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Steady quarter, growth to accelerate going forward…

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 FY23)

Q4FY23 Results: PCBL reported a steady performance in Q4FY23.

* Net sales for the quarter came in at | 1,374 crore with carbon black sales volumes at 119 KT (up 6% QoQ, 16.4% QoQ) and realisation at | 112/kg (down 20% QoQ largely tracking decline in crude prices)

* EBITDA for the quarter came in at | 184 crore with corresponding margins at 13.4%. EBITDA/tonne for the quarter was at | 15,424/tonne

* Consequent PAT for Q4FY23 was at | 102 crore, up 2% QoQ

* Management guided for ~500 KT+ carbon black sales volume in FY24E (up 12% YoY, 445 KT in FY23) amid a new greenfield plant & expects to further grow speciality volumes to ~50 KT in FY24E vs. ~40 KT clocked in FY23

What should investors do? PCBL’s stock price post its initial enormous re-rating over 2016-18 (up ~6-7x) has been largely flat over the past five years i.e. 2018-23.

* We retain BUY rating amid healthy volume growth in the offing in the domestic tyre space and favourable demand supply situation in PCBL’s key export markets amid its new capacities coming on stream and healthy b/s

* Target Price and Valuation: Revising our estimates and rolling over our valuations to FY25E, we now value PCBL at | 180 i.e. 12x P/E on FY25E EPS of | 15/share

Key triggers for future price performance:

* Amid healthy demand prospects, we expect sales, PAT to grow at 7.8%, 13.0%, CAGR, respectively, in FY23-25E, building in 12.2% volume CAGR

* With greenfield expansion (~150 KT) commissioned and successful strides made in the speciality carbon black domain, long term growth prospects are robust amid favourable demand – supply situation in overseas markets

* Expected phase 2 commissioning of Greenfield project in near term with brownfield expansion of speciality grade carbon black lines (40 KT) in FY24E

* Trades at inexpensive valuation of 10% over FY22-25E

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