Phillips Carbon Black


(Excel Monkey) #21

You are calling Sanjay Bakshi old and wrinkled) )

:)) :D


(Donald Francis) #22

Hey Neeraj,

Great to see your participation. We miss the natural sceptics like you around. The quality of our analysis/discussion would go up by a few notches, if you participate more regularly. really appreciate.

By the way, I always thought Radioactive Potato was nice & innovative:). If you want a staid one now, reflecting your status, we will be glad to accommodate that.

And by the way, we encourage links to external sources (with the caveat that, there is enough meat in the discussion piece, not merely the links)by authors themselves and/or others. Most times it serves to substantiate facts/claims and refer quality material for further reading to those interested. We believe if the community finds it useful, they will go read and also refer others; if they find something of little value-addition they will ignore. The investor community will decide.


(Hitesh Patel) #23

neeraj

forigve me bcos I thought that this radioactive guy was blatantly copying material from neeraj marathe’s blog after I read both the articles and hence put up the request to acknowledge the originator of the idea. (not knowing the two names bearing the same identity).

Coming to philips carbon black, I think it might be worth keeping an eye on for a short to medium term ride. As you say these kind of companies are not worth long term bets. Key remains to have a precise entry and exit strategy.

hitesh.


(Radioactive Potato) #24

How so Excel?

I said thats what i feel…no question of what i feel being applicable to anybody else!

You are calling Sanjay Bakshi old and wrinkled) )

Hi guys,

:)) :D


(Vivek Gautam) #25

Isn’t Aditya Birla Nuvo a better option in carbon black due to better quality promoter , diversified range like insurance, retail, insulators etc. even valuation at current PE of 10-11 is attractive? Anti dumping imposed on insulators n carbon black for next 18 months n DI in retail n insurance is an icing on cake


(Excel Monkey) #26

Professor Saheb please don’t take it seriously was meant to be a joke ))

How so Excel?

I said thats what i feel…no question of what i feel being applicable to anybody else!

You are calling Sanjay Bakshi old and wrinkled) )

Hi guys,

:)) :D


(Radioactive Potato) #27

Completely agree with you Hitbhai.


(Radioactive Potato) #28

Hi Donald,

Well, i like this name quite a lot :slight_smile:

As for being a naturalskeptic, it leads to a huge number of opportunity losses and is not a pretty picture! :smiley: Someone like Ayush with whom i have discussed stock ideas on numerousoccasionswould know this thing about me very well.

innovative:)). links)by


(Radioactive Potato) #29

:slight_smile: yaa i know that…

but i can surely say that while i am **A **professor, Bakshi is **THE **professor!!

Professor Saheb please don’t take it seriously was meant to be a joke ))

How so Excel?

I said thats what i feel…no question of what i feel being applicable to anybody else!

You are calling Sanjay Bakshi old and wrinkled) )

Hi guys,

:)) :D


(T Anil Kumar) #30

This is going to be very long post. For convenience of everyone, I have split it into various sections, realising that everyone might not be interested in all the details.

After going through various scenarios and risk involved, I think that at current valuation risk-reward ratio is quite favourable. My opinion can be biased, as I am invested in the company.

Excluding other income & FX losses

Scenario

Scenarios

FY 2011

TTM

Sept-12(annualised)

A

B

C

D

E

Domestic demand

614,152

653,627

NA

653,627

653,627

653,627

653,627

653,627

PBCL % share

39.1%

33%

NA

39%

33%

33%

40%

37%

- PBCL share (only domestic sales)

240,026

217,663

NA

254,915

217,854

217,854

261,451

241,842

PBCL sales vol Chg over TTM

NA

17%

0%

0%

20%

11%

PBCL exports

68,579

83,131

NA

83,131

83,131

83,131

83,131

83,131

- Exports % of total sales

22%

28%

NA

25%

28%

28%

24%

26%

Total Sales Volumes

308,605

300,794

295,816

338,046

300,985

300,985

344,582

324,973

Total sales vol - Chg over TTM

12%

0%

0%

15%

8%

Capacity

422,000

422,000

422,000

422,000

422,000

422,000

422,000

Capacity utilisation

71%

70%

80%

71%

71%

82%

77%

ASP

52,484

71,942

75,594

75,594

79,374

83,154

79,374

83,154

'---Chg over Sept 12

0%

5%

10%

5%

10%

Other cost (exl FX and power cost)

211

273

259

273

273

273

273

273

RM cost per unit

38,905

60,161

69,038

69,038

69,038

69,038

69,038

69,038

Other cost per unit

7,470

9,083

8,747

8,082

9,077

9,077

7,929

8,407

EBITDA/MT

6,109

2,698

-2,191

-1,525

1,259

5,039

2,408

5,709

--EBITDA - CB

189

96

-52

-52

38

152

83

186

--EBITDA - power(net of power exp)

48

60

60

60

60

60

60

60

Total EBITDA (Excl forex)

237

156

8

8

98

211

143

245

Depreciation

-39

-49

-52

-52

-52

-52

-52

-52

Interest

-44

-72

-73

-73

-73

-73

-73

-73

PBT

155

35

-117

-116

-27

87

18

121

Taxes @ 20% flat rate

-31

-

-

-

-17

-4

-24

PAT

124

35

-117

-116

-27

70

15

97

Note: Also attached picture of the above chart

Company need to achieve a 10% increase in volumes and 10% increase in ASP to achieve PAT of around 100 crs. While volumes should not be a problem, there is a possibility that it may not be able to increase ASP. Recovery in volumes are less significant for the company to achieve profits compared to increase in ASP, as more than 70% of the cost is variable cost.

Increase in volumes:

Company can easily achieve 10% increase in volume with decline in Chinese imports and achieving its market share of FY12 in domestic demand. To achieve 10% increase in volumes, no increase in domestic demand is required.

Increase in ASP:

GoI had imposed safeguard duty of 30% for 12 months starting from Oct 12, which will decline to 25% after Oct 13 for next three months. [no duty after Jan 14 as of now]. Historically during 2008-12, Indian prices were on average 18% premium to China prices [without considering any duty] and in FY12 at 20% premium. I think with imposition of safeguard duty, over next 6-9 months companies should be able to increase ASP by alteast 5-10%.

Carbon Black prices are reset only quarterly. Safeguard duty was imposed in Oct 12 and assuming that Tyre companies stocked 2-3 months of inventory in anticipation of imposition of duty, I do not expect any hike in ASP during Dec-12 quarter. Any meaningful hike should happen only during quarter ended Mar-12. {most of the data historical data quoted is from Safeguard Duty order of July 2012. See Neerajâs earlier post for link}.

Historically, realisation from exports has been lower by 4-5% than from local sales. So change in product mix in favour of domestic sales itself will boost ASP by 1-2% [exports account for 20-30% of sales].

Raw material prices:

During July and Aug 12, WTI crude oil prices cumulatively increased by 13%. This may impact the Dec-12 results negatively, if there was no commensurate increase in ASP in last quarter. Again any steep depreciation in INR while crude oil prices remaining constant will impact the company negatively.

Some assumptions in the above table:

1) Exports remain at the TTM level. 2) Chg in ASP is over and above any incremental increase in raw material cost 3) Expenses, other than raw material exp remain at TTM levels 4) Power EBITDA remain at TTM level. 5) No major FX losses. In the last four quarters company had consistently booked FX losses, but from annual report, could not get any indication of open position in FX.

Table_PCBL.docx (25.1 KB)

(T Anil Kumar) #31

Contâ

Now lets look at the user industry [Tyres] to see if there is a possibility of steep decline in demand

70% of carbon black demand comes from the tyre industry. Tyre industry demand is generally driven more by replacement than by OEM. Share of OEM is 25% and replacement 75%. Exports accounts for 12% for FY12.

Imports market share in truck segment (truck segment accounts for 55% of industry revenue) is around 5% and in passenger cars around 15%… Even during 2009 slowdown tyre production had not declined but remained flat (1.2% y/y growth). Same is the trend during 2012 wherein despite its main segment trucks facing double digit decline, overall production of tyres grew by 4%.

From the above data, we can we reasonably say that there wonât be any steep decline in domestic demand for Carbon black.

Global Carbon black industry

In 2011, the three largest global carbon black producers, Birla/Columbian, Cabot and ORION, together accounted for approximately 38% of the installed global carbon black capacity. China accounts for almost 40% of global Carbon Black capacity (China capacity stands at 5.6M tonnes).Capacity utilisation stands at 60% during CY 2011, which is among the lowest in the world. Total world ex China capacity utilisation stands at 88%.Companies in China have aggressively added capacity at a far greater rate than demand has risen, which has resulted in pressured margins in the region. [Orion annual report]

Thus Chinaâs idle capacity at 2.2M is much higher than Indiaâs installed capacity. China will continue to remain a threat for stability of CB prices.

Coke - Main determinant of raw material prices to make Carbon Black in Chinese way

[take this section with a pinch of salt as this is more based on my incomplete understanding and just brief reading of some articles on China industry]

China accounts for 46% of the world’s crude steel production. That is more than the European Union, plus the U.S., plus Japan all put together. In China, like most other countries, power plants and steel plants are largest consumer of coal. It seems that in China coal prices are not regulated but power plants are regulated at the rate at which they can sell the power. Some time back, power plants demand for coal decline because of reduced manufacturing activity and also because power tariff rates were not competitive enough.

Now Chinaâs economy itself is dependent so much on exports that another steep decline in coke prices cannot be ruled out completely if there is renewed global slowdown.


(T Anil Kumar) #32

Cont…

Valuation:

Company had incurred a capex of around 1.5-2.0 crs per 1000 MT for CB plant in the past and around 4-5 crs for setting up power plant. Taking up mid point of this range, total replacement value comes to INR 1,100 crs [ CB plant (422K MT) power plant (76MW) ] and current enterprise value is 1,300crs.

Additional points:

  1. Company is into heavy expansion mode. You can check the corporate pres available on their website for full details. Around 40crs of investment in Vietnam is under review as per one of the brokers report. High risk of this loss in this venture, looking at economic slowdown in Vietnam economy over the last two years.

  2. The prices of finished carbon black are revised every quarter, whereas it buys raw material based on spot prices. There may be time lag in passing on any increase in RM prices.

  3. During 2010-12, around 65% of Operating Cash Flow stuck in working capital.

  4. During 1997-2006, company was never able to generate ROIC above its cost of debt. Its only after 2007, with installation of captive power plants and expansion of capacity which resulted in economies of scale that company started reporting ROIC between 15-20%.

Benchmarking with peer [Hi-tech division of Aditya Birla Novo]

Even with 4% lower market share compared to PBCL, ASP and EBITA per MT of Hi-tech are better than PBCL. For the last three years and last eight quarters, ASP was in general at a premium of 8-10% compared to PBCL. Reported EBITDA of Hi-tech was higher than that of PBCL for last eight quarters. It seems Hi-tech concentration is more in maintaining margins than increasing market share, which is reflected in higher decline in volumes compared to PBCL. In downturn, Hi-tech has always fared better. In 2009 and in Q2 FY13, absolute EBITDA of Hi-tech remains much higher compared to that of PBCL.__


(Ayush Mittal) #33

Hi Anil,

Haven’t gone through the details but a simple question - If a product has to depend on safeguard duty by the govt, doesn’t it means that the competition from some other country has destroyed the long term economic viability of that business?? Also these anti dumping duties are not viable options over a very long term.

Also, while valuing a co, we are not valuing one or 2-3 yrs of earnings. We are actually valuing the earnings of the co for atleast next 10 yrs. So we need to look at the long term prospects.

Ayush

PS: Just trying to raise the negative points on my mind. Stock may actually be offering a lot of value and may be a multibagger in making. So please take your own call.


(T Anil Kumar) #34

Hi Ayush

Thanks for view. I always solicit contrary opinion, which forces me to think over my analysis again and again. If everyone simply agrees, that may not serve any purpose.

I agree with you 100%. But every stock is not for long term and not every business enable one to take call for next 10 years. Forgot about next 10 years, in companies like Philips Carbon we cannot say with reasonable certainty what sort of earnings will be after 1-2 years. But most important point here is to see, what market is factoring into current price. In a broader sense, I will put this sort of situation into another SPECIAL SITUATION, which enables one to make HIGHER ANNUALISED RETURN.

For Philips Carbon, at current valuation market is factoring that this company will never ever report profits and losses will continue. The fact is that with the imposition of safeguard duty over next 3-6 months imports will decline and domestic producers share will increase. No need for any increase in domestic demand too. It just need to remain where it is.

With increase in domestic sales Philips carbon blended price will increase by around 1-2% without any increase in price. Further any increase in price between 5-10%% will be sufficient for it to report PAT of 20-100cr depending upon the level of price increase it can achieve.

I have invested in stocks like NTPC, SJVN and NHPC from next 10 year perspective, because business is scalable, there is sustainable demand and no amount of foreign competition can take away the competitive advantage of these companies and moreover they are available at cheap valuation. But Philips carbon is for next 6-12 months. Odds are in favour of profits in IMHO and I reserve right to be wrong.

Thanks again for your comments; it really makes one to think all over again when we receive any contrary opinion.


(Hitesh Patel) #35

Saw Ashish Tater on cnbc coming out today with pcbl as one of its picks.


(Radioactive Potato) #36

Hi Ayush,

IMHO, there is no point in looking at a long term picture in companies like PCBL. There is no way we can make rational and logical assumptions about even the basic things like realisations or raw mat cost over the long term.

Additionally, the mgmt would make anybody jittery. So i dont think it makes much sense looking at this as a long term investment. Pure commodity companies are rarely compounding stories anyway.


(Ayush Mittal) #37

hmmm…yeah, may be something like Thirumalai Chemicals can happen here.

Cheers,

Ayush


(Radioactive Potato) #38

Phillips Carbon - Pain continues…

I hadwritten about

Phillips Carbon some time ago. After that, the December 2012 quarterly result has come in. The company reported a totally subdued performance (to be honest, I was expecting a much worse result). I had mentioned some risks in the earlier write-up, many of which have started playing out. Following points may be noted:

  • CBFS (raw material) prices continue to be high. Over the last one year, they have really spiked up. Although the carbon black prices have also increased, it has not been enough to cover the raw material price increase. The situation is not expected to improve anytime soon and one can expect the next 2-3 quarters to remain subdued. The following table gives a bit of perspective on the matter.

null

Ratio: Roughly 56 kg of carbon black can be obtained from 100 kg of CBFS. Prices given are blended of domestic as well as foreign and hence cannot give us a 100% perfect view… * indicates approximate price.

  • The company’s power sales continue, but at lower realisations. Merchant power rates are also not exactly going through a great time.
  • There is slowdown in the auto sector, which trickles down to a slowdown for the carbon black sector. The company is currently trying to develop its export sales, but given the slowdown in Europe and the China-angle, that seems quite difficult.
  • There is an interesting comment in the Q3FY13 investor presentation. Post imposition of safeguard duty on Chinese carbon black, “imports in India from China have reduced, however, total imports in India continue to remain the same.” :slight_smile: That’s interesting!
  • I believe the company will skip dividend this year/declare nominal dividend. So please dont look at the “5.3% dividend yield” based on last year’s dividend, shown on most financial websites.
  • Debt will prove a further drag on performance, specially in a cyclical downturn like the one at present.
    All-in-all, nothing great is expected to happen here in the near term. In fact, if auto sales slow down further, the company’s performance would nose-dive further. The imposition of safeguard duty does help, but the other risks will undo that help!!

Link:http://neerajmarathe.blogspot.in/2013/02/quarterly-update-phillips-carbon-and.html


(Excel Monkey) #39

Probably the rest was routed through Dubai and Singapore

Previously Radioactive PotatoPhillip

:)) That’s interesting!


(Radioactive Potato) #40

Qrtly performance and stock price nose dives!!

Available at 33 bucks now.