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Buy Phillips Carbon Black Ltd For Target Rs.260

Stable performance, inexpensive valuation merit BUY

Phillips Carbon Black (PCBL) reported a steady performance in Q4FY21. Net sales for the quarter were at | 867 crore, up 24% YoY. Carbon black sales volume came in at 113,022 tonne (up 14.4% YoY) with consequent realisation at | 75/kg vs. | 65/kg in Q3FY21. EBITDA in Q4FY21 was at | 186 crore (EBITDA margins at 21.5%) with EBITDA/tonne at ~| 16,500/tonne (flat QoQ). PAT for the quarter was at | 127.4 crore, up 2% QoQ. Carbon black sales volume for FY21 was at 3.9 lakh tonne vs. 4.1 lakh tonne in FY20. Net sales in FY21 were at | 2660 crore (down 18% YoY), EBITDA at | 519 crore (EBITDA margins: 19.5%, EBITDA/tonne: | 13,322/tonne) and PAT at | 312 crore (up 10% YoY). PCBL had already declared and paid dividend of | 7/share for FY21, with dividend payout at ~40%

Revival in auto space, volume led growth for tyre ancillaries

We believe the auto sector is well poised for growth, subject to intermittent Covid induced hiccups, with demand seen bouncing back sharply (double digit volume growth) across segments in FY22E. Given low penetration of 4- W domestically and infrastructure segment led demand creation in the CV space, we have seen structural legs to this demand recovery. Interestingly, CV segment is expected to bounce back sharply, having surpassed its usual two-year period of down cycle. This bodes well for auto ancillaries, especially tyre segment that also derives significant share of sales (~70%) from aftermarket channel. Moreover, tyre, as a category, is immune to electrification with carbon black being a critical raw material in tyre manufacturing and, hence, immune to EV risk. Carbon black forms ~26% of tyre by volume. Building in the positives, we build in 4.5 lakh tonne of carbon black sales volume for FY22E (up 16% YoY), 4.8 lakh tonne in FY23E (up 7% YoY), implying volume CAGR of 11.2% in FY21-23E. Prudently, we have not built in any volumes from new greenfield expansion (120 KT).

Healthy cash flow generation, b/s strength; structural positives

Cash flow generation has been healthy at PCBL with the company generating average CFO of ~| 350 crore in FY17-21. Going forward, we expect the company to generate an average annual CFO to the tune of ~| 500 crore in FY22E, FY23E thereby providing healthy CFO yield of ~14%. On the b/s front, PCBL currently has ~| 400 crore as net debt with net debt: equity at ~0.2x. With greenfield expansion under way, debt is expected to increase marginally but still within the comfortable range by virtue of its robust CFO generation with gross debt: equity seen at 0.3x by FY23E.

Valuation & Outlook

We maintain our positive stance on PCBL amid its capital efficient business model (RoE, RoCE>16%), robust cash flow generation and overall positive demand scenario both domestically as well as globally. Building in ~16%, 20% sales, PAT CAGR, respectively, in FY21-23E we retain BUY on the stock valuing it at | 260 i.e. 10x P/E on FY23E EPS of | 26/share (earlier TP | 210).

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