By: ICN Bureau
Last updated : October 29, 2022 8:27 am
PCBL expects demand in the export markets to be volatile in the near term on Europe situation (Europe was contributing significantly to export volume growth).
Phillips Carbon Black’s (PCBL) Q2FY23 gross profit/kg was at a healthy Rs32.4, but a tad below our estimate due to normalisation of spreads in the spot market. Gross profit also benefited from contracts with higher freight cost, which will not be applicable on renewal. Management is of the view that the FY22 gross profit of Rs29/kg is more sustainable, and that it should be able to grow the same by Rs1 p.a. on better product mix, efficiency and higher power contribution over the next 5 years (cumulative Rs4-5/kg), which is a positive.
Volumes declined in Q2FY23 on YoY basis due to capacity constraints (new capacity in Chennai should come into play from Q4FY23). PCBL expects demand in the export markets to be volatile in the near term on Europe situation (Europe was contributing significantly to export volume growth). It also expects India business to be impacted from new capacity addition of 500ktpa for industry. Yet, PCBL remains confident of reaching peak utilisation in the new Chennai facility in 2 years. It is also positive on the first product launch in conductive grade in the next few months.
Carbon black volumes down 1.6% YoY, up 4.1% QoQ, at 114kte. PCBL’s volume growth is restricted due to peak capacity utilisation, and the QoQ rise was due to maintenance shutdown in Q1FY23. It is in the process of commercialising its greenfield capex in Chennai with 150ktpa carbon black plant likely to start production from Dec’22, and phase-1 of specialty black capacity in Mundra by Mar’23. India volumes fell 4.8% YoY to 78kte on weak demand and increase in supply though export volumes rose 6.2% YoY to 36kte. Specialty volumes were up 22% YoY (+ 1.5% QoQ) to 10kte, and now account for 8.8% of total volumes.
Exports volumes outlook for carbon black in the near term is uncertain on production challenges in Europe due to higher power cost. India volumes face challenges from increased supply on new capacity addition from Epsilon (115ktpa), Continental (150ktpa) and BKT (largely for captive) apart from PCBL.
Gross profit/kg rose 7.1% YoY, fell 7.5% QoQ, to Rs32.4. Gross profit was higher on the back of increased contribution from specialty black and higher revenue from power. The QoQ dip was anticipated as Q1FY23 was benefited by high spot prices. Gross profit in Q2FY23 also had the non-recurring benefit of higher freight cost baked into contracts. However, since freight cost has lately been declining, this anomaly will be corrected on renewal of the contracts. Nevertheless, the company believes it has an 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, launch of conductive carbon black, increased contribution from power and efficiency gains.
EBITDA expanded 0.8% YoY to Rs1.9bn. Revenue grew 52.5% YoY led by higher realisations, which rose 54.7% YoY to Rs139.8/kg. Gross profit rose 5.4% YoY to Rs3.7bn on expansion in spreads. Employee cost rose 18% YoY and other expenses were up 8% YoY. Net profit was down 4.6% YoY to Rs1.2bn due to lower ‘other income’. Tax rate rose slightly to 21.6% in Q2FY23 vs 20% in FY22.
Earnings call highlights. 1) Chennai facility will be commissioned by Dec’22 with capacity of 150ktpa. Company expects peak utilisation over next 2 years. 2) PCBL plans to add 40ktpa in specialty segment in two phases in Mundra, with the first phase (20ktpa) to complete in Mar’23. The new plant will cater to the markets for coating, fibre and ink products portfolio. 3) Power realisation was high on strong demand. 4) Company anticipates 10ktpa incremental specialty volumes sales in FY23. 5) Europe accounts for 18-19% of the global carbon black market and it contributes 15-16% of PCBL’s exports. 6) Specialty black demand (for industry) comes from polymers segment (~65%), inks and dyes (15-20%), conducting materials (7-8%) and the rest from others. PCBL was adding 7-8 grades p.a. earlier, but will increase this to 12-13 in FY23. 7) Logistics cost is down 50% from peak, hence its benefit on Q2FY23 EBITDA/kg was a passing phase and will not be sustained.