PCBL Ltd – BUY

Recommended Price: ₹158

Target Price: ₹198 

Upside: 25% 

Time Horizon: 12 Months

Recommendation Date: 1st August 2023

PCBL Ltd, was incorporated in 1960 when the company commenced production of carbon black. Currently, the company has five manufacturing facilities that are strategically located near ports, domestic tyre manufacturing plants, and its raw material suppliers. Currently, the company has a production capacity of 666,000 MTPA (including the commissioning of the first phase of 63,000 MTPA, the Greenfield Project in Chennai through its wholly-owned subsidiary) and 98 MW of green power for captive consumption. Today, PCBL stands as India’s largest manufacturer of carbon black and the seventh-largest global player.

Why to invest in PCBL?

Domestic leadership position in carbon black along with expanding global footprint is the perfect recipe for growth

PCBL with a market share of more than 45% in the domestic market and the seventh largest player globally. It has a diversified portfolio of soft, hard, and specialty grades of carbon black and the company is in the process of increasing its product category by developing a new form of carbon black grade. With PCBL deriving 70% of its sales volume from the tyre industry as of FY23 compared to 65% in FY21, it provides ample opportunities from the automobile industry. This will help the company to sustain its leadership position in the carbon black industry going ahead. The management expects the demand situation to remain favourable and is set to improve. 

Ongoing capacity expansion is a befitting moniker for being “at right place at right time”

The company has started a new plant in Chennai (Tamil Nadu) through its wholly-owned subsidiary PCBL (TN) Ltd. whose first phase of 63,000 MTPA capacity has been successfully commissioned. In the next leg, the plant will add 1,47,000 MTPA of carbon black capacity and 24 MW of green power. At its Mundra plant in Gujarat, the company is adding an additional capacity of 40,000 MTPA in its specialty chemical segment. This expansion is divided into two phases, of which the first phase of the specialty chemical line is almost ready and is under commissioning and phase-2 is expected to be commissioned during H1FY24. This will help PCBL to cater to the growing demand of its existing clientele, explore new opportunities, and be ready for the expected demand from domestic and international markets.

Product portfolio enhancement in specialty chemical business is a well-rounded approach with several inherent advantages

The company is now in the process of growing its limits to emerge as a leading chemical manufacturer. PCBL has deployed dedicated production lines for the specialty chemicals segment comprising more than 40 grades in FY23 and plans to add 9 to 10 grades every year with a focus on developing the highest value chain of specialty products. The specialty product caters to the growing requirement of customers globally across various segments such as rubber, engineering plastics, cables & fibres, inks & coatings, conductive, batteries, and so on. PCBL also expanded its brownfield expansion at the Mundra plant in Gujarat, with a specialty chemical capacity of 40,000 MTPA. The expansion is divided into two phases, the first phase of the 20,000 MTPA specialty line at Mundra is almost ready and is under commissioning. The Phase-2 of the project is expected to be commissioned during H1FY24. 

Strong business and industry tailwinds to aid in healthy cash flow generation and superior return ratios

We expect a 15.0% revenue CAGR over FY23-25 due to significant growth across the global automobile industry due to easing supply chain concerns and improved demand. PCBL is one of the few Indian carbon black companies to clock ~18% revenue CAGR in the past five years. The management expects the carbon black and specialty chemical segment to grow faster than the industry as it sees multi-fold growth opportunities in both segments. The company also has strengthened its competitiveness by enhancing its global presence, diversifying its product portfolio, and consistently delivering robust performance. Further, on the financial front, the company is generating strong operating cash flows for the business. 

Valuation & Outlook

The company has a strong clientele including major tyre manufacturers and chemical customers in various spheres such as plastics, inks, paint and coatings spread across 50+ countries. Given the strong R&D focus, commissioning of new lines (greenfield & brownfield), improvement in manufacturing efficiencies and increased share of value-added products, the company is placed in a sweet spot to take advantage of the opportunities in the sector. 

Moreover, strong industry tailwinds and business opportunities from Europe & the US due to the imposition of sanctions on Russia is likely to provide further boost to the carbon black industry in India. With its stable financial performance, capacity expansion, low leverage, healthy cash flow generation and improving return ratios, we expect the company to perform well in future. On the valuation front, we value the company based on 11x of FY25e earnings and arrive at a target price of Rs. 198 (25% upside from CMP) with a 12 months investment horizon.