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Strong leadership and expansion will drive growth

Established in 1960, Phillips Carbon Black Ltd (PCBL) is an integral part of the RP-Sanjiv Goenka Group. Over the decades, they have built scale, expanded global footprint and set up world-class R&D facilities to address diverse customer requirements. At present, they are the largest carbon black manufacturer in India with 603,000 MT of annual production capacity. Also, it has four strategically located state-of-the-art plants at Durgapur (West Bengal), Palej & Mundra (Gujarat) and Kochi (Kerala) along with R&D Centre in Asia and Innovation Centre in Europe. Further, PCBL is a strong global player with a significant customer base in 45+ countries and offices in Japan, Germany, Belgium, China, South Korea and Vietnam.

Investment Rationale

* Sector outlook remains bright: The global carbon black market grew to ~USD 18.2bn in 2020 and is expected to grow at a CAGR of ~4-5% by 2026. Primarily the market is driven by rising demand for high-performance rubber products (especially tyres) in the automotive industry. Besides, increasing demand from the non-tyre rubber segment, plastics products and inks, paints & coating industries will help further growth for the sector. In India as well, demand is growing rapidly and is expected to be strong with government initiatives like Atmanirbhar Bharat, large investment lined up in auto and tyre industries and global players looking for China +1 strategy. All these will be a win-win situation for Indian players manufacturing carbon black.

* Strong diversified product portfolio: PCBL is one of the leaders in carbon black in India and also is the 7th largest player globally. The company earns the majority of revenue from domestic business (75-77%) and the rest via exporting carbon black (~25-27%). Amongst the segments, the majority of its revenue is earned from the carbon black segment (96-97%) and remaining via power. It produces more than 60+ grades from rubber to specialty black products and it is also a manufacturer of value-added products (22-25% of revenue) which aids in earning better margins. Going forward, the company aims to continue innovating new different grades of products with growing demand, concentrating on value-added products as well as on exports which will augur well for both earning high revenue as well as strong margins.

* Expansion and deleveraging of the balance sheet is driving growth: In 2015, PCBL started the business transformation by focusing on building the brand, widening and strengthening its footprint and deleveraging its balance sheet by reducing debt-equity from 2.2x to 0.3x in FY21. On the expansion front, the company has commissioned 2 specialty black lines at Palej, Gujarat in FY21. Further, with growing customer needs, it is progressing well on its upcoming Greenfield project (~150 KTPA) at Tamil Nadu (60 acres land) for the manufacturing of carbon black and green power. Going forward, the company strategy is to reduce its debt, expand capacity, improve the supply chain and focus on digital & automation processes.

Outlook & Valuation

PCBL is a leader in carbon black having a strong presence in India as well as globally. The company’s products, i.e. carbon and specialty black, demand is likely to be driven by increase in global demand, the focus of the Indian government on the manufacturing sector and recovery in the auto sector. In addition, its focus on manufacturing high-performance new grades products, improving operating efficiency and increasing specialty black portfolio across inks, coatings and paints segments will further drive growth. We have a positive outlook on the company from the long term perspective and have initiated a ‘Buy’ on the stock with a target price of Rs 306.

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