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B. Krishnakumar

Robust demand for tyres will accelerate performance.

INVESTORS can consider exposure in the Phillips Carbon stock at the prevailing levels for the long term. Though the company's financial performance in recent quarters has not been too inspiring, with capacity expansion in place, it appears well-positioned to capitalise on the likely upturn in business prospects.

Phillips Carbon is among the country's largest producers of carbon black, a critical raw material for tyres. The company caters to the requirements of almost all tyre majors. It has a captive consumer in Ceat, a group company.

Phillips Carbon's performance in recent quarters has not been quite impressive. For the three months ended December 2004, it recorded a 22 per cent growth in turnover to Rs 192.2 crore and a 45 per cent drop in profitability. The company has extended its accounting year ended from September 2004 to March 2005.

The lacklustre performance is explained by the sharp rise in the price of carbon black feedstock (a key raw material used in the production of carbon black) and higher depreciation and interest outgo owing to the implementation of capacity expansion projects. The sharp rise in the price of crude oil, in turn, had an inflationary impact on the price of carbon black feedstock.

On the demand side, while the offtake of tyres from the original equipment market has picked up, the replacement market demand is just catching up.

Considering that the replacement market is the largest constituent of the tyre industry, a recovery in this segment would have positive implications for the tyre industry and for Phillips Carbon as well.

The replacement market tyre demand typically lags the growth of the original equipment by 12-18 months.

Taking into account the steady pick-up in commercial vehicle sales in the recent quarters and the buoyancy in economic growth and industrial production, the demand for replacement market tyres is likely to improve. Phillips Carbon could turn out to be a major beneficiary if the demand were to pick up. The company expanded capacities in 2004.

Along with the capacity expansion project, the company also set up a captive power plant, which was commissioned a few months ago. The company plans to sell the excess power generated to the grid. The income from the power unit could drive earnings for the company.

On the flip side, the firm trend in the price of crude oil is a cause for concern. The appreciation in the value of the rupee and the recent reduction in peak Customs duty rate would offer some relief to the company. Any significant decline in the crude price would have a positive impact on profitability.

The `buy' recommendation is based on expectations that the tyre production would be robust and the recent buoyancy in the economy would be sustained. Any signs of a slowdown in either can be used to reduce exposure in the company.

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