IGI Logo

Recalibrated + re-innovated + structural tailwinds

We initiate coverage on PCBL with a BUY rating and target price of Rs300, valuing the stock at 12x FY24E PE. PCBL has recalibrated after challenging times till FY14. It is strengthening its business model; re-innovated with an emphasis on R&D, and is seeing structural tailwind from reduced China concern. PCBL is adding greenfield capacity after a decade, which shows growing management confidence in the business. It has introduced specialty grade and is expanding into new highperformance carbon blacks used in energy storage, improving resistance quality and investing in greener process. We forecast PCBL’s EBITDA and net profit to grow at a CAGR of 13.9% and 14.5% over FY21-24E. The stock is trading at reasonable valuation of 9.9x FY24E PE and FCFF yield of 5.6%.

* Recalibrated: Bought process efficiency. Intense competition from Chinese manufacturers has put pressure on PCBL to re-evaluate each facet of business, including product portfolio, manufacturing efficiency, raw material sourcing, currency exposure and addressable market.

1) PCBL has adopted three-pronged strategies for process efficiency:

   1) Comprehensive management system,

   2) higher process knowledge and

   3) increased role of science in all activities. This approach is focused at doing more with less and enhancing the quality in a continuous way. This has resulted in improved yield, energy efficiency, better quality standards and lower maintenance expenditure.

2) PCBL’s operating cost/kg has remained under control despite significant investment in R&D, higher repair & maintenance for process improvement and lower utilisation of specialty carbon black as it is still in ramp-up stage.

3) PCBL had two issues - speculation on oil prices and currency exposure. The company used to keep excess inventory to benefit from rising oil prices; however, higher inventory has hurt performance more when oil prices dipped. It has taken a cautious call to keep minimal feedstock inventory (no speculation on oil prices) required by business and has also increased domestic sourcing.

* Re-innovated: Investment in R&D. PCBL has changed its business model with investment in R&D across products and processes development. This has helped the company offer customised solutions and products and has entered specialty carbon black segment. It has strong plans for future wherein it aims to produce new highperformance carbon black products used in energy storage, improving resistance quality in rubber and investing in greener manufacturing process of carbon black. R&D has been the key reason behind not only significantly improving profitability, but also sustaining it at higher levels. We would closely watch new product development, and success of these products will be key for shareholders’ wealth creation.
 

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer