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PCBL witnessed healthy Q1FY24 volume growth of 12.5% YoY in carbon black driven by 22.6% rise in export volumes, which indicates that the strong overseas market opportunity is playing out. Company also witnessed a steady 6.7% volume growth in the domestic market. Specialty volumes grew 19.4% YoY. Gross profit per kg surprised positively with 14% QoQ jump to Rs33.5 (with no one-offs) though it remains in line with the FY24 guidance of Rs32/kg. Spreads are likely to benefit in FY25 and onwards on the back of improving mix towards specialty chemicals and the more yield-efficient Chennai facility. Company anticipates strong volume growth over the next few years due to Europe / US looking to source more carbon black volumes from China / India amid muted capacity addition in Russia, Europe and US. PCBL anticipates capacity addition of 80-100ktpa over the next few years to meet the growing demand. Company is working on developing super-conductive-grade carbon black, which finds application in EV batteries. We have increased our EPS estimates by 1-2% over FY24E-FY25E as we raise volumes and spreads; however, the EPS improvement has been restricted due to higher tax rate. We have increased our FY25E P/E multiple to 13x (from 12x) as we believe the market is becoming favourable. Our revised target price is Rs200 (earlier: Rs180). Maintain BUY. Risks: 1) rise in competitive intensity from China or Russia in the export markets; and 2) lower than expected spreads in India.

* Carbon black volumes rose 12.5% YoY / 3.2% QoQ to 123kte. PCBL’s carbon black volumes benefited from the commissioning of Chennai facility, which added 5kte to sales with utilisation reaching 45% in the first quarter of production from line-1. Company will commission remaining two lines in Q2FY24, and anticipates 45% utilisation for the entire Chennai facility in FY24. Management expects the facility to breakeven in FY24 and, with production ramp-up, start contributing to EBITDA FY25 onwards. Domestic demand remains healthy, and the company expects high-single-digit growth for next two years. This is helping absorb the domestic carbon black capacity added in FY23. Though PCBL is cautious on export volumes, it has not seen any negative impact on volumes as it continues to win market share. Europe is becoming an important export market with its share of the company’s export volumes increasing from 4% in FY22 to 14-15% in FY23 – with expectations of 25-30% in the next few years. PCBL expects a capacity requirement of 80-100kpa to meet carbon black demand. It also sees continued growth in the market for specialty carbon black.

India volumes grew 6.7% YoY to 82kte and export volumes 22.6% YoY to 41kte in Q1FY24. Specialty volumes rose 19.4% YoY to 11.8kte and now accounts for 9.6% of total volumes. Company will likely commission the entire 147ktpa capacity in Chennai and 20ktpa specialty carbon black capacity in Mundra by Q2FY24. These capacities are expected to aid volume growth in FY24/FY25. We see big opportunity in Europe arising from the complete ban on Russian carbon black w.e.f. Jul’24 (from a quota of 752kte). Russian carbon black to India will be uncompetitive due to higher logistic costs.

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