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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 84 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

Mixed performance – Domestic market witnessed demand softness while exports demand remained strong

* During Q3FY22, PCBL net sales increased by 50.3% y-o-y and 8.3% q-o-q to Rs 11,561.4 mn, mainly on account of higher realization led by higher crude prices. The domestic market witnessed demand softness due to supply chain issues and semiconductor shortages impacting OEM production, while exports demand remained strong, and the Company was swiftly able to increase volumes in the international markets. Domestic sales volume declined by 9.7% y-o-y and 6.5% qo-q to 76,621 MT while, export sales volume increased by 34.6% y-o-y and 18.3% q-o-q to 39,973 MT. During the quarter, CB realization increased by ~47.9% y-o-y and 7.1% q-o-q to Rs 96,773/tonne on account of higher crude prices.

* With enhanced demand for packaging material & engineered plastic goods coupled with increasing global reach leading to new customer additions, PCBL reported highest ever sales volume of specialty grade CB (SCB) at 9,835 MT in Q3FY22. The Company is investing in R&D to launch consumer-centric products to drive premiumisation and gain market share in both rubber and SCB applications.

* The management expects tyre demand to show healthy growth going forward on the back of a recovery in OEM sales, replacement demand and growing export demand. Further, 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. With an 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, 4,95,000 MT and 5,70,000 MT during FY22E, FY23E and FY24E respectively against 3,89,261 reported in FY21. Realisation is also likely to remain firm on account of higher crude prices.

* The management has changed the Company name from Phillips Carbon Black Ltd to PCBL Ltd to reflect the diversification of the product portfolio from a pure play carbon black to performance chemicals, SCB and green power.

Timely capex for capacity addition to propel growth and lend visibility

* During FY21, PCBL enhanced its SCB capacity by 32,000 MTPA to 72,000 MTPA at an investment of Rs 2.3 bn, resulting in further strengthening of high margin SCB portfolio (EBITDA/tonne for specialty black is 3-5x of rubber black). It has also planned to increase its power capacity by 23 MW, of which 8 MW capacity at Mundra, Gujarat was commissioned during Q1FY22. The remaining 7 MW capacities each at Palej and Kochi are expected to be commissioned in Q4FY22E.

* 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 7-8 bn. The plant is expected to be commissioned by December 2022, benefits of which will start reaping from FY24E onwards. As of now the project is progressing well with major equipment orders being placed.

* 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.

EBITDA/tn to remain stable at ~17,250/tn by FY24E led by better product mix

* During Q3FY22, PCBL reported EBITDA/tn of Rs ~14,136/tn vs. ~Rs 16,203/tn reported in Q3FY22 and ~Rs 15,687 in Q2FY22 owing to higher RM prices which was not completely passed on. Further, during the quarter, the Company swiftly moved to increase volumes in the export markets to optimize CU, the same impacted margins on account of higher freight rates on spot contracts. EBITDA margins declined by 986 bps y-o-y and 275 bps q-o-q to 14.3%. 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 17,250/tn by FY24E.

* Recently, the Company has raised ~Rs 4 bn by issuing 16.4 million shares at a price of Rs 244/share vide a QIP.

* During the quarter, in view of the best ever operating performance (highest ever sales volume), the management has declared an interim dividend of Rs 10/-.

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 32.8/share and recommend a “BUY” with a target price of Rs 361 (upside of 55%) in 18 months.

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