CRISIL Equities assigns fundamental grade 4/5 to Phillips Carbon Black Ltd

 | November 02,2010 10:38 am IST

 CRISIL Equities has assigned a CRISIL IER fundamental grade of 4/5 (pronounced four on five) to Phillips Carbon Black Ltd (PCBL). The grade indicates that the company's fundamentals are ‘superior’ relative to other listed equity securities in India.

CRISIL Equities has assigned a valuation grade of 5/5, indicating that the stock has ‘strong upside’ with the current market price of Rs 198 (as on October 29, 2010). Our oneyear fair value of the stock is Rs 286. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.


The assigned fundamental grade reflects PCBL’s position as the largest domestic manufacturer of carbon black with a manufacturing capacity of 360,000 MT (~46% of total domestic capacity). The grade is supported by CRISIL Equities’ belief that PCBL is all set to ride the tyre industry-led growth wave in the carbon black segment (95% of revenues). CRISIL Research expects the tyre industry to grow at 11-12% in volume terms over the next two years driven by higher OEM (original equipment manufacturer) offtake and increase in replacement demand. In this backdrop, PCBL is increasing capacity at the Mundra facility by 50,000 MT by December 2010.

 

The grade has also factored in PCBL’s presence, albeit small, in power generation, which is very profitable as it enjoys higher margins; since power is generated via waste gases produced during the manufacturing of carbon black, the cost of production is negligible. PCBL plans to increase its captive power generation capacity from 60.5 MW to 76 MW by Q2FY12.


The grade is moderated by the fact that PCBL's margins are susceptible to a change in raw material - carbon black feedstock (CBFS) - prices. CBFS is a derivative of crude oil and is highly co-related to the latter’s prices, which have been very volatile in the past two-three years. The ability to pass on a hike in CBFS prices remains a key monitorable for the company. Additionally, the demand for carbon black is highly dependent on the fortunes of the auto sector which is inherently cyclical.

 

 

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