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Bullishness reloaded, well poised for profitable growth

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)

Investment Rationale

• New greenfield plant commissioned: PCBL, in the recent past, has commissioned its new carbon black plant with a nameplate capacity of ~150 KT at a total capex outlay of ~| 800 crore. The company expects to fully utilise its plant in about three years thereby targeting double digit volume growth over next few years. With domestic macro drivers in place & favourable export outlook, volume growth is seen at healthy 12.2% CAGR over FY23-25E to 5.6 lakh tonne in FY25 vs. 4.45 lakh tonne in FY23

• Speciality grade volume to outgrow base grade: PCBL has, over the years, with indigenous R&D efforts developed grades in specialty carbon black domain, which is a high margin product (typically ~3-4x normal trye grade carbon black). In this domain, PCBL is executing a brownfield expansion of ~40 KT at a capex outlay of ~| 300 crore with commissioning in FY24. Speciality grade carbon black volumes are slated to grow at a CAGR of 22% (higher than base grade) over FY23-25E to 60 KT in FY25 vs. 40 KT in FY23

• Margins and RoCE to expand, driving re-rating; With volume growth on the anvil amid thrust on exports and increasing volume share of high margin speciality grade carbon black sales (from 9.1% in FY23 to 10.7% in FY25), EBITDA margins are slated to improve ~200 bps to 14.6% in FY25E with EBITDA/tonne seen improving to ~| 17,500/tonne in FY25. Consequent RoCE is seen expanding from sub 16% in FY23 to closer to the 20% mark in FY25E, which we believe, should drive a re-rating of the stock • Healthy cash flow generation with CFO yield >10% over FY23-25E and inexpensive valuation of <10x P/E on FY25E provide good margin of safety

Rating and Target price

• We assign BUY rating on PCBL amid healthy volume growth in the offing, increasing share of speciality grade carbon black, consequent rise in margins and return rations, inexpensive valuations and healthy b/s

• We value PCBL at a conservative 13x P/E on FY25E EPS of | 15.4/share with our consequent target price as | 200/share (over the next 6 months)

• This is our high conviction Midcap Idea

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