The following is the outcome of our recent interaction with the management of Phillips Carbon Black Ltd.

• The company currently has a Carbon Black capacity of
270000 tonnes which would increase by 90,000 tonnes by September 2009. The proposed expansion will be at Mundra, which will also have a Power generation capacity of 16 MW.

• Apart from the above the company plans another capacity increase at its Kochi plant by additional 50000 tonnes taking the total Kochi plant capacity to 90000 tonnes and the overall company capacity to 410000 tonnes by July 2010. The above capacity addition will add another 10MW of power capacity.

• PCBL currently has a Power generation capacity of 44.5 MW which will add up to 60.5 MW post the Mundra Plant commissioning in September 2009 & further to 70.5 MW post Kochi Plant commissioning in July 2010.

• The company has contracted to sell its additional power (other than Captive Consumption) to sell at Rs. 5.5 per unit, which we believe will be the growth driver going forward.

• Out of the capacity of 60.5 MW of power, which will be available to the company from second half of FY10, the company plans to sell 35 MW of power which we believe will account for revenues of over Rs. 100 crores from the power segment in FY10.

• The company plans to sell the carbon credits received over the period of last 2 years and is expected to earn around Rs.
6 crores from the sale.

• Out of the capex plans of Rs. 390 crores announced in FY08 the company has already incurred Rs. 270 crores as on date and is expected to spend the remaining in the next two years.

• PCBL’s cost of raw material as on date is capped at USD 70 per barrel and the company has signed an agreement with all its customers where in it will pass on any hike in the Raw Material prices to them.

• We believe the operating margins of the company will be 14.3% for FY10 and PAT margins at 6.65%.

QIFY10 Result Highlights

The company reported total sales of Rs. 316.1 crores in Q1FY10 as against Rs. 333.7 crores in Q1FY09, down by 5.3% on a YoY basis and Rs. 262 crores in Q4FY09, up by 20.6% on QoQ basis. The QoQ rise was on account of higher realizations on account of revival in the Auto industry & increased capacity in both Carbon Black & Power in the current quarter.

The Company reported EBIDTA of Rs. 32.3 crores in Q1FY10 as against a profit Rs. 38.1 crores in Q1FY09 and a loss of Rs. 72 crores in Q4FY09. The growth in operating profits was basically due to lower raw material prices in the current quarter as against in Q4 wherein the company had stocks at higher prices.

The Company reported Net profit of Rs. 20.5 crores in Q1FY10 as against a Net Profit of Rs. 22.9 crores in Q1FY08 and a loss of Rs. 57.1 crores in Q4FY08.

Going Forward

Going forward with the economy expected to pick up and auto industry which is the major contributor of revenue to the company already showing positive signs, we do see demand picking up in the next 2?3 quarters. We believe going forward Revenues from Power will give a major boost to the overall revenues of the company & the profits from it will surpass the profits of Carbon black business.

Recently on 31st July, 2009 India has imposed anti? dumping duty on imports of carbon black, used in rubber applications, to guard the domestic industry from cheap shipments from China, Russia, Thailand and Australia. The countries have been exporting carbon black to India below its normal value. We believe this move will benefit Indian Carbon Black manufacturers, especially Phillips Carbon Black Ltd.

Valuation & Recommendation

At the current market price of Rs. 141 per share, PCBL is currently trading at a PE of 4.7x FY10E and 4.1x FY11E EPS estimates. We expect the company to earn a RONW of 33% in FY10E and 29% in FY11E. At Rs. 141 per share the stock is trading at a discount of 73.2% from our intrinsic price of Rs. 244 per share which is 8.1x FY10E and 7.1x FY11E earnings. We assign a BUY rating on the stock with a long term view with a revised Price target of Rs. 244 per share.