Recent correction in PCBL Ltd offers attractive risk-reward play. Buy for target price of Rs 330 (35% upside): ICICI Direct

Recent correction offers attractive risk-reward play

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 ~9% of sales volume from speciality carbon black, which fetches high margins and finds application in paints, plastics among others

• It has healthy margin profile, capital efficient business model (RoCE>15%)

• Recently acquired speciality chemical company i.e. Aquapharm Chemicals Pvt. Ltd in water treatment and industrial cleaning chemicals space

Investment Rationale

• Volume led growth in base Carbon black business: PCBL, in the recent past, has commissioned its new carbon black plant with a nameplate capacity of ~150 KT at a total capex outlay of ~₹ 800 crore. It expects to fully utilise its plant in about three years thereby targeting double digit volume growth. With domestic macro drivers in place & favourable export outlook, volume growth in this domain is seen at healthy 12.4% CAGR over FY23-26E to 6.35 lakh tonne in FY26E vs. 4.45 lakh tonne in FY23

• 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 domain, which is a high margin product (typically ~3-4x normal trye grade carbon black). In this domain, PCBL is executing a brownfield expansion of ~40 KT at a capex outlay of ~₹ 300 crore with commissioning in FY24E. Speciality grade carbon black volumes are slated to grow at a CAGR of 23% over FY23-26E to 75 KT in FY26E vs. 40 KT in FY23. This is a structurally driver improving EBITDA/tonne at PCBL’s carbon black business. With tightness in international markets & increasing share of speciality grade, EBITDA/tonne at PCBL is expected to improve to ~₹ 20k/tonne in FY26E vs. ₹16.5k/tonne in FY23

• Acquisition in Speciality chemical domain at fair price: PCBL in the recent past has acquired speciality chemical company i.e. Aquapharm Chemicals Private Limited (ACPL), for an Enterprise Value of ₹ 3,800 crore. ACPL is a global speciality chemical company operating in the domain of Water treatment Chemicals and Oil & Gas Chemicals with application in water treatment, detergents, industrial cleaners, oil fields, etc. It clocked sales of ~₹2,045 crore as of FY23 did gross margins of 30%+, EBITDA of ~₹417 crore (EBITDA margins 21%) and PAT of ₹275 crore. PCBL has acquired this company at a valuation of ~1.9x P/S, ~9x EV/EBITDA and 14x PE on FY23 basis and appears to be fair to us. It should support growth at PCBL.

Rating and Target price

• We assign BUY rating on PCBL amid better-than-expected margin and return ratios profile, healthy volume growth in the offing, increasing share of speciality grade carbon black & healthy cash flow generation with CFO yield at ~10% over FY23-26E. We value PCBL at ₹330 i.e. 15x P/E on FY26E

Click here to download IDirect PCBL CoUpdate Mar 24