Phillips Carbon Black’s (PCBL) Q1FY23 EBITDA came in strong at Rs2bn, up 19.3% YoY driven by significant expansion in gross profit/kg to Rs35 (up 25.3% QoQ) which had some opportunistic sales from favourable supply situation, particularly in exports market, in our view.

It also benefited from higher contribution of specialty black, which improved to 9% (from 8.3% in Q4FY22), and rise in power EBIT. Volume growth remained elusive in the absence of capacity, and new capacity will commission only in Q4FY23, which gives visibility for volume growth from FY24 onwards. Supply situation remains favourable as Chinese producers are facing issues in coal-based oil, while restriction on supply from Russia is also adding to demand for Indian and Chinese producers.

The company was slightly down beat vs previous quarter as it anticipates headwinds in demand, but is confident to navigate through this difficult situation. Despite a very strong Q1FY23, we have increased our EBITDA estimates by only 1-2% over FY23-24E as we keep spreads at normalised levels.

Carbon black volumes flattish YoY but down 2.7% QoQ at 109kte. PCBL’s volume growth is restricted due to peak capacity utilisation, and QoQ dip is from some maintenance shut down. It is in the process to commercialise 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 rose 5.5% YoY to 77kte on improving tyre demand from easing chip-set issue; however, export volumes dipped 8.4% YoY to 33kte. Specialty volume was up 35.5% YoY (+ 5.5% QoQ) to 9.9kte, and has now contributed 9% of total volumes.

Gross profit/kg rose 15.6% YoY / 25.3% QoQ to Rs35. It benefited from favourable demand-supply situation in exports market, and part of it is unsustainable as the company believes demand situation may remain muted in exports market, and opportunistic sales may erode. However, some of the reasons why margins will be higher than earlier are: 1) Rising share of specialty black where margin is 2x of standard carbon black; 2) rising contribution of power from higher pricing, and new power capacity will add to volumes; and 3) rising demand in domestic market. It has also invested in R&D for improving oil mix and yields, which will also help.

EBITDA grew 19.3% YoY to Rs2bn. Revenue grew 40.4% YoY led by higher realisation which rose 39% YoY to Rs125.6/kg. Gross profit rose 15.5% YoY to Rs3.8bn on expansion in spreads. Employee cost rose 31% YoY and other expenses were up 6.5% YoY on higher freight cost. Net profit was up 21% YoY to Rs1.3bn. Tax rate rose slightly to 21.5% in Q1FY23 vs 20% in FY22.

Earnings call highlights. 1) Chennai plant will be commissioned by Dec’22 with capacity of 150ktpa. It would take a few weeks for stabilising the plant and customer audit; 2) PCBL plans to add 40ktpa in specialty in two phases in Mundra with first phase to complete in Mar’23; 3) power realisation was high on strong demand; 4) company anticipates 10ktpa incremental specialty volumes sales, and post Chennai plant commissioning, overall volume addition should cross 50ktpa; and 5) it remains cautious on demand due to slowdown in developed markets.