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Steady performance, base case valuations to prevail…

About the stock: PCBL Ltd (erstwhile Phillips Carbon Black) is the leading manufacturer of carbon black, which is used as a reinforcing material in tyres.

* PCBL also derives ~9% of sales volume from speciality carbon black, which fetches high margins and finds application in paints, plastics among others

* It has a healthy margin profile, capital efficient business model (RoCE>15%) with limited leverage on b/s (~0.3x debt: equity as of FY22)

Q2FY23 Results: PCBL reported a steady performance in Q2FY23.

* Net sales in Q2FY23 were at | 1,628 crore, up 15.5% QoQ with carbon black sales volumes at 114 KT (up 4% QoQ) and realisation at | 140/kg (up 11% QoQ). Speciality grade carbon black sales volumes were at 10,016 tonne

* EBITDA in Q2FY23 came in at | 189 crore with corresponding margins at 11.6%. Consequent PAT for Q2FY23 was at | 116 crore, down 7.7% QoQ

* EBITDA/tonne for the quarter was at ~| 16,570/tonne, down 7.3% QoQ, still second highest in its history. It was higher than our expectations, primarily driven by a decline in outward freight rates

What should investors do? PCBL was one of our early finds wherein it grew ~8x since our initiation over six years (~| 17.5 in July 2016 to ~| 140 as of October 2022).

* We retain BUY rating on the stock. PCBL stands to benefit from the current recovery in volumes in the domestic auto space, especially the CV domain with greater export play amid constrained exports from China

Target Price and Valuation: Tracking management commentary and, thus, revising our estimates, we now value PCBL at | 170 i.e. 12.5x P/E on FY24E EPS

Key triggers for future price performance:

* Healthy growth on the anvil. We expect sales, PAT to grow at 26%, 9.5%, CAGR, respectively, in FY22-24E, building in 7.6% volume CAGR at same time. Sales growth looks optically higher on crude led rise in realisation

* With greenfield expansion (~150 KT) under execution and successful strides made in the speciality carbon black domain, long term growth prospects are robust amid limited competition in overseas markets

* Expected commissioning of greenfield project in CY22E with brownfield expansion of speciality grade carbon black lines (~40,000 tonne) by FY24E

* Trades at inexpensive valuation of ~10x P/E on FY24E EPS of ~| 13.6/share

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