Near term headwinds transitory in nature, Visibility of growth in sight, Maintain BUY!
Except for stronger power business, the company reported largely muted show in CB & Aquapharm business during the quarter as its gross & operating spreads per kg remained weak in the latter businesses. Power business reported steep ~32% YoY & ~8% QoQ revenue growth led by stronger volumes & better realizations coupled with cost benefits led to strong ~55% YoY & ~13% QoQ jump in EBIT & supported the overall operating profitability. Despite CB volumes growing by ~9% YoY/~5% QoQ, CB revenue declined by 3% YoY because of lower realizations due to muted demand & tariff uncertainty. Aquapharm volumes was up 3% YoY/down ~5% QoQ, but revenue grew by 9% YoY/~3% QoQ because of better realizations. Domestic volumes grew by ~10% YoY & 11% QoQ led by robust domestic tyre industry, but export volumes dipped by ~4% on QoQ basis. The good part remains that speciality black volumes grew by ~2% YoY & ~9% QoQ because of demand certainty & increasing end user applications but in overall volume contribution, slight dip is seen on YoY basis. Blended gross spreads per kg declined by 12% YoY & ~7% QoQ because of weak product mix & softening demand. EBITDA spreads dipped by 32% YoY & ~19% QoQ to Rs ~14.2 per kg because of higher conversion cost. PCBL started phase 1 CB capacity of 30KT in the Chennai plant & remaining 60KT will be completed by FY26E end. The company is witnessing strong pickup in EU market owing to ban on Russian CB supplies, but recent US tariff puts a brake on US exports & it remains a wait & watch about how things pan out on tariff front. PCBL will continue to remain in capex mode for the next 3 years, adding brownfield capacity in Chennai, doubling Aquapharm capacity, increasing speciality CB capacity & infusing money in JV to capture future growth opportunities. The company is focussed on improving composition in existing CB commodity grades commanding better spreads, increasing speciality grade pie & entering newer value-added grades (eg. Acetylene Black). Despite near term uncertainty of muted demand & tariff related uncertainty, the long-term outlook is good. We trim our spreads per kg forecast factoring slower uptick than earlier expected. We maintain our target multiple of 27x & roll forward our valuation to Sept’27E as growth momentum will remain strong & newer businesses will likely contribute higher share in EBITDA by FY30E & hence we arrive at a target price of Rs 540 per share. Maintain BUY rating on the stock. Per unit spreads declined YoY & QoQ because of muted demand & inferior product mix, improvement in sight for next 2 years
▪ Despite higher CB volumes growing by ~9% YoY & ~5% QoQ, CB revenue declined by 3% YoY because of lower realizations
▪ Carbon black EBITDA spreads dipped by 32% YoY & ~19% QoQ to Rs 14.2/kg & Aquapharm EBITDA spread/kg stood at Rs 19.1/kg, dip of ~7% YoY during the quarter. The CB spreads have remained weak largely led by tariff impact & muted demand, however, with pickup in market spreads per ton coupled with higher speciality CB & Aquapharm volumes, we anticipate EBITDA/kg to inch up by in the next 2 years. Current CB spread factors in most of the negativity.
▪ Supply tightness in CB space globally & EU ban on Russian CB is aiding PCBL export volumes, but with recent US tariff, if continued, exports could face material headwinds. The long-term outlook is bullish as PCBL is a proxy play on volume recovery in the tyre sector which is set to grow at 5-8% from FY25-28E, the CB will witness volume CAGR of ~10.4% from FY25-28E. We expect speciality volumes to grow at a CAGR of ~15% & reach ~94.8K tonnes by FY28E.
Muted uptick in Aquapharm, strong uptick in sight, newer business ventures to keep capex intensity high for next 4-5 years
▪ The company 1st phase of Chennai plant brownfield expansion of 30KT has started contributing to volumes & Phase 2 of 60KT to start by end of FY26E. The capex for the same is Rs3.5-4bn.
▪ In Aquapharm, the volume growth of ~3% YoY is largely because of better home care segment, although oil & gas applications underperformed led by weak crude oil prices & lower demand. The recent capacity commercialization of 11,500 TPA would support growth going ahead. We factor in volume growth of ~16% CAGR for the next 3 years.
▪ Nanovace’s pilot plant project on track. Process patent for nano-silicon granted in US and patent expected from Japan, South Korea and Europe. The combined JV will generate EBITDA of ~Rs12-13bn at peak levels in 2-3 years’ time frame post commercialization. Expected commercialization is by FY28E.
▪ Overall, capex of Rs35bn will be incurred over the next 4-5 years & it will be funded largely via internal accruals.
Valuation
▪ Near term demand weakness coupled with tariff related uncertainty is weighing on stock price. We feel current issues are transitory in nature & company will come out strongly from these short-term hiccups. Robust volume growth & focussing on growth capex are the key triggers. We roll forward our valuations to Sept 27E. Currently, the stock is trading at P/E of ~19x. We maintain our target multiple of 27x despite near term uncertainties as growth momentum will accelerate going ahead & newer businesses (Nanovace, Acetylene black, greenfield CB) will likely more than double from FY25 base EBITDA and, thereby, we arrive at target price of Rs 540 per share which offers upside of ~49% from current valuation. Therefore, we maintain our BUY rating on the stock.
PCBL Chemical Ltd – Q2FY26 Result Update – SMIFS Institutional Research
