PCBL’s Ebitda for the last quarter of FY22 was disappointed owing to higher other expenses, but gross profit/kg improved quarter-on-quarter (QoQ). The company’s management sounded bullish on the carbon black cycle with favourable demand-supply and anticipates an upside risk to both volumes and spreads. It sees the possibility of an upside risk to spreads for carbon black in the exports market with supply restrictions from Russia and China.
We expect it to announce more capacity expansion in the rubber carbon black if demand from export markets sustains, which should increase volume growth visibility. We have increased our earnings per share (EPS) estimates by 10-15% over FY23-24E on better volumes and spread assumptions. Thus we maintain ‘buy’ and have increased our target price to 170 (from
147; unchanged 12x FY24E EPS).
Early signs of an upcycle in carbon black: Russia and China, the two key exporting countries, are seeing supply constraints. Russia has 1.1 mnte capacity with 70% exports to Europe and is hit by sanctions. China is seeing feedstock restrictions and industry consolidation. Thus, PCBL anticipates a favourable demand-supply situation and is looking at a faster ramp-up of new capacity, and more line commissioning/announcement in the speciality.
Carbon black volumes flattish YoY but are down 3.6% QoQ: PCBL’s volume growth is restricted due to peak capacity utilisation, and the QoQ dip is from two lower working days in Q4FY22. It is in the process to commercialise greenfield capex in Chennai with a 150 ktpa carbon black plant likely to start production from December 2022. India volumes dipped 6.7% year-on-year (YoY) to 77 kte on weak demand. The company sold higher export volumes, which grew 16.2% YoY to 35kte. Speciality volume growth has accelerated at 22.7% YoY to 9.3kte and has now contributed 8.3% of total volumes.
Gross profit/kg falls 10.7% YoY buy up 3.3% QoQ: The gross profit/ kg was hurt from delay in pass-through of feedstock inflation, and lower contribution from power (power production dipped QoQ on two lower days). The rising and sticky high crude prices are a concern for the company. However, it is seeing silver lining for improvement in spreads from tightening supply on Russia and China situation and demand normalisation. It would also benefit from the rising contribution of speciality carbon black and power (due to higher realisation and volume growth with new capacity addition). Cost inflation hits Ebitda: Revenue of PCBL grew 40% YoY, led by higher realisation which rose 41.2% YoY to 106/kg. However, gross profit dipped 11.1% YoY to
315 crore on contraction in spreads.