The basic fundas
- Carbon black is used mostly as a pigment, which finds vast application in the tyre industry, among others.
- The basic raw material for carbon black is carbon black feedstock (CBFS), which can be obtained in 2 ways; from oil refineries (Indian way of doing things) or through the coal tar distillation route (Chinese way of doing things!). The price of CBFS obtained from oil refineries is directly linked to crude prices.
- Well, it so happened that due to increase in crude prices, the Indian way of making carbon black became more expensive than the Chinese way. As a result, the Chinese happily started dumping carbon black in the Indian markets. Being a complete commodity, branding, manufacturer reputation etc just does not matter.
- The annual Indian demand for carbon black is about 6.5 lakh tons, while the Indian manufacturers produce about 7.2 lakh tons, some of which is exported.
- The Indian carbon black market is a duopoly, with just 2 companies; Phillips Carbon and Aditya Birla Nuvo controlling more than 80% of the market.
- Now, till FY11, the Chinese imports of carbon black in India were about 16000 tons annually, which is no big deal. But then, the dumping started. In FY12, Chinese imports increased to about 80000 tons and over the trailing 12 months, have been estimated to have crossed 1.1 lakh tons. Now thats a big deal. If one wants to understand more on this, one can read this notification by the DG - Safeguards. Gives very good data as well as an overview of the sector. (I have highlighted the document for faster reading)
- Landed cost of the China-maal is about 18-20% lower (esti) than the locally sold carbon black. So obviously, the local manufacturers could not compete and were severely hit. Phillips Carbon was no exception and the recent results paint a very sorry picture.
What has happened now
- The Indian manufacturers obviously got pissed off and made a case before the Govt to impose a safeguard duty on Chinese imports to curtail their dumping.
- The Govt found the concerns of the Indian industry valid and a safeguard duty of 30% was imposed on Chinese carbon black for a period of 15 months from Oct 5, 2012. Go India!
- Of course, there would be existing stock of cheap, pre-duty Chinese carbon black, yet to be exhausted, so one cannot expect immediate miracles for the Indian manufacturers.
What are the risks if one thinks of investing
- The company does something RPG-ish!
- Further increase in crude prices
- Raw material is heavily imported and rupee is at 54ish.
- Severe slowdown in Auto sector, trickling down to severe slowdown for carbon black sector
- A really awful upcoming quarterly result is possible!
- As far as possible, one should not look at an RPG company as a long term investment. So, at least for me, that door is closed.
- However, what does Phillips Carbon earn in a 'normalised scenario'? Well, Rs.1800-2000 cr of sales with 6-7% PAT margins seems doable for the company. So, is Rs.100 cr PAT? Easily possible. Btw, the stock price has drifted down from Rs.220ish to Rs.95 over the last two years, giving a market cap of Rs.330 cr at present. Interesting!
- So whenever the company starts showing improved profitability, the market will reward it with a nice spurt in the stock price. Forget EPS growth, forget 're-rating'..even a 'reversion to mean' can give good returns in this case.
- Now, the big question is - when will this happen?! While I will not talk about that, I can say that I dont think it will happen in this quarter's (December) result, since existing cheap Chinese stock will take time to get exhausted. December result may also be equally bad, in which case the stock price will take a further hit. But this does have potential as a 2-3 quarter short term puff!
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