PCBL Ltd is good proxy to play upon recovery in volumes in the tyre and broader auto space: ICICI Direct

Robust performance, healthy growth lies ahead…

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 a healthy margin profile, capital efficient business model (RoCE>15%) with limited leverage on b/s (~0.3x debt: equity as of FY22)

Q1FY23 Results: PCBL reported robust performance in Q1FY23

► Net sales in Q1FY23 stood at ₹1,409 crore, up 16% QoQ with carbon black sales volumes at 109kt (down 3% QoQ) and realisation at ₹126/kg (up 18% QoQ). Speciality grade carbon black sales volumes stood at 9,867 tonne

► EBITDA in Q1FY23 came in at ₹196 crore with margins at 13.9% (up 270 bps QoQ). Consequent PAT for Q1FY23 stood at ₹126 crore, up 39% QoQ.

► EBITDA/tonne for Q1FY23 stood at ~₹18,000 (vs. ~₹12,200 in Q4FY22), highest ever in PCBL’s history, primarily driven by lucrative spot sales

What should investors do? PCBL has been one of our early finds wherein it grew ~2x in the past five years (~Rs 60 in July 2017 to ~Rs 120 as of July 2022).

► We maintain our positive view and retain BUY rating on the stock. PCBL with organic growth prospects, much heathier B/S and return ratios is a good proxy to play upon recovery in volumes in the tyre and broader auto space

Target Price and Valuation: Revising our estimates (volume, margins), we value PCBL at unchanged target price of Rs160 i.e. 12x P/E on FY24E EPS

Key triggers for future price performance:

► Healthy growth on anvil. We expect sales, PAT to grow at 25%, 9%, CAGR, respectively, in FY22-24E, building in ~8% volume CAGR in the same time. Sales growth looks optically higher due crude led rise in realisations.

► With greenfield expansion (~150 KT) under execution and successful strides made in the speciality carbon black domain, long term growth prospects are robust amid limited competition in overseas markets.

► Expected commissioning of Greenfield project in CY22E with brownfield expansion of speciality grade carbon black lines (~40,000 tonne) by FY24E  Trades at inexpensive valuation of <10x P/E on FY24E EPS of ~Rs 13.4/share