Buy Phillips Carbon Black, target Rs 328: Edelweiss Financial Services

Edelweiss Investment Research has a buy call on Phillips Carbon Black with a target price of Rs 328.

The current market price of Phillips Carbon Black is Rs 264.05.

Time period given by the brokerage is one year when Phillips Carbon Black price can reach the defined target.


Investment rationale by Edelweiss Investment Research:
Price hike and increase in specialty carbon black volumes drive up EBITDA/ton: Overall sales volumes for Q1FY19 came in at 99,080 MT (Metric ton) up 1 per cent YoY with capacity utilization hitting 95 per cent based on debottlenecked nameplate capacity of 515 KTPA. Specialty carbon black volumes declined by 12.5 per cent to 5,600 MT in the quarter having a dilutive impact on EBITDA/MT. Despite lower specialty carbon black volumes, EBITDA/MT increased by Rs 5,883/MT (up 59 per cent) on a sequential basis driven by yearly price hikes taken for tyre customers to account for inflationary overheads while raw material changes remained pass through in nature.

Brownfield capex plans to boost medium term growth: Management has highlighted that the brownfield expansion of fungible rubber black capacity at Mundra remains on track to come online by Q3FY19 and would add another 56,000 MT to the existing capacity of 515 KTPA. Moreover, the 32,000 MT expansion of specialty carbon black is likely to come online in 2 phases with the first line of 12,000 MT to come online by end of Q4FY19 and another line of 20,000 MT to come online by Q2FY20 (earlier expected to be completed by Q1FY20). The overall outlay for the aforementioned expansions is expected to be around Rs 450 cr.

Outlook and valuations: The company is expected to be a major beneficiary of tyre investments in India and ASEAN region which coupled with global demand supply tightness is likely to keep contribution margins high for rubber carbon black. Expansion in specialty carbon black is further likely to boost EBITDA/ton and growth in FY20. Driven by the strong increase in profitability, we upgrade our EPS estimates for FY19 and FY20 by 15.2 per cent / 24.9 per cent respectively. We reiterate our ‘BUY’ recommendation on the stock with a price target of Rs 328/share valuing the stock at ~13x FY20E consolidated earnings of Rs 24.1/ share excluding any impact from dilution from the QIP.