There will be some people who will surely run away after seeing that Phillips Carbon Black Ltd (PCBL) is a RPG group company, hence the warning! :-) Also, please read my disclosure at the end of this post.
PCBL is India's largest manufacturer of Carbon Black. It is also the largest exporter of carbon black in India, deriving around 20% of its revenues from exports. The company has three manufacturing units with an installed capacity of 2.7 lakh MT, as shown in Fig. 1.
Consider the following points about the carbon black industry in India:
- Only 2 players, PCBL and Hi-tech, a unit of Aditya Birla Nuvo, control over 80% of the country's carbon black market. It is a virtual duopoly. (Total size of the market is approx 6.2 lakh MT)
- However, the duopoly does not result into any pricing power for the pair. The risk of cheap imports (a.k.a. dumping) always ensures that the carbon black prices are benchmarked with international prices. Carbon black is a commodity business, with operating margins between 13-15%.
- Currently, the industry is protected by an anti-dumping duty which is in force.
- Tyre manufacturers are on a massive expansion spree in India, which will inevitably result into improving demand for carbon black, which is expected to grow at a CAGR of around 8% over the next three years.
- Of course, PCBL is expanding capacity from the present 2.7 lakh MT to 4.1 lakh MT (0.9 lakh MT Greenfield at Mundra and 0.5 lakh MT Brownfield at Kochi). These capacities are expected to be operational towards the end of this calender year. Considering the customer-industry growth, this expansion seems to be well-placed.
- PCBL has also made its maiden international foray by forming a 80:20 JV with Vinachem, a Vietnam based company for manufacturing 1 lakh MT of carbon black in Vietnam.
- During the manufacture of carbon black, a combustible waste gas is released, which has to be flamed up. PCBL has established co-gen power plants, where this waste gas is used as fuel to generate power. The company is targeting expansion in this segment too, from the present 44.5 MW to about 70 MW. This move augurs well for the company, since there is virtually no feedstock cost (no coal/gas required). The per unit cost of generation is below 40 paise/unit, while the power can be sold on merchant basis at above Rs.4/unit. This segment wont add much to the top-line, but will add tremendously to the bottom-line.
- For re-using this waste gas, instead of flaming it up, PCBL is also eligible for carbon-credits. (Not clear exactly how much)
- Additionally, PCBL also has investments in listed group companies, with market value of investments of about Rs.100 cr. (Since i do not believe in the 'holding company valuations' theme, this is totally meaningless for me.)
Surely sounds like a steal? Well there is some stuff I am afraid of:
- This RPG group company may do something RPG-ish and screw up returns for shareholders of PCBL.
- Volatility in crude prices as well as forex could distort future numbers.
- Like PCBL, Hi-tech also has aggressive expansion plans. If tyre demand were to taper off or is not as high as expected in future, both these players will sit on their expanded capacities, looking at each other! This is typically what happens in a lot of commodities and is exactly why investing in commodity companies should not be one's first choice.