PCBL Ltd is a carbon black giant, set to grow at a fast clip. Buy for 35% upside: SMIFS

PCBL is a proxy play on tyre growth story. Over the longer term, growth is expected to be robust led by expansion in normal and speciality grade Carbon black (CB) and rising exports. As speciality volumes inch up, exports would gain traction because 70% of speciality volumes are export oriented. However, volatile crude oil & CBFS prices & incremental supply addition of CB in domestic market would keep the realization of carbon players in check. With speciality grade CB ramp up over the next few years, the gross spreads are expected to remain robust. Near term pain in exports is visible and the same is expected to resolve in a couple of quarters, the company’s long term outlook is bullish considering the capex announced by tyre players which bodes well for carbon black players. We assign 12.5x P/E on FY25E EPS and arrive at Rs 183 per share, recommending BUY rating on the stock.

Expansion to lead visibility in volume growth for the next 2-3 years

▪ Historically, the company’s volume grew at a CAGR of 3.3% from FY17-22. The reason for slower growth was because of slowdown of automobile industry in FY20, covid-19 related disruptions & supply chain disruptions. Now, tyre manufacturers are increasing their investment to cater to increased demand and gain additional market share. As the demand outlook remains favourable, the tyre industry is seeing a revival in capex spend towards capacity additions. The proposed capex by the tyre companies is estimated at more than Rs214bn over the next three years and this bodes well for carbon black manufacturers.

▪ To capitalize on the opportunity, PCBL is adding 1.47 lakh tonnes in normal grade CB & 40,000 tonnes in the speciality grade CB which is expected to start by end of December 2022 & by FY25E respectively. With this capacity addition, the total installed capacity of the normal grade CB would stand at 7.5 lakh tonnes & speciality grade CB capacity would be at 1.12 lakh tonnes.

▪ The capex for capacity addition would be Rs~9.7bn (Rs6.5bn for CB capacity & Rs3.2bn for power capacity). We expect peak utilization to be achieved in 1.5-2 years’ timeframe considering the competitive intensity in the carbon black space for the next 2-3 years.

▪ Post expansion we expect the company to be a dominant player in the domestic industry and to report robust CAGR volume growth of 8.5% in normal grade CB over FY22-25E vs 3.5% from FY19-22 & speciality grade CB CAGR volume growth is expected to be 21% CAGR over FY22-25E.

Increase in value added segment would likely improve EBITDA spreads going ahead

▪ EBITDA has been nearly ~3x from Rs 4 per kg in FY13 to Rs ~13 per kg in FY22. This was majorly led by declining imports from China which helped Indian manufacturers to become competitive, rising share of speciality black & improvement in yields led by changes in manufacturing process.

▪ The performance chemicals is a value added segment of carbon black application which is roughly 30% of total sales volume. The contribution margins are nearly 20-25% higher in performance segment. The end user industries of performance segment are generally the non-tyre rubber goods like conveyor belts, hoses and pipes etc.

▪ Speciality black has the highest contribution margin which is nearly 2-2.5x of normal grade carbon black application.

▪ Going ahead with the rise in speciality black contribution and increasing volume mix towards performance chemicals segment, we expect EBITDA spreads will increase to Rs ~14 per kg by FY25E. Ramping up product portfolio will increase greater visibility

▪ The company has been developing new speciality chemical grades, thereby, moving up the value chain in the tyre and performance chemical grades and simultaneously focusing on customisation of grades.

▪ The company’s research and innovation centres in India and Belgium have led the company to expand its product portfolio, as well as undertake process innovations to cater to the evolving needs of customer. The company’s R&D and innovation division has helped the company to develop a strong foundation for customised offerings and innovative solutions for customers.

▪ The company is confident & planning of developing 6-7 new grades over the period of two-three years with focus on developing the highest value chain of Specialty products.

▪ During 2021–22, the company ventured into the less pursued markets in Latin America and Africa. The company has also focussed on strengthening its position in Europe and North America. The company is focussed on penetrating new geographies and increasing its customer base.

Valuation

▪ Currently, the stock is trading at inexpensive valuation on FY25E P/E of ~9.3x. We value the stock on forward P/E multiple of 12.5x owing to increasing share of speciality business, robust volume growth & rising exports share and, thereby, arrive at target price of Rs 183 per share which offers upside of 35% from current valuations.

▪ Therefore, we assign BUY rating on the stock.