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Company Background & Product Highlights

Phillips Carbon Black Limited (PCBL), 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 76 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 cost.

Investment Rationale

Buoyancy in tyre demand resulted in better CB volumes

* During Q4FY21, PCBL net sales increased by 23.8% y-o-y to Rs 8,667.3 mn, on account of higher CB volumes and higher realization led by higher crude prices. The Company witnessed encouraging demand pickup during the quarter reflected by ~14.4% y-o-y growth in sales volume. Domestic sales volume was at 82,518 MT, witnessing a robust growth of ~15.2% y-o-y. Export sales volume also increased by ~12.3% y-o-y to 30,504 MT. During the quarter, CB realizations increased by ~9.1% y-o-y and 14.7% q-o-q to Rs 75,801/tonne mainly on account of higher crude prices. With enhanced demand for packaging material and engineered plastic goods, sales volume of specialty grade CB (SCB) stood at 7,619 MT in Q4FY21 against 7,185 MT in Q3FY21. For FY21, SCB sales volume stood at 23,969 MT. During the quarter, PCBL continues to expand its product portfolio of high-performance high-margin grades for both rubber and specialty black applications.

* Management highlighted that domestic tyre sector did relatively better due to buoyancy in automobile demand and CB industry in general and PCBL in particular is expected to benefit from the completion of a strong capex cycle undertaken by the domestic tyre industry. Further, with expected strong revival in commercial vehicle demand, resulting in higher tonnage growth for tyre players, CB demand looks promising. We believe PCBL will clock CB sales volume of 4,50,000 MT and 4,95,000 MT during FY22E and FY23E against 389,261reported in FY21. Realisation is also likely to remain firm on account of higher crude prices. However, our estimates are contingent upon future uncertainties of COVID-19 disruptions, which might impact our forecasts.

Timely capex for capacity addition to propel growth and lend visibility

* PCBL recently undertook a de-bottlenecking exercise wherein it converted its 30,000 MTPA of CB capacity into SCB capacity, resulting in reduction of its overall capacity by 14,000 MTPA. This has strengthened its higher margin SCB portfolio (EBITDA/tonne for specialty black is 3-5x of rubber black). Further, the Company enhanced its SCB capacity by 32,000 MTPA at an investment of Rs 2.3 bn by commissioning its 2nd SCB line 20,000 MTPA at Palej during the quarter. The 1st SCB line of 12,000 MTPA was commissioned in Q3FY21. The Company has planned to increase its power capacity by 22 MW which will commission in FY22.

* PCBL(TN) Ltd, a wholly owned subsidiary of PCBL has been incorporated for implementing the greenfield project of 1,50,000 MTPA of CB and 25 MW of CPP over 60 acres of land in Tamil Nadu at a total investment of ~Rs 6 bn. The Company is also evaluating to add one SCB line of 20,000 MTPA, which if added, will increase the total capital outlay by ~Rs 1 bn, spread over three years The plant is expected to be commissioned by 2023, benefits of which will start reaping from FY24E onwards.

Margins to remain stable at ~19%

* During Q4FY21, PCBL reported higher EBITDA/tonne to Rs 15,924/tonne vs. Rs 9,932/tonne reported in Q4FY20 owing to higher CB volumes and lower RM prices. EBITDA margins improved by 675 bps y-o-y to 20.8%. Going forward, brownfield nature of expansion will kick in; operating leverage benefits coupled with increasing share of SCB are expected to lead to EBITDA/tonne of ~Rs 15,750/tonne by FY23E. Deleveraging balance sheet and focus on rewarding shareholders

* PCBL accumulated substantial debt with peak debt at Rs 12.2 bn in FY15 due to declining profitability and an elongated working capital cycle. In FY21, debt stands at ~Rs 5.5 bn. Going forward, with strong operational performance and consequent cash flow generation, we expect leverage (debt-equity) to further improve to 0.2x by FY23E. The Company aims to become debt free in next few years.

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 10x of FY23E earnings of Rs 29/share and recommend a “BUY” with a target price of Rs 290 (upside of 41%) in 18 months.

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