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ADD ruled out, fundamental demand drivers stay intact

In a recent notification, the Ministry of Finance has denied extension of antidumping duty (ADD) on imports of carbon black (used for rubber application) into India largely from China & Russia. It is amid the Commerce Ministry proposing an extension of ADD. This comes as a negative surprise to us but does not change any business dynamics for the domestic carbon black players, as of now, including industry leader Phillips Carbon Black (PCBL). As highlighted in our recent report (dated December 28, 2020), extension of ADD just ensures better volume offtake for carbon black players and by no means implies better pricing or profitability. We remain confident of better sales volume prospects and profitability at PCBL, reiterating our positive stance on the company.

Domestic demand-supply favourable, bottoming of CV space to provide further fillip to carbon black demand!

As per industry estimates, as of FY20, domestic effective capacity of carbon black is pegged at ~11 lakh tonne with domestic consumption pegged at ~9.5 lakh tonne, thereby implying industry operating at ~85%+ utilisation levels. On the import-export front, carbon black exports in FY20 were at ~1.4 lakh tonne, with imports at ~1.9 lakh tonne, implying net imports of ~0.5 lakh tonne. Going forward, carbon black demand is expected to grow to ~11.5-12 lakh tonne by FY23E, implying incremental demand of ~2-2.5 lakh tonne. With ~1 lakh tonne of surplus capacity being put up by PCBL’s competition, there is still a gap of ~1 lakh tonne that is up for grabs either for domestic players or to be met by imports. Hence, there is room for growth and removal of anti-dumping duty will not materially impact domestic carbon black players. Also, improvement in freight movement along with steady pace of road construction, pick-up in mining activity amid government focus on infrastructure and continued e-commerce demand has helped M&HCV truck and LCV segments to record a substantial upturn in performance post September 2020. This bodes well for the domestic tyre industry. Hence, it is also positive for carbon black players, including PCBL.

Valuation & Outlook

PCBL has successfully turned around its business from a peak debt of | 1,230 crore in FY15 to | 617 crore as of FY20. EBITDA margins have also improved from 6.2% in FY15 to 14.3% in FY20. Hence, its business model is much more mature and is on a strong footing vs. earlier. Carbon black pricing scenario in the interim period is dependent on a lot of factors viz. crude price, Chinese consumption as well as demand prospects both domestic as well as global, and is difficult to ascertain. However, with fundamental demand levers at play, we remain positive on PCBL and maintain our BUY rating with an unchanged target price of | 210 valuing it at 10x P/E on FY23E EPS. Sensing the robust demand, PCBL is in the midst of setting up a greenfield plant of 150 KT capacity (capex of ~| 600 crore) and is awaiting regulatory approval for the same. Healthy return ratios matrix (RoCE>15%) and robust cash flow from operations (CFO yield>15%) provide good margin of safety.

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