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Steady show, inexpensive valuations, value play…

About the stock:

Phillips Carbon Black (PCBL) is the leading manufacturer of carbon black, which is essentially used as a reinforcing material for manufacturing tyres.

* PCBL also derives ~6% of sales volume from speciality carbon black, which fetches high margins and finds application in paints, plastics among others

* It realises healthy margin profile (15%+), has a capital efficient business model (RoCE>15%) with limited leverage on b/s (~0.3x debt: equity)

Q1FY22 Results:

PCBL reported a healthy operational performance in Q1FY22.

* Net sales for Q1FY22 were at | 1004 crore with carbon black sales volume at 109 KT, down 3% QoQ and consequent EBITDA/tonne at ~| 15,000

* Consequent PAT in Q1FY22 was at | 104 crore, down 18% QoQ

What should investors do?

PCBL has been one of our early finds wherein it has grown 6x in the past five years (~| 40 in July 2016 to present ~| 240 as of July 2021).

* We maintain our positive view and retain BUY rating on the stock

Target Price and Valuation: We value PCBL at | 330 i.e. 12x P/E on FY23E EPS

Key triggers for future price performance:

* Expectation of robust volume growth in the tyre space amid cyclical recovery in the CV space as well as need for personal mobility driving sales in the 2-W & PV segment. This will ensure volume growth at tyre ancillaries

* Healthy double digit growth on anvil. We expect sales, PAT to grow at 26%, 23%, CAGR, respectively, in FY21-23E, building in 11.2% volume CAGR

* With greenfield expansion (120 KT) under execution, long term growth prospects are robust amid limited competition in overseas markets

* Trades at inexpensive valuation of <10x PE on FY23E EPS of | 27.5/share

Alternate Stock Idea:

In mid, small cap coverage, we also like VST Tillers & Tractors.

* It is a leader in domestic power tiller space and a key beneficiary of import restrictions in the category. Successful launches in higher hp tractor space

* Capital efficient, cash rich b/s. BUY with a target price of | 2470

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