PCBL witnessed healthy Q1FY24 volume growth of 12.5% YoY in carbon black driven by 22.6% rise in export volumes, which indicates that the strong overseas market opportunity is playing out. Company also witnessed a steady 6.7% volume growth in the domestic market. Specialty volumes grew 19.4% YoY. Gross profit per kg surprised positively with 14% QoQ jump to Rs33.5 (with no one-offs) though it remains in line with the FY24 guidance of Rs32/kg.

Spreads are likely to benefit in FY25 and onwards on the back of improving mix towards specialty chemicals and the more yield-efficient Chennai facility. Company anticipates strong volume growth over the next few years due to Europe / US looking to source more carbon black volumes from China / India amid muted capacity addition in Russia, Europe and US. PCBL anticipates capacity addition of 80-100ktpa over the next few years to meet the growing demand. Company is working on developing super-conductive-grade carbon black, which finds application in EV batteries. We have increased our EPS estimates by 1-2% over FY24E-FY25E as we raise volumes and spreads; however, the EPS improvement has been restricted due to higher tax rate.

Carbon black volumes rose 12.5% YoY / 3.2% QoQ to 123kte. PCBL’s carbon black volumes benefited from the commissioning of Chennai facility, which added 5kte to sales with utilisation reaching 45% in the first quarter of production from line-1. Company will commission remaining two lines in Q2FY24, and anticipates 45% utilisation for the entire Chennai facility in FY24. Management expects the facility to breakeven in FY24 and, with production ramp-up, start contributing to EBITDA FY25 onwards. Domestic demand remains healthy, and the company expects high-single-digit growth for next two years. This is helping absorb the domestic carbon black capacity added in FY23. Though PCBL is cautious on export volumes, it has not seen any negative impact on volumes as it continues to win market share. Europe is becoming an important export market with its share of the company’s export volumes increasing from 4% in FY22 to 14-15% in FY23 – with expectations of 25-30% in the next few years. PCBL expects a capacity requirement of 80-100kpa to meet carbon black demand. It also sees continued growth in the market for specialty carbon black.

India volumes grew 6.7% YoY to 82kte and export volumes 22.6% YoY to 41kte in Q1FY24. Specialty volumes rose 19.4% YoY to 11.8kte and now accounts for 9.6% of total volumes. Company will likely commission the entire 147ktpa capacity in Chennai and 20ktpa specialty carbon black capacity in Mundra by Q2FY24. These capacities are expected to aid volume growth in FY24/FY25. We see big opportunity in Europe arising from the complete ban on Russian carbon black w.e.f. Jul’24 (from a quota of 752kte). Russian carbon black to India will be uncompetitive due to higher logistic costs.

Gross profit per kg dips 4.5% YoY to Rs33.5 (up 14.3% QoQ). Gross profit in Q1FY24 was higher, but there were no one-off benefits influencing this parameter during the quarter. Company continues to guide for flattish gross profit per kg in FY24 (vs FY23) at Rs32. It expects the Chennai plant to have better efficiency and aid margin expansion in FY25. Structurally, the company believes it will continue to improve spreads on the basis of underlying factors. 

EBITDA up 7.8% YoY on high base (+14.7% QoQ) to Rs2.1bn. Revenues dipped 4.4% YoY to Rs13.5bn driven by lower realisations, which dropped 15.3% YoY (5% QoQ) to Rs106 per kg. Gross profit was up 7.5% YoY at Rs4.1bn on better spreads. Employee cost rose 11.2% YoY and other expenses were up 5.8% YoY. Finance cost increased 2.2x to Rs193mn on commissioning of Chennai facility. Net profit dipped 13.5% YoY to Rs1.1bn, and was restricted due to a higher tax rate at 29% (vs 21.5% in Q1FY23).

Earnings call highlights.

1) Chennai facility will breakeven at 45% utilisation.

2) The facility is initially catering to export demand as it awaits approval from domestic buyers (the completion of audit from domestic producers will divert incremental volumes for domestic consumption).

3) PCBL needs to add 80k-100k p.a. carbon black capacity to meet domestic and exports demand; capex is Rs50-60k per te; company has excess land for future expansion in Chennai and Mundra.

4) the specialty plant at Mundra can provide addition volumes of 15-16kte, and is expected to reach peak utilisation in the next few quarters; PCBL is seeing strong demand from specialty-grade carbon black and the new product additions also helping; company is producing semi-conductive grade carbon black which finds application in coating of electric wires and conventional batteries; the product is yet to reach purity levels required for super-conductive grade carbon black.

5) Russia carbon black plants are located at landlocked places, hence logistic costs will be too high for exports to India / China; benefit to the company lies in Russia not adding fresh capacities.

6) CBFS and CBO (raw materials used by Chinese vendors) pricing gap has increased from US$251/te in Q4FY23 to US$269/te in Q1FY24.

7) South-East Asian countries such as Indonesia and Vietnam are key export market and likely to remain so.

8) PCBL has no spot sales in tyre-grade carbon black (65% of volumes); however, 90% of performance-grade carbon (25% of volumes) and 20-30% of specialty grade carbon black are sold on spot basis.

9) Tax rate is estimated at 24-25% in FY24 as the tax benefit on power sales has expired after 15 years of concession period. In FY25, it will again drop to 22% as the Chennai facility has a lower tax rate of 17%.