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Outlook is black, not bleak

During our discussions with investors, questions were raised regarding the sustainability of the company’s carbon black spreads and its elevated debt levels. We highlight that the jump in PCBL’s carbon black per kg EBITDA has been on account of both i) higher specialty volumes and ii) operating leverage. Hence, per kg EBITDA spreads have not peaked, contrary to the prevailing belief; more so when structural tailwinds are in place. We remain constructive on the name on account of i) continued increase in specialty sales providing lift to gross spreads, ii) strong ramp-up on account of continued supplydemand imbalance, iii) promising pricing cycle even in 2025, iv) benefits of operating leverage kicking in from utilisation of additional capacities, v) imminent European sanctions on carbon black imports from Russia starting Jul’24, and vi) integration of the Aquapharm business. We further highlight that the benefits of the Aquapharm integration will start kicking in from 1QFY25 given the company had liquidated high cost inventories in 4QFY24. With the strong ramp-up of both new carbon black capacities and Aquapharm, net debt to EBITDA is likely to come down to 2.2x by FY27E (vs. 4.2x in FY24). Also, Kinaltek JV, and a likely foray into carbon black for Li-ion batteries takes PCBL away from a commodity to a specialty play. We reiterate BUY with unchanged estimates and Sep’25 TP of INR 335/share (based on 18x Sep’26E EPS).

* Jump in per kg EBITDA is sustainable: We believe PCBL’s jump in per kg EBITDA to USD 235/MT in FY24 is sustainable given the company has kept its operating costs in check at USD 190-197/tonne over the last 5 years (refer Exhibit 1). This is despite commercialising both new specialty black capacities as well as standard carbon black capacities. Further, its gross spreads have increased steadily largely on account of specialty mix going up from 4.8% in FY20 to 10.8% in FY24 (refer Exhibit 2). Going forward, this mix is expected to tilt further towards specialty. Besides, demand-supply imbalance and European sanctions should help sustain profitability in standard grade carbon black as well.

* 1QFY25TD spreads have further improved for various grades: During 1QFY25TD, CBOCBFS differential has decreased by 7% in 1QFY25TD (refer Exhibit 4-5). However, CBO prices are still very competitive. Basis our calculations, gross spreads of various grades over CBFS have further improved or been flat in 1QFY25TD (refer Exhibit 6).

* Reiterate BUY with unchanged estimates and Sep’25 TP of INR 335/share: PCBL completed acquisition of Aquapharm in Jan’24. Hence, it did not see the full benefits of that in 4QFY24. In fact, it will enter FY25 with low cost inventories. Besides, it will look to stability in operating costs while increasing rated utilisation. Hence, integration benefits will start kicking in 1QFY25 onwards. With the strong outlook for carbon black and meaningful contribution from Aquapharm, we expect PCBL to register 19%/17% EBITDA/EPS CAGR over FY24-27E. The stock is currently trading at 9.1x/7.8x FY26/27 EV/EBITDA even when ~30-35% of the company’s FY26/27 EBITDA would be from specialty products. Hence, we reiterate BUY. Key risks: faster-than-expected carbon black volume ramp-up could act as a key upside risk.

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