

ck C

at

CSR

C

Om

sk

PC

BL

Lon

gxin

g

Toka

i

Sid

Ric

ha

rdso

n

208 199 227 243294

468 463490 494

495

676 662

717 737789

0

100

200

300

400

500

600

700

800

FY13 FY14 FY15 FY16 FY17

KTP

A

PCBL Others

Location CB (MT) CPP (MW) Products Manufactured

Durgapur 1,47,000 30 ASTM, MRG, low-end

specialty black

Mundra 1,58,000 24 ASTM, MRG, low-end

specialty black

Palej 107,000 12 ASTM, MRG, low-end and

high-end specialty black

Kochi 90,000 10 ASTM, MRG, low-end

specialty black

Total 502,000 76


7 GWM

II. Tight demand-supply scenario to ensure high utilisation

The tyre industry consumes 73% of the global volumes of carbon black and 70% of the value

of the industry, while the non-tyre rubber industry takes 19.7% of the volume and 18.3% of the

value.

The specialty carbon segment accounts for only 7% of the volumes, but 11.2% of the value,

given that these are products with higher realisations and margins.

KTPA – Kilo tons per annum


As per Notch Consulting, worldwide carbon black utilisation levels are likely to increase from

the current levels of 82% to 86% by 2020–21 as demand is likely to outstrip supply additions

over the next four years. Demand is likely to improve by 3.8% over 2016–2021, even as supply

increases only at a 2% CAGR over the period.

Low utilisation rates over the past five years were largely the result of significant capacity

additions in China due to lower coal tar prices.

Historical Utilisation Rates Hovered Below 80% until 2016; Expected to Pick up to 86% by 2021


A surge in demand is likely due to increased tyre production in developing economies, which

are likely to increase their rubber consumption at a 3.7% CAGR, almost twice the rate of

consumption in advanced economies.

Region 2006 2016 2021f %AGR

2006-2016

%AGR

2016-2021

Rubber Consumption (’000 tonnes) 21692 27281 31733 2.30% 3.10%

Tyre Markets 13313 17242 20182 2.60% 3.20%

Non-tyre Markets 8379 10039 11551 1.80% 2.80%

Advanced Economies 10462 9473 10410 -1.00% 1.90%

Developing Economies 11230 17808 21323 4.70% 3.70%


70%

72%

74%

76%

78%

80%

82%

84%

86%

0

5000

10000

15000

20000

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17f

KTP

A


77%

79%

82%

85%86%

86%85%

77%

79%

81%

83%

85%

87%

8000

10000

12000

14000

16000

18000

2015 2016 2017f 2018f 2019f 2020f 2021f

KTP

A


World Carbon Black Market by Industry Volumes (KTPA)

Tyres , 9,014

Non Tyre Rubber Goods , 2,428

Specialty Markets ,

881

Tyres , 8,896

Non Tyre Rubber Goods , 2,307

Specialty Markets ,

1,410

World Carbon Black Market by Value (USD

mn)

12,323 KTPA $ 12,613 mn


8 GWM

The tyre industry is likely to be the key driver of the carbon black industry and might see

over USD22 bn worth of investments during 2016–21. Asia is likely to see ~46% of these new

investments in the tyre industry, with Asia excl. China to see ~27% of this.


Thailand and India are likely to see the highest investments in the tyre segment within the

Asia-Pacific region excl. China.

As per Notch Consulting, India is likely to need ~180 KT of incremental carbon black over

2016–21, which is the second largest demand gain among all countries, after China and

in line with that of the US. Moreover, apart from PCBL, only Himadri Specialty Chemicals

Limited intends to expand capacity by 30,000 tonnes (INR148 cr) over the next few years,

thus further upsetting the demand-supply equation.

Carbon Black Demand Forecast 2016–2021

Item 2016 (KT) 2021 (KT) Volume

Increase (KT)

Percent

Increase

World Total 12579 14750 2171 3.20%

China 4416 5400 984 4.10%

US 1490 1670 180 2.30%

India 795 975 180 4.20%

Thailand 473 590 117 4.50%

Indonesia 360 430 70 3.60%

Brazil 466 524 58 2.40%

Russia 279 335 56 3.70%

Vietnam 116 170 54 7.90%

Turkey 187 235 48 4.70%

Korea 444 485 41 1.80%


The recent imposition of antidumping duties on Chinese TBR tyres (at USD250–450/MT) is

likely to result in incremental capacity utilisation for existing domestic tyre manufacturers.

China,

19%

North

America,

27%

South

America,

1%

Europe,

17%

Af/ME, 9%

Asia excl.

China,

27%

USD22 bn Investments in Tyre

Industry 2016–21

Vietnam,

19%

Indonesia

, 9%

Banglad

esh, 6%

Korea,

5%Taiwan,

5%Others,

5%

Thailand,

29%

India,

22%

USD5.9 bn to be Invested in Asia

Pacific excl. China


9 GWM

III. Higher Chinese coal tar prices make crude-based CBFS more competitive

Carbon black production in China is mainly based on CBO. This oil is a by-product of

processing the waste obtained from coke oven batteries during steel production.

Manufacturers in other regions except China mainly use CBFS, which is a crude derivative.

Additions of carbon black capacity in China over 2010 to 2014 led to a significant shift in the

global feedstock mix. Coal tar replaced both local and US decant in 2011 as the largest

feedstock for carbon black production.

2004 Global Feedstock Mix – 14mn Tonnes 2016 Global Feedstock Mix – 21.3mn Tonnes


Chinese coal tar prices declined until 2016, driving down the floor prices for carbon black

and pulling down realisations and profitability of carbon black producers worldwide that

used local/US decant oil as feedstock. After five years of volatility-induced decline,

Chinese coal tar prices rallied in 2017, almost tripling since the levels in November 2016.

The rally was primarily driven by the rising prices of raw materials and environmental

protection campaigns by the Chinese government on illegal polluters, which led to a

supply shortage. Moreover, demand from downstream products like coal tar pitch,

industrial naphthalene and phthalic anhydride sectors supported the higher prices of coal

tar.

CBO Prices Tripled Over Past 2 Years, Widening Spread with CBFS

Source: Edelweiss Investment Research, Company

Coal

Tar, 3550

Ethylene

Tar, 2500US

Decant,

5720

Local

Decant

, 2230

Coal Tar,

11100

Ethylene

Tar, 2300

US

Decant,

4600

Local

Decant,

3300

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

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Ap

r-17

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t-17

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n-1

8

GC 3% Sulphur LO ($/MT) CBO ($/MT)


10 GWM

The mentioned factors made other crude-based CBFS competitive vis-à-vis CBO. With

pollution concerns in China likely to remain high, we expect coal tar prices to remain

elevated in the future.

Cost Comparison of Carbon Black Feedstock in Asia

Source: Edelweiss Investment Research, CTC International

225

275

325

375

425

475

525

575

625

675

Jun - 11 Jun - 12 Jun - 13 Jun - 14 Jun - 15 Jun - 16 Jun - 17

(US$ p

er

ton

)

HSFO 180 (Singapore) Gulf Coast HS CBO (CIF SE Asia)

Anthracene Oil (China) Raw Coal Tar (China)


11 GWM

IV. Antidumping duty on Chinese imports provides additional protection

China is one of the world’s largest carbon black exporters (along with Russia), exporting close

to 734 KT of carbon black in 2017. India takes in ~8% of these Chinese exports.

Leading Carbon Black Exporting Countries Chinese Exports by Destination


China, South Korea, Russia and the US contribute 80–90% of Indian carbon black imports.

The introduction of antidumping duties on China, amounting to USD397/MT in November

2015, and an increase in coal tar prices slowed the dumping of carbon black into India from

China; Chinese imports declined substantially over the past two years. The antidumping

duties on Chinese carbon black are on until November 2020. India also levies antidumping

duties of USD36.17/MT on imported Russian carbon black, which saw a recent surge in 2017.

Country-wise Split of Carbon Black Imports in India


0

100

200

300

400

500

600

700

800

Ch

ina

Ru

ssia

Ge

rma

ny

Ko

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Po

lan

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Hu

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ary

Ca

na

da US

Tha

ilan

d

Ita

ly

Eg

yp

t

Ind

ia

(000 t

on

s)

2015 2016 2017f

Indonesia,

18%

Japan, 9%

Vietnam,

9%

India,

8%

Taiwan, 7%Malaysia,

5%

Korea, 4%

Others, 14%

Thailand,

26%

87,806

64,036 55,898

24,060

27,87626,599

3,768

6,70214,954

5,360

6,101 5,619

-10,000

10,000

30,000

50,000

70,000

90,000

1,10,000

1,30,000

1,50,000

FY2015 FY2016 FY2017

Ton

s

China Korea Russia USA Others


12 GWM

V. Move towards specialty black to bring higher EBITDA/tonne

Specialty black is a niche, high-value sub-segment of the carbon black industry.

It is used as black pigment and as an additive to enhance material performance, including

conductivity, viscosity, static charge control and UV protection. This type of carbon black is

used in several applications in the coatings, polymers and printing industries as well as other

special applications.

Specialty Carbon Black: Market Overview

Application Key Attributes Customer Benefits End Products

Coatings

High jetness with bluish undertone

High solid & water-based coatings

Easy dispersal

Consistent quality

Enhanced colour performance

Furthers compliance with stricter

regulations

Improves process efficiency

Key to reputational positioning

Automotive coatings OEM and

refinish

Architectural paint

Industrial coatings

Polymers

Conductiveness

UV protection

Infrared absorption

Easy dispersal

Purity

Colour

Enhancement of high/ultra-high

voltage cables

Protection against polymer

degradation and subsequent

deterioration of mechanical

strength

Good processing properties and

easy handling

Improved properties for thermal

applications (for buildings, industrial

and HVAC)

Wire and cable jacketing and

conductive sheathing

Fibre pigmentation – replacing

dyes

Plastic piping for water, gas,

drainage

Engineered plastics for consumer

electronics and automotive

applications

Printing

Colour

Gloss

Wettability

Low abrasion

Contributes to packaging inks

approved for food contact

Rising customisation in packaging

inks due to variety of binder systems

Easy dispersability for toners and

conductive inks

Miniaturisation and less material in

black matrix

Packaging inks for labelling and

coding

Inkjet applications

Food-grade and food-contact

printing

Source: OEC Presentation

Specialty carbon black is USD1.4 bn global industry with annual volumes of ~900 KT sold

as of 2015. This market is expected to grow at a 8–10% rate over the next five years.

Plastics and inks account for 78% of the global carbon black market by volume and 72%

by value.


Currently, non-rubber carbon black accounts for only 9% of PCBL’s sales volume and 12%

of its revenue. The company has a capacity of 24,000 MT at Palej for super-specialty non-

rubber carbon black, which is mainly used as a pigment in plastic applications.

69%

13%

4% 14%

Plastics Ink Toners Paints & Coatings Other Specialty

Specialty Carbon Black Volume - 915 KT (2015)

Specialty Carbon Black Value - USD1.4 bn (2015) –

59% 19%

10%

12%

Plastics Ink Toners Paints & Coatings Other Specialty


13 GWM

PCBL Sales Volume – FY17 PCBL Revenue – FY17

Source: Edelweiss Investment Research, Company

Specialty Carbon Black Market Size (in MTPA)

Source: Edelweiss Investment Research, HSCL

PCBL currently is focussed on increasing penetration in high-end specialty carbon black

and recently de-bottlenecked capacity of 12,000 MT. The company is further planning to

increase capacity by ~32,000 MT in the specialty black segment over the next two years

to reduce dependence on imports, while also intending to capture specific export

markets.

PCBL Plans to Increase Specialty Black Capacity by 4x by FY20


Non

Rubber,

9%

Rubber,

91%

Non

Rubber,

12%

Rubber,

88%

49000

915000

Indian Demand Global Demand

Specialty CB volumes are less than

5% of overall CB volumes in India

compared with ~10 % globally

12000

12000

12000

20000

56000

0

10000

20000

30000

40000

50000

60000

Super Specialty

Black Capacity FY17

Palej

Debottlenecking

New line by Sept

2018

New line by Mar

2019

Super Specialty

Black Capacity FY20

MT


14 GWM

Specialty carbon black brings twice the realisations of normal rubber black and four–five

times the margins of normal rubber black, depending on the applications it is used for.

This can be seen by the difference between the rubber carbon black and specialty

carbon black range margins as reported by Orion Engineered Carbons (OEC), a global

leader in the carbon black industry. PCBL also derives ~20% of its EBITDA from the non-

rubber carbon black segment, but only 12% of its revenue.

Orion Engineered Carbons – Difference between Rubber Carbon Black and Specialty Black


PCBL plans to increase its normal rubber black capacity by 48,000 MT, likely to come

online by the end of FY19. Overall capex for the incremental 80,000 MT of capacity (48,000

MT of rubber carbon black and 32,000 MT of specialty carbon black) is expected to be

INR 320 cr, likely to be funded largely through internal accruals.

727

18297

1596

734

565

0

200

400

600

800

1000

1200

1400

1600

1800

Revenue/ton Gross Profit/ton EBITDA/ton

EU

R/t

on

Rubber Carbon Black Specialty Carbon Black


15 GWM

VI. EBITDA/tonne stabilises, improves over past three years

Tyre rubber carbon black prices trail the cost of carbon black feedstock (CBFS). Most

companies have a fixed contribution in absolute terms on a per tonne basis over and above

the cost of the raw materials for fixed overheads and margin. The spreads are decided with

each customer at the start of the year, based on the demand-supply scenario and inclusive

of fixed costs and margins. However, volatile CBFS prices might result in inventory gains or

losses, which cannot be passed on to the end consumer.

PCBL has seen a steady increase in EBITDA and gross profit/tonne over the past three years,

irrespective of overall end product prices, as it is able to maintain and improve its per-tonne

profitability after commencing production on its specialty black line. Also, PCBL’s

EBITDA/tonne dropped significantly in FY13 and FY14 due to foreign exchange losses and

hedging costs. The company since then started hedging its export positions completely, thus

bringing about almost negligible foreign exchange exposure. Adjusted for foreign exchange

losses and hedging costs, PCBL’s EBITDA/tonne steadily increased over the past five years, a

significant part of which was down to more volumes sold of specialty black.

EBITDA/Tonne (Adjusted for Forex Losses, Hedging Costs) Improved


A transition of the mix towards specialty carbon black is likely to raise PCBL’s EBITDA/tonne

overall. We expect the EBITDA figure to rise from INR 6,663/tonne in FY17 to INR 11,536/tonne

in FY20.

Increasing Specialty Black Contribution, Improved Operating Leverage to Spur EBITDA/tonne


2,452

842

4,817 4,928

6,663

3,679

4,615

6,4875,963

7,371

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY13 FY14 FY15 FY16 FY17

(IN

R)

EBITDA/Ton EBITDA/Ton adj. for forex losses and hedging costs

6,663

9,211

10,64511,699

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY17 FY18E FY19E FY20E

(IN

R)

EBITDA/Ton


16 GWM

VIII. Power segment to contribute more as production hits peak utilisation

The production of carbon black begets a few polluting gases. Before 2003, PCBL had to

incinerate or flare up such gas for a cost. However, with the Electricity Act 2003 permitting

the sale of excess power generated by industries, PCBL commissioned power-generation

units at each of its facilities that could use these gases.

The power generation process involves the recovery and utilisation of thermal energy from

the processed waste gas (i.e., tail gas) generated from carbon black manufacturing. This

waste heat/gas is utilised to generate steam, which in turn is used to generate electrical

energy. PCBL currently produces ~1,300 units of electricity per MT of carbon black produced;

some units generate 1,500 units per MT, while others generate 1,100 units per MT. PCBL is

improving power-generation efficiency at all its units to bring them up to 1,500 units per MT.

Moreover, as utilisation levels across plants increase, power generation follows suit, leading

to more incremental revenue and profitability from the residual power sold to the grid. We

assume there are no efficiency gains currently from the power plants.

FY15 FY16 FY17 FY18 FY19 FY20

Power Sales (INR cr) 69 77 81 95 116 125

Power EBITDA (INR cr) 49 45 51 62 79 89

71% 58% 63% 65% 68% 71%

Power Generation (MU) 342 372 484 481 558 606

Power Export (MU) 199 225 304 306 376 404

Power Internal (MU) 143 147 180 174 182 202

Capacity (MU) 405 432 498 525 583 635

Utilisation (%) 84% 86% 97% 91% 96% 95%

Price (INR/unit) 3.5 3.4 2.7 3.1 3.1 3.1

Waste Gas

Waste gas

generated at CB

plant

Waste Gas co-

generation plantElectricity

Enternal plant

requirement

Surplus power sold to

grid

Incineration

Earlier

Now


17 GWM

IX. Greenfield capex plans to boost bottom line after FY20

PCBL plans a greenfield capex project of 1.2 lakh tonnes at a cost of INR 480 cr, expected to

be set up either in Tamil Nadu, where it already has land, or in Andhra Pradesh, if that state

government sweetens term deals in terms of incentives and tax sops.

Although the details of the project are yet to be finalised, we believe it is likely to support the

company’s growth after FY20.

Greenfield Project Dynamics at Full Utilisation

INR cr (unless otherwise mentioned) Comments

Investment 480 Capex based largely on internal

accruals

Capacity (Tonnes) 1,20,000 Nameplate capacity

Sales (Tonnes) 1,05,600 Assuming 88% based on current plants

Contribution/Tonne (INR) 15,000 Assuming normal fungible rubber black

capacity

Fixed Cost/Tonne (INR) 3,000

Lower fixed cost per tonne as new

plant would be largely automated,

with firm level costs not increasing

proportionately

EBITDA/tonne (INR) 12,000

Carbon Black EBITDA 127

Power EBITDA 24 Assuming 1,500 units/tonne produced

and 450 units/tonne used internally

DA 24 Straight line depreciation for 20 years

EBIT 127

Interest 19 Assuming 10% interest on 40% capex

(INR192 cr)

PBT 108

Tax 28% Effective tax rate currently

PAT 77

EPS (INR) 22


18 GWM

PCBL: Key Milestones

Key Clientele

1960-2004

Capacity: 270KT

2009

Mundra: 90KT

2012

Mundra & Durgapur:

62KT

2013

Kochi: 50KT

PCBL Capacity: 472 KT

Rubber Blacks

Rubber &

Specialty Blacks

Diversified

Customer

Base


19 GWM

Global Reach in Over 30 Countries


Americas

BRAZIL

PERU

Africa

NIGERIA

ETHOPIA

KENYA

SOUTH AFRICA

Africa

Saudi Arabia

UAE

TURKEY

IRAN

Europe

Asia

CHINA

HONG KONG

NEPAL

ISRAEL

JAPAN

MALAYSIA

INDONESIA

PHILLIPINES

SINGAPORE

KOREA

TAIWAN

THAILAND

VIETNAM

BANGLADESH

SRI LANKA


20 GWM

Valuation and peers

PCBL is the largest carbon producer in India and is likely to register earnings CAGR of 93% over

FY17–20, largely driven by the brownfield expansion in specialty black and improving operating

efficiencies. Moreover, the company’s ROCE profile is similar to that of OEC, which is one of the

largest specialty black producers in the world. We initiate coverage with a BUY rating, valuing

PCBL at 18x FY20E P/E. We thus arrive at a target price of INR 1,685, implying an upside of 35% from

the current levels.

Estimated EPS (FY20E) Target multiple Target price

93.6 18x 1685

International Peer Comparison

Name Market

Cap EV

EBITDA

Margin -

FY1 (%)

EBITDA

Margin -

FY2 (%)

PAT Margin

- FY1 (%)

PAT Margin

- FY2 (%)

P/E -

FY1

P/E -

FY2

EV/EBITDA

- FY1

EV/EBITDA

- FY2

ROE -

FY1

ROE -

FY2

Cabot Corp 26,616 31,791 18% 18% 5% 6% 18.3 16.7 9.6 9.1 15.5 16.0

Orion Engineered

Carbons SA 10,877 14,854 16% 18% 6% 6% 17.7 15.9 9.7 8.2 133.7 94.4

Tokai Carbon Co

Ltd 21,212 20,226 10% 14% -2% 4% NA 22.3 29.3 15.2 9.2 16.3

Phillips Carbon

Black Ltd 4,385 5,090 16% 18% 9% 10% 21.8 16.4 13.7 10.6 16.6 19.1

Source: Bloomberg, Edelweiss Investment Research

Domestic Peer Comparison

Name Market

Cap EV

EBITDA

Margin -

FY1 (%)

EBITDA

Margin -

FY2 (%)

PAT Margin

- FY1 (%)

PAT Margin

- FY2 (%)

P/E -

FY1

P/E -

FY2

EV/EBITDA

- FY1

EV/EBITDA

- FY2

ROE -

FY1

ROE -

FY2

Oriental Carbon

& Chemicals Ltd 1,362 1,417 28% 29% 5% 6% 21.4 17.2 13.3 11.3 18.7 18.4

NOCIL Ltd 3,405 3,290 25% 25% 24.8 21.6 14.9 13.1

Phillips Carbon

Black Ltd 4,385 5,090 16% 18% 9% 10% 21.8 16.4 13.7 10.6 16.6 19.1

Source: Bloomberg, Edelweiss Investment Research


21 GWM

Key Management

Name Designation Profile

Mr. Sanjiv Goenka Chairman and Executive

Director

Mr. Sanjiv Goenka is currently the chairman of the RP-Sanjiv

Goenka group. He is currently the honorary Consul General of

Canada in Kolkata. In April 2001, he took over as the youngest-

ever President of the Confederation of Indian Industry (CII), was

appointed Chairman of the Board of Governors of the Indian

Institute of Technology, Kharagpur (IIT-KGP) and currently serves

on the Board of the Indian Institute of Management, Kolkata (IIM-

Kolkata). He was a member of the Prime Minister’s Council on

Trade & Industry and is also the current Chairman of the Board of

Directors of Woodlands Medical Centre Ltd, Kolkata.

Mr. Kaushik Roy Managing Director

Mr. Kaushik Roy has vast multi-functional business experience of

over two decades across different sectors such as tyres and

cement. Before PCBL, he was associated with Apollo Tyres Limited

in various leadership roles and was also a board member of the

company.

Mr. Roy took on the leadership of PCBL from January 2013. He

holds an M. Tech (Mechanical) degree from IIT- Kharagpur and is

an alumnus of IMD-Switzerland. He also holds a degree in Business

Administration from the University of Tokyo. He is a member of the

Managing Committee of the Bengal Chamber of Commerce and

Industry (BCC&I). Presently he is on the Board of Harrisons

Malayalam Limited (HML) and STEL Holdings Limited (STEL)

Mr. Shashwat Goenka Board of Directors

Mr. Shashwat Goenka has joined the company’s Board of

Directors from 1 September 2014. He graduated from The Wharton

School, University of Pennsylvania with a Bachelor of Science in

Economics, specializing in finance, marketing and management.

He has worked with companies like NestléIndia Limited and KPMG

India. Presently he is on the Board of Firstsource Solutions Limited,

Spencer International Hotels Limited and Retailers Association of

India.

Mr. Raj Kumar Gupta Chief Financial Officer

Mr. Raj Kumar Gupta has rich professional experience of over 20

years in the areas of Treasury Management, Project Finance,

Working Capital Management, Taxation and Business Planning.

He started his career with CESC Limited a fully integrated Power

Generation & Distribution Company as part of the Finance team

and has moved to Phillips Carbon Black Ltd. around three years

back as Chief Financial Officer. He is a commerce graduate, a

Chartered Accountant and a Cost Accountant.

Key Risks

Inability to realise incremental sales volumes in the specialty black market

Any sharp movement in crude oil prices that bring inventory losses

Relaxation of environmental laws in China

Sharp fall in coal tar prices that could hit realisations of carbon black


22 GWM

Business Overview

Company Brief

Phillips Carbon Black Ltd. (PCBL) is the leading producer of carbon black in India and also the world’s seventh largest. PCBL

plans a brownfield expansion of 32,000 MT of high-end specialty black and 48,000 MT of rubber carbon black over the next

two years for capex of INR 320 cr. It also plans a greenfield expansion of rubber carbon black of 1,20,000 MT after FY20 for

an estimated capex of INR 480 cr.

Business Model

PCBL is India’s largest producer of carbon black, which is mainly used as a reinforcement

material in tyre and other rubber products. The company is also among the country’s

largest producers of specialty carbon black, which is used as a pigment, conducive

material or for UV protection.

Strategic Positioning The company is the largest carbon black producer in India and the seventh largest

worldwide.

Competitive Edge

Largest producer of rubber carbon black in India, which brings advantages of scale

Largest producer of specialty carbon black in India; significant expansion in this high-

margin business

Consistency in quality and quantity for major customers

Strong brand and distribution network

Financial Structure Most of the brownfield and greenfield capex projects is to be funded with internal

accruals.

Key Competitors Birla Carbon, Continental Carbon India Limited, Himadri Specialty Chemicals Limited

Industry Revenue Drivers

Significant tyre capex in India over the next five years is likely to drive the demand for

rubber carbon black; the specialty carbon black market is currently completely served by

imports.

Shareholder Value

Proposition

We initiate coverage with a BUY rating, valuing PCBL at 18x FY20E P/E and thus arrive at a

target price of INR 1685.


23 GWM

VII. Financial Analysis

Sales growth a combination of volume growth and changes in mix

PCBL’s revenue growth moves largely in line with feedstock prices as rubber carbon black (the

highest contributor to revenue) has a pass-on clause for feedstock prices, which are related to

crude oil and coal tar prices. We expect rubber carbon black prices to remain at the current

levels, while revenue would likely increase when the mix shifts towards specialty carbon black.

Net Sales Transition


EBITDA/tonne to increase due to operating leverage and shift of mix towards specialty black

PCBL commands a fixed rupee/tonne margin over the raw material feedstock prices, depending

on the margin and fixed-cost overheads. However, specialty black prices are fairly stable, based

on the grades produced; these have contributed 4–5 times more per tonne as against normal

rubber black grades. We expect EBITDA and per-tonne contribution to improve substantially as

the mix changes more in favour of specialty black products.

EBITDA/Tonne adj. for forex and hedging costs to Improve as Mix Moves to Specialty Black


PAT and PAT margin to improve substantially

We expect PAT to compound at a rate similar to the EBITDA, resulting in PAT increasing at a 27%

CAGR over FY18–20. PAT in FY13–15 was hit by forex losses and hedging costs. The company has

since FY16 adopted an approach that involves hedging majority of its forex exposure.

PAT Transition

Source: Company, Edelweiss Investment Research

2,285 2,2772,470

1,894 1,927

2,3252,621

2,896

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

(IN

R c

r)

3,6794,615

6,487 5,9637,371

9,21110,645

11,699

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


(IN

R)

-22

-87

10 1669

201

267323

-200

-100

0

100

200

300

400


(IN

R c

r)


24 GWM

Leverage to remain at current levels as greenfield capex to be partly funded with debt

We expect leverage in terms of Net debt to Equity to remain near current levels inspite of strong

operational cash flows as we expect the new greenfield capex at either Tamil Nadu or Andhra

Pradesh is expected to be partly funded by debt.

Leverage likely to remain at current levels


ROAE to improve as mix changes towards specialty carbon blacks

We expect ROE to improve on the back of mix change towards specialty blacks which is likely to

drive up net profit margins improving ROAE by 310 bps over FY18-20E.

ROAE to reach ~20% till FY20E


1.37

2.152.38

0.930.65 0.55 0.46 0.46

0.00

0.50

1.00

1.50

2.00

2.50


(X)

0.7 0.7 0.8 0.5 0.5 0.6 0.6 0.6

5.3 5.8 5.94.5 3.5 3.2 3.0 2.9

-1.0-3.8

0.40.8 3.6

8.7 10.2 11.1

-5.0

0.0

5.0

10.0

15.0

20.0


(%)


25 GWM

Appendix

Carbon Black Applications

1 – Mechanical Rubber Goods

2 – American Society of Technical Manufacturers


Specialty Grades

• Coating, Polymers, Printing Inks,

Specialty Applications (e.g. Batteries)

• Relatively smaller volumes/SKUs, some

volumes sold through distributors

• High margins relative to Rubber

• Global market

Technical Tire and MRG (1)

• Extrusion Molding

• High Performance Tires

• Smaller volumes

• High margins relative to standard Tire

ASTM Soft Black

• Tire Carcass

• Large volumes, sold directly to global tire producers

• Average rubber industry margins

• Almost exclusively regional markets

ASTM(2) Hard Black

• Tire Tread

• Conveyor Belts

• Construction Profiles

• Damping Elements

• Hoses

• Transmission Belts

• Molded Goods

• Seals

• Rubber-to-Metal Bonding

• Unvulcanised Sheets

• Adhesives

• Tubing

• Passenger Vehicle Tire

• Truck and Bus Tire

• Off-Highway Tires

• Agricultural Tires

• Original Equipment

manufacturer (“OEM”) Tires

• Replacement Tires

• Motorcycle Tires

• Aircraft Tires

• Racing Tires


26 GWM

Financials

Income statement (INR crs)


Income from operations 1894 1927 2325 2621 2896

Total operating expenses 1729 1669 1953 2144 2324

EBITDA 165 258 372 477 572

Depreciation and amortisation 62 61 63 70 82

EBIT 103 198 309 407 490

Interest expenses 72 51 49 53 58

Profit before tax 47 165 279 371 448

Provision for tax 31 96 78 104 126

Core profit 16 69 201 267 323

Extraordinary items -1 -1 0 0 0

Profit after tax 15 67 201 267 323

Adjusted net profit 15 67 201 267 323

Equity shares outstanding (mn) 3 3 3 3 3

EPS (INR) basic 4 20 58 78 94

Diluted shares (Cr) 3 3 3 3 3

EPS (INR) fully diluted 4 20 58 78 94

Div idend per share 3 6 12 16 19

Div idend payout (%) 54 30 20 20 20

Common size metrics- as % of net revenues (INR crs)


Operating expenses 91.3 86.6 84.0 81.8 80.3

Depreciation 3.3 3.1 2.7 2.7 2.8

Interest expenditure 3.8 2.7 2.1 2.0 2.0

EBITDA margins 8.7 13.4 16.0 18.2 19.7

Net profit margins 0.8 3.5 8.7 10.2 11.1

Growth metrics (%)


Revenues (23.3) 1.7 20.6 12.7 10.5

EBITDA 9.4 56.3 44.2 28.2 19.8

PBT 292.5 247.4 69.6 32.8 20.8

Net profit 53.5 331.4 192.9 32.8 20.8

EPS 39.6 363.4 198.1 32.8 20.8

Ratios


ROAE (%) 2.1 6.3 16.6 19.1 19.7

ROACE (%) 5.2 9.1 14.2 17.2 18.3

Debtors (days) 84 88 75 75 75

Current ratio 2.2 1.6 2.2 2.2 2.2

Debt/Equity 1.0 0.7 0.6 0.5 0.5

Inventory (days) 47 46 45 45 45

Payable (days) 70 88 60 60 60

Cash conversion cycle (days) 62 47 60 60 60

Debt/EBITDA 6.2 2.9 2.0 1.6 1.6

Adjusted debt/Equity 0.9 0.6 0.5 0.5 0.5

Valuation parameters


Diluted EPS (INR) 4.2 19.6 58.4 77.5 93.6

Y-o-Y growth (%) 39.6 363.4 198.1 32.8 20.8

CEPS (INR) 23 38 77 98 117

Diluted P/E (x) 301.1 65.0 21.8 16.4 13.6

Price/BV(x) 4.2 3.9 3.4 2.9 2.5

EV/Sales (x) 2.8 2.7 2.2 1.9 1.8

EV/EBITDA (x) 32.4 19.8 13.7 10.6 9.1

Diluted shares O/S 3.4 3.4 3.4 3.4 3.4

Basic EPS 4.2 19.6 58.4 77.5 93.6

Basic PE (x) 301.1 65.0 21.8 16.4 13.6

Div idend yield (%) 0.2 0.5 0.9 1.2 1.5

Balance sheet (INR crs)

As on 31st March FY16 FY17 FY18E FY19E FY20E

Equity share capital 34 34 34 34 34

Preference Share Capital 0 0 0 0 0

Reserves & surplus 1,010 1,096 1,257 1,471 1,729

Shareholders funds 1,045 1,131 1,292 1,505 1,764

Secured loans 811 602 602 602 713

Unsecured loans 210 156 156 156 185

Borrowings 1,022 758 758 758 898

Minority interest 7 6 6 6 6

Sources of funds 2,073 1,895 2,056 2,269 2,668

Gross block 1,478 1,506 1,636 1,886 2,306

Depreciation 62 123 186 256 338

Net block 1,416 1,383 1,450 1,630 1,968

Capital work in progress 80 80 100 100 100

Total fixed assets 1,496 1,463 1,550 1,730 2,068

Unrealised profit 0 0 0 0 0

Investments 228 295 240 200 200

Inventories 244 244 287 323 357

Sundry debtors 438 466 478 539 595

Cash and equivalents 52 26 53 73 83

Loans and advances 84 36 43 49 54

Other current assets 0 0 0 0 0

Total current assets 819 771 860 984 1,089

Sundry creditors and others 361 462 382 431 476

Provisions 4 8 8 9 9

Total CL & provisions 365 470 390 439 485

Net current assets 454 301 470 544 604

Net Deferred tax -147 -205 -205 -205 -205

Misc expenditure 43 41 0 0 0

Uses of funds 2,073 1,895 2,056 2,269 2,668

Book value per share (INR) 303 328 375 437 512

Cash flow statement (INR crs)


Net profit 17 70 201 267 323

Add: Depreciation 62 61 63 70 82

Add: Misc expenses written off 30 3 41 0 0

Add: Deferred tax 120 57 0 0 0

Gross cash flow 229 190 305 338 405

Less: Changes in W. C. -257 -127 142 54 50

Operating cash flow 486 317 162 284 355

Less: Capex 627 28 150 250 420

Free cash flow -141 290 12 34 -65


27 GWM

Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)

Board: (91-22) 4272 2200

Vinay Khattar

Head Research

[email protected]

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

0

500

1000

1500

2000

2500

3000

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-1

4

Se

p-1

4

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-1

5

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Se

p-1

6

No

v-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Se

p-1

7

No

v-1

7

Jan

-18

(In

de

xe

d)

Phillips Carbon Sensex

Disclaimer

28 GWM

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29 GWM

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