Buy Philips Carbon Black - Sharekhan

• Philips Carbon Black
• Cluster: Cannonball
• Recommendation: Buy
• Price target: Rs173
• Current market price: Rs117

Price target revised to Rs173

Sales grew on better realisation but volume performance was poor: The net sales of Philips Carbon Black Ltd (PCBL) grew by 35% year on year (YoY), supported by a 27% growth in the realisation of carbon black. However, the performance on the volume front was poor. The volume grew by 7% YoY (new capacity was added over the previous year) but declined by 8% sequentially, indicating a poor demand. We observed that the company has cut production compared to the Q1FY2012 levels and there was a significant rise in its inventory in H1FY2012. Both indicate a lower demand outlook. The sales from the power segment remained healthy with a 23% growth YoY but slipped by 18% quarter on quarter (QoQ).

Profitability hit by margin pressure: The operating profit margin (OPM) for Q2FY2012 slipped to 8.2% compared to the historical trend of 12-13%. One of the highlights of the cost was a large foreign exchange (forex) fluctuation loss of Rs10 crore (PCBL has foreign debt) due to the rupee's depreciation. Even if we adjust this expense (as the same is notional in nature), the OPM appears to be around 10%, which is still lower. Moreover, the employee cost was reported high in this quarter compared to the previous quarter due to a variable payment made by the company (historical data suggests the trend). Consequently, the operating profit declined by 9% YoY despite a 35% sales growth. Sequentially, on flat sales the operating profit declined by a whopping 40%.

Valuation and outlook: Given the apparent slowdown in the domestic demand, the company is likely to witness several challenges in the medium term. Moreover, a higher interest rate coupled with the depreciating rupee could further be challenging for the company for some time. Hence, we have cut our earnings estimates by 13% and 11% for FY2012 and FY2013 respectively. As a result, we have reduced our price target to Rs173 from Rs205, considering the likely headwinds the company is expected to face in the medium term. Nevertheless, we remain positive on the stock from a longer-term perspective given its leadership position in the growing Indian market and the stock's low valuation. At the current market price, the stock trades at 0.6x its FY2012E BV and 0.5x its FY2013E BV. It is available at 3x its FY2012 and FY2013 earnings estimates. Therefore, we retain our Buy rating on the stock with a revised price target of Rs173.

Source : Equity Bulls

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