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Company Background & Product Highlights

PCBL (formerly Phillips Carbon Black Ltd.), incorporated in 1960 in collaboration with Phillips Petroleum Company, is a part of RP-Sanjiv Goenka Group. It is the largest manufacturer of carbon black (CB) in India (~10% market share in Asia-ex China) and seventh largest in the world, having an aggregate installed capacity of 6,03,000 MTPA and co-generation power capacity of 91 MW spread over four locations viz. Durgapur (W.B.), Palej and Mundra (Gujarat), and Kochi (Kerala). CB is used as a reinforcement material providing tensile strength to tyres and other industrial rubber goods and forms 23% by volume of tyre weight and 10% by value of tyre cos

Investment Rationale

Mixed performance – Export market witnessed demand softness while domestic demand remained stable

* During Q1FY23, PCBL net sales increased by 40.4% y-o-y and 15.6% q-o-q to Rs 14,090.7 mn, mainly on account of higher realisation led by higher crude prices. The domestic market witnessed better demand with easing of supply chain issues and improving rural demand, while export demand was soft led by geopolitical issues in Western Europe.

* Domestic volume increased by 5.5% y-o-y to 77,097 MT (vs. 77,015 MT in Q4FY22) while, export volume declined by 11.2% y-o-y to 32,280 MT (vs. 36,350 MT in Q4FY22). During the quarter, CB realisation increased by ~39.1% y-o-y and 18.5% q-o-q to Rs 1,25,611/tonne on account of higher crude prices. Further, with rising demand for power in the country and consequent increase in power tariffs, the realisation from power sales improved from Rs 2.65/kWh to Rs 4.06/kWh.

* With growing demand coupled with increasing global reach and new customer additions, PCBL continues to witness traction in demand for specialty grade CB (SCB), with sales of 9,867 MT during the quarter vs. 7,283 MT in Q1FY22 and 11,149 MT in Q4FY22.

* The management remains cautiously optimistic in the near term as geopolitical scenario remains extremely volatile with large fluctuations in both international crude prices and currency, and remains hopeful of normalcy returning back to market soon.

* Domestic market demand is showing healthy growth on the back of a recovery in OEM sales, replacement demand, easing of supply chain issues and improving rural demand. With consolidation of capacities in China and geopolitical issues in Western Europe, the supply side challenges are expected to remain in near future. This has opened a multi-year opportunity for Indian CB players. Further, ocean freight rates have started softening, which may continue as global supply chains are restored

* The CB industry in general and PCBL in particular is expected to benefit from the completion of a strong capex being undertaken by the domestic tyre industry. However, near-term uncertainty remains and thus, we have lowered PCBL CB sales volume to 4,75,000 MT and 5,35,000 MT, against our earlier projection of 4,95,000 MT and 5,70,000 MT respectively for FY23E and FY24E. Realisation is also likely to remain firm on account of higher crude prices.

Timely capex for capacity addition to propel growth and lend visibility

* PCBL(TN) Ltd, a wholly owned subsidiary of PCBL has been incorporated for implementing the greenfield project of 1,47,000 MTPA of CB and 25 MW of CPP over 60 acres of land in Tamil Nadu at a total investment of ~Rs 8 bn. The plant is expected to be commissioned by 2022 end, benefits of which will start reaping from FY24E onwards.

* Further, the Company has announced a brownfield 40,000 MT of SCB capacity at Mundra which is also expected to get commissioned by FY23E. Thus, with commissioning of new SCB capacities, the Company expects strong growth in sales volume in coming years.

* The 7 MW power plant in Kochi is under commissioning stage, post which power generation capacity will enhance from current 91 MW to 98 MW.

EBITDA/tn to stable at ~16,000/tn by FY24E led by better product mix

* During Q1FY23, PCBL reported EBITDA/tn of ~Rs 17,806/tn vs. ~Rs 14,404/tn reported in Q1FY22 and ~Rs 11,507/tn in Q4FY22 on back of a conducive demand-supply scenario and improved performance from power and specialty business.

* Going forward, brownfield nature of expansion will kick in; operating leverage benefits coupled with an increasing share of SCB (better product mix) are expected to lead to EBITDA/tn of ~Rs 16,000/MT by FY24E

Valuation

PCBL is on a strong footing led by buoyancy in tyre demand coupled with operating leverage benefits and strong cash flow generation. We have valued the stock on the basis of P/E - method of relative valuation - of 11x of FY24E earnings of Rs 14.3/share and recommend a “BUY” with a target price of Rs 157 (upside of 32%) in 18 months.

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