Recommendation from Chemicals Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

PHILIPS CARBON BLACK LIMITED - ON A SOUND FOOTING

HERE IS WHY
☛Good market position
☛Healthy expansion plans
☛Good growth prospects.

Philips Carbon Black Limited is the largest producer of carbon black in the country and one of the largest players in the world with an installed capacity of 571,000 MTPA of carbon black. It is also the largest exporter of carbon black from India and has a presence in more than 30 countries. Additionally, it also has captive power plants (CPP) at all its locations with an aggregate capacity of 84 MW. The company sells excess electric power that it generates. Its plants are located in West Bengal, Gujarat and Kerala. PCBL is managed under Kolkata-based RP–Sanjiv Goenka Group. 

CBFS, the key raw-material for carbon black, accounts for around 80 per cent of cost of sales. CBFS is a derivative product of crude oil refining having strong correlation with crude oil prices. With low crude oil prices, the company will have the advantage of lower raw material prices and thereby witness reduced expenditures and improved profit margins.

A major portion of carbon black produced across the globe is used for tyre manufacturing. In line with that, a substantial part of PCBL’s revenue is from sale of carbon black to tyre manufacturers. This leads to PCBL’s dependence on the fortunes of the tyre industry which in turn is partially dependent on the automotive industry. However, 60 per cent of the overall tyre market is the replacement market which is fairly stable and not affected by the vagaries of auto sales numbers. Thus, carbon black demand has less than perfect correlation with auto sales number as a part of demand is from the stable replacement tyre market.Further,PCBL has also been increasing its presence in the specialty black range catering to diversified industries such as paints, inks, plastics, etc. Going forward, this will help it reduce its dependence on the auto industry even more. Its ongoing speciality black project at Palej is in progress and expected to be commissioned in June 2020. PCBL also has a greenfield project for a capacity of 150,000 MTPA in Tamil Nadu, expected to be funded majorly out of internal accruals. These expansion projects will further boost the topline. Also, being majorly funded by internal accruals will help keep the balance-sheet healthy.

For the quarter ended December 2019, its gross sales has decreased 18.74 per cent to Rs 768.65 crore in Q3FY20 from Rs 945.89 crore in Q3FY19. PBIDT (excluding other income) showed a decrease of 32.2 per cent to Rs 120.16 crore in Q3FY20 from Rs 177.22 crore in the same quarter last year. PAT for Q3FY20 stood at Rs 70.20 crore as against Rs 107.07 crore in the same quarter last year, showing a decrease of 34.44 per cent. It has manageable debt levels with improving interest coverage ratio of over 15x. The full year ROCE for FY19 stood at 25.11 per cent. High ROCE indicates efficient use of capital by the company. PCBL has shown significant improvement in ROCE and profit margins (EBITDA margins and PAT margins) over the last few years. Reduction in raw material prices might further help improve the profit margins. The stock is trading at a PE multiple of 4.81x. By virtue of these factors, we recommend our reader-investors to BUY this stock.