PCBL’s carbon black volume in Q3FY23 declined 13% YoY mainly on account of de-stocking to protect from cut in prices. Carbon black prices in Q4FY23 are likely to dip by US$200/te due to fall in input prices. PCBL does not anticipate any inventory losses and gross profit/kg is expected to remain stable. The company said underlying demand is strong, and volumes in FY24 will benefit from commercialisation of Chennai plant. Despite supply increase in India by 0.5mn tpa (~30%), PCBL believes it has enough domestic and exports opportunities, and it would be able to achieve peak utilisation in 24months without much impact on spreads. Specialty carbon black has under-delivered volumes, while PCBL continues to add capacity and launch new products, and remain confident to grow faster. PCBL plans for brown-field expansion of carbon black over the next two years which will provide further visibility for volume growth. We have increase our EPS estimates by 1.7% for FY23E but cut by 3.6% for FY24E. We have rolled over our valuations to FY25E; however, we cut target price to Rs155 (from Rs170) as we reduce PE multiple to 10x FY25E EPS (earlier 12x). Maintain BUY. Risks: 1) Any material slowdown in demand for carbon black; and 2) lower than expected gross profit/kg in India with rise in supply.

 

• Carbon black volumes down 13% YoY/ 10.9% QoQ, at 101kte. PCBL’s volume was impacted due to de-stocking based on the expectation of carbon black prices declining by >US$200/te on formula pricing in Q4FY23 where input CBFS prices have declined. The entire value chain has reduced inventory including PCBL and the company anticipates to recoup some of the lost volume sales in Q4FY23. India volumes fell 5.5% YoY to 72kte while underlying demand has been strong; export volumes dipped 27% YoY to 29kte on high base. Specialty volumes were down 8.5% YoY (10.2% QoQ) to 9kte, and now account for 8.9% of total volumes.

PCBL believes volume decline is transitory and outlook for volume growth across categories remains unchanged. Demand outlook for exports is also decent with 75% of volumes coming from South East Asia where PCBL has good foothold; Europe is 20% where company expects favourable market from demand and supply perspective. Though India’s supply is likely to increase by 0.5mn tpa - Epsilon (115ktpa), Continental (150ktpa) and BKT (largely for captive) apart from PCBL, company remains confident of placing the capacity in domestic and exports market without much pricing disruption.

 

• Gross profit/kg rose 16% YoY, fell 2.9% QoQ, to Rs31.5. Gross profit was lower QoQ due to reduced contribution from specialty carbon black and power. Company believes it can retain the existing spreads as global market for carbon black remains favourable, and it is working to improve mix. In Q2FY23 concall, company mentioned opportunity to increase its gross profit/kg by Rs1 p.a. for next 5 years (cumulatively Rs4-5/kg) on rise in revenue from specialty black, increased contribution from power and efficiency gains.

 

• EBITDA dipped 2.8% YoY to Rs1.6bn. Revenue grew 17.9% YoY to Rs13.6bn led by higher realisations which rose 35.6% YoY to Rs131/kg. Gross profit rose 1.2% YoY to Rs3.2bn on expansion in spreads. Employee cost rose 20% YoY and other expenses were up 0.4% YoY. Finance cost increased by 2.2x to Rs150mn. Net profit was down 13% YoY to Rs970mn.

 

• Other Highlights: 1) Realisation in Q4FY23 will be down at least US$200/te due to lower input prices. The company is not carrying any excess inventory as it was aware about the situation, and is unlikely to have any negative impact on spreads from drop in prices (no material inventory loss is expected); 2) demand in domestic / exports market across grades of products has been strong; decline in volume is entirely attributed to de-stocking. PCBL anticipates higher volume sales in Q4FY24 due to re-stocking; 3) specialty carbon black volumes will be lower than earlier guided. It is expecting to commercialise additional line with 20ktpa capacity in FY24 in specialty category. It launches 9-10 products each year in specialty carbon black to augment the portfolio; 4) Chennai phase-1 will start in the next few days and phase-2 in 15-20days, while last phase will come soon. Commercial sales will begin in FY24; company aims to achieve peak utilisation in 24months; 5) PCBL is planning to buy additional land near existing facility for future brownfield expansion; 6) power volumes can improve by another 10% from existing levels excluding Chennai plant; 7) China still has dis-advantage of US$300/te on feedstock procurement pricing; and 8) standalone net debt is stable at Rs7.5bn.