Healthy performance, unchanged growth aspirations
About the stock: PCBL Ltd (erstwhile Phillips Carbon Black) is the leading manufacturer of carbon black, which is used as a reinforcing material in tyres.
• PCBL also derives ~11% of sales volume from speciality carbon black.
• Recently acquired speciality chemical company i.e. Aquapharm Chemicals
Q2FY25 Result: PCBL reported a healthy performance in Q2FY25. Total operating income came in at ₹ ₹ 2,163 crore with carbon black sales volumes at 149 kt (up 14% YoY, down 3% QoQ. EBITDA for the quarter stood at ₹364 crore with margins at 16.8% (up 10 bps QoQ). Consequent PAT for Q2FY25 stood at ₹123 crore, flat YoY. Speciality carbon black sales volume stood at 17K tonne (~11.5% of sales vol.).
Investment Rationale:
• Buoyed by export demand, aiming for 10 lakh carbon black capacity: PCBL is India’s largest and world’s 7th largest carbon black manufacturer with installed capacity of ~7.7 lakh tonnes as on date. Sensing robust demand prospects especially in Export market, it is looking at adding 90 KT capacity via brownfield expansion at its new Tamil Nadu plant (30KT due for commissioning in Q3FY25) and scouting for a new greenfield plant. It is targeting double digit volume CAGR over next 5 years and is looking at substantial export play with near term capacity pegged at ~10 lakh tonne. We have modelled carbon black sales volume at PCBL to grow at a CAGR of 11% CAGR over FY24-27E to 7.3 lakh tonne in FY27E. Exports share in its total carbon black sales volume mix is on the rise from 27% in FY21 to 38% in FY24 and is further slated to increase to 45% by FY27E.
• Increasing share of speciality grade, margin accretive, structural driver: PCBL has, over the years, with indigenous R&D efforts has developed grades in specialty carbon black (SCB) domain, which is a high margin product (typically ~3-4x normal trye grade carbon black). Speciality grade carbon black volumes grew 42% YoY to 57KT in FY24. On a high base, SCB volumes are expected to grow at a CAGR of 14% over FY24-27E to 85KT in FY27E. This is structurally positive for EBITDA/tonne profile at PCBL.
• Healthy margin & RoCE profile, trades inexpensive vs. promised growth: With carbon black volume growth on anvil amid thrust on exports, increasing share of high margin specialty grade carbon black, expansion in sight at its new acquired Aquapharm and ramp up niche battery chemical business, it expects to clock 5x PAT in 5 years i.e. (~₹ 2,500 crore in FY29E vs. ~₹ 500 in FY24). We have baked in ~24% earnings CAGR at PCBL over FY24-27E with scope of company beating our estimates.
Rating and Target Price
• With organic levers of growth amidst changing business profile in favour of more speciality chemical play, healthy margin & RoE profile (~15%+), robust cash flow generation, we retain BUY rating on PCBL. We value PCBL at ₹600 i.e. 24x P/E on FY27E. We believe the current correction in stock price offers good entry point for long term wealth generation.
Leave a Reply