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Spreads shrink from multiple factors

PCBL’s Q3FY22 gross profit/kg disappointed with a decline of 10.5% QoQ to Rs27.1 on higher exports mix, higher freight cost and lower raw material inflation pass-through to non-tyre carbon black users. Domestic demand was weak, and volumes declined 9.7% YoY on subdued demand for tyres. Additional exports volumes were tactical sales to keep higher capacity utilisation. Volume growth in specialty remains encouraging, and new power capacity addition will add to margins. Though the company has reiterated its ambition to maintain gross profit per kg at Rs29-30, the recent sharp rise in crude oil prices does pose a risk. However, management remains optimistic on the ongoing consolidation in Chinese carbon black market, and higher inflation in coal which will keep Chinese producers’ cost higher. We have cut our EPS estimates by 6.7%/1.9%/1.9% for FY22/FY23/FY24 as we were conservatively building lower spreads. We have, accordingly, revised our TP to Rs294 (from Rs300), valuing the stock at 12x FY24E EPS. Maintain BUY.

* Carbon black volumes grew only 1.8% YoY to 116.6kte. PCBL volume growth was weak due to limited capacity. We understand it can reach peak volumes of 120kte from existing capacity. It is in the process to commercialise greenfield capex in Chennai with 150ktpa carbon black plant likely to start production from Q3FY23. India volumes dipped 9.7% YoY to 76.6kte on weak demand; company opportunistically sold higher exports volumes, which grew 34.6% YoY to 40kte. Specialty volumes growth has accelerated at 36.9% YoY to 9.8kte, and has now contributed 8.4% of total volumes.

* Gross profit/kg dipped 10.5% QoQ / 8.8% YoY to Rs27.1. It was impacted by higher export mix (34.3% vs 29.2% in Q2FY22); cost of export was higher due to elevated freight cost which is borne by the company. Further, it could not pass-on raw-material inflation in non-tyre rubber category customers while tyre carbon black margins were stable. Thus, improvement in contribution of specialty did not aid in margin expansion. Power EBIT growth of 16.6% QoQ to Rs290mn came from rise in units sold. The company had difficulty in passing on raw material inflation and that can be a potential risk to margin considering crude oil price has started going up again. We believe the company can earn steady margin as Chinese carbon black industry is witnessing consolidation; nonetheless, we would wait to see performance in next few quarters before factoring it. PCBL has reiterated Rs29-30/kg gross profit for future.

* Cost control helped EBITDA dip lower by 12.5% YoY to Rs1.6bn. Revenue grew 50% YoY led by higher realisation which rose 47.9% YoY to Rs96.8/kg. Gross profit dipped 7.2% YoY to Rs3.2bn on contraction in spreads. Other expenses dipped 5.5% YoY to Rs1.1bn which restricted the EBITDA decline. Net profit decline was lower at 10.8% YoY to Rs1.1bn which benefited from much lower net finance cost.

* Earnings call highlights. 1) In specialty grade, PCBL’s products cover 90% of polymer products; 40-45% of color grades carbon black which go into inks, dyes and coatings. The new two specialty lines coming in Mundra with 20ktpa capacity each would mostly produce color grades. It is also working on super-conductive materials used in batteries; 2) specialty grade volumes’ acceleration is also from increase in distribution reach, and PCBL expects to grow specialty volumes by 10kte pa in coming years; 3) company aims to expand exports contribution to 50% over the next few years with strategic tie-ups; 4) PCBL sees gross profit/kg going back to Rs29-30; 5) tyre demand in India has been weak, particularly from OEMs which have been hit by semiconductor shortage. It sees pent-up demand for products, and the lost sales may be recouped in future quarters; and 6) 14MW power will be commissioned in Q4FY22. The company expects 1MW power to potentially generate revenue worth Rs24mn.

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