Phillips Carbon Black Limited, (PCBL) is a part of the RPG Group and is the leading producer of Carbon Black (CB) in the country. PCBL sells CB to almost all tyre companies in the country. It is the world's ninth largest manufacturer of Carbon black. Quarterly Highlights o The company reported total sales of Rs. 316.1 crores in Q1FY10 as against Rs. 333.7 crores in Q1FY09, down by 5.3% on a YoY basis and Rs. 262 crores in Q4FY09, up by 20.6% on QoQ basis. The QoQ rise was on account of higher realizations on account of revival in the Auto industry & increased capacity in both Carbon Black & Power in the current quarter. o The Company reported EBIDTA of Rs. 32.3 crores in Q1FY10 as against a profit Rs. 38.1 crores in Q1FY09 and a loss of Rs. 72 crores in Q4FY09. The growth in operating profits was basically due to lower raw material prices in the current quarter as against in Q4 wherein the company had stocks at higher prices.

The Company reported Net profit of Rs. 20.5 crores in Q1FY10 as against a Net Profit of Rs. 22.9 crores in Q1FY08 and a loss of Rs. 57.1 crores in Q4FY08. Segmental Revenue Revenue from Carbon Black was Rs. 282 crores in Q1FY09 as against Rs. 294.78 crores in Q1FY08 a fall of 4.3%. Whereas revenue from power business has doubled at Rs. 12.90 crores in Q1FY10 as against Rs. 6.67 crores in Q1FY09 out of which the EBIT from the segment is Rs. 9.09 crores thus increasing the overall profitability of the company for Q1FY10.

Valuation & Recommendation

At the current market price of Rs. 103 per share, PCBL is currently trading at a PE of 7.9x FY10E and 4.8x FY11E EPS estimates. We expect the company to earn a RONW of 16% in FY10E and 22% in FY11E. At Rs. 103 per share the stock is trading at a discount of
39.8% from our intrinsic price of Rs. 144 per share which is 11.4x FY10E and 7.1x FY11E earnings. We assign a HOLD rating on the stock with a long term view with a revised Price target of Rs. 144 per share.

We believe going forward the company could cash in on the falling prices of raw materials. The raw material costs went down from Rs. 214.3 crores in Q1FY09 to Rs. 172 crores in Q1FY10.

Going forward with the economy expected to pick up and auto industry which is the major contributor of revenue to the company already showing positive signs, we do see demand picking up in the next 2?3 quarters.

As far as the expansion plans are concerned, all expansions plans are delayed by 3?6 months time frame due to the slowdown in demand. The companies Carbon Black Plant at Mundra with a capacity of 75000 tonnes is expected to be commissioned by Sept 2009. The power plant of 16MW from the above unit will commission by Dec 2009. The company has deferred its expansion plans of Vietnam & Kochi as of now.

We believe with the commissioning of 30MW power plant at Durgapur on
1st April 2009 & another power plant of 16MW at Mundra expected to be on stream by Dec 2009, the income from power segment will continue to flow in the second half of the year & the full effect of it can be observed in FY11, which will lead to expansion in the margins going forward.

Recently on 31st July, 2009 India has imposed anti? dumping duty on imports of carbon black, used in rubber applications, to guard the domestic industry from cheap shipments from China, Russia, Thailand and Australia. The countries have been exporting carbon black to India below its normal value. We believe this move will benefit Indian Carbon Black manufacturers, especially Phillips Carbon Black Ltd.