Kotak Securities Picks This Multibagger Small Cap Stock, Sees 40% Strong Gains, Assigns Buy Call

Kotak Securities initiates coverage on PCBL Limited with a Buy in its recent report published on December 27, 2022. The brokerage has estimated a target price of Rs 180 apiece for stock. It claims a potential upside of 40% considering the given target price to the stock. PCBL is a small-cap Tyre sector company that operates in the Carbon Black industry. It has a market capitalisation of Rs 4,873.04 crore.

PCBL is India's largest and the seventh largest (as per management) carbon black producer globally with an installed capacity of 603,000 tonnes annually. The company, is transforming business model more towards specialty and performance chemicals, to reduce earnings cyclicality. With a new capacity of 1.9 lakh tonnes, likely to get operational in the next three to four months, PCBL is well placed to capitalize the market opportunities, both in export as well as domestic market, we opine. The company is one of the key beneficiary of growth in the tyre production and industrial production.

Stock Outlook-CMP, 52-Week Low & High, & Returns

The Current Market Price (CMP) of PCBL stock is Rs 128.80 apiece on NSE at the time of writing, trading 1.62% up from its previous close of Rs 126.75 apiece. Today, it opened at Rs 127.65 apiece. The 52-week low is Rs 89 apiece and the 52-week high is Rs 153.75 apiece, respectively.

In the past 1 week, the stock has fallen 7.1%, and in the past 1 month, it fell 5.43%, respectively. In the past 1 year, it gave 14.01% positive return. Over the past 3 years, it gave 127.43% multibagger return, whereas, in the past 5 years, it gave a 32.67% positive return.

Strong demand supply dynamics to absorb new capacity

As per the management, with the closure of couple of capacities in China on the back of the government environmental protection program, structural shift in the industry for alternate supplier (China +1) and increasing feedstock (CBO) prices for Chinese operational capacity, creating a huge market opportunity for an existing carbon black manufacturers. As per Notch consulting, carbon black market globally is expected to grow at 3-4% annually, indicating incremental demand of ~14 lakh tonnes by end of 2024, on the other hand incremental supply during the same period, is expected to be ~11 lakh tonnes, thereby creating a deficit of ~3 lakh tonnes and opportunities for the players who are expanding their capacity. "Given the PCBL's expansion in place, which is expected to come on stream in the next three to four months, the expected deficit would help the market to absorb the new capacity at the faster pace. Hence, we expect PCBL's volume to grow at a CAGR of 10% during FY22-25E period," the brokerage has said.

EBITDA/kg to increase gradually with change in product mix

The company has leveraged its R&D facility so effectively, that over a period of the last seven years, PCBL has gradually increased the proportion of specialty and performance chemicals in the overall mix to 35% and contribution to operating performance to ~18% by end of FY22. "With the new 40,000 tonnes of capacity coming on stream, we expect incremental volume of 10,000 tonnes of specialty carbon black, every year for the next three years, implies volume CAGR of ~34%. With the change in product mix, the overall contribution (EBITDA/kg) has grown over 2x in the last seven years to Rs14,531/tonne at end of FY22. With the gradual increase in share of specialty carbon black in overall basket (50:50 in the next five years from 65:35 currently), we expect EBITDA/t to stabilize in the range of Rs151,00- 15,400 in FY23E and FY24E and expect the same to increase to Rs16,200 by end of FY25E. The strong operating performance, would also led to an improvement in Return Ratios (RoCE) from 17% in FY22 to 22.9% in FY25E," Kotak Securities has said

 

Strong earnings, low leverage and improving return ratios

According to the brokerage, Backed by higher volume and increase in share of value added product (specialty chemical black) in the overall revenue proportion, we expect revenue/EBITDA/PAT to grow at a CAGR of 14%/18%/17%, respectively. The strong operating performance would also lead to improvement in free cash flows (FCF), we expect cumulative FCF of Rs633 cr over the next three years, and leverage to remain

Kotak Securities Initiate with BUY

PCBL is a dominant player in domestic carbon black industry with a strong global presence. It is gradually realigning its business model with changing market opportunities to reduce earning cyclicality. "Given the strong R&D facility, commissioning of a new capacity, improvement in manufacturing efficiencies, increase in share of value added products and strong industry tailwinds, we believe PCBL is better place to capitalize on opportunities. At CMP, the stock is trading at 10.2x/8.4x/7.0x on FY23E/FY24E/FY25E earnings, respectively. Given the strong tailwinds, heading to low cyclicality, low leverage, strong earnings growth and improving return ratios, we expect the stock to trade at a premium to its historical multiples. Recommend BUY, with a target price of Rs180," the brokerage has said.

Risks & Concerns

Almost 75% of PCBL's sales volume goes to tyre industry and another 18- 20% goes to molded rubber goods, which are highly dependent on the prospects of automotive and tyre industry. Any slowdown in industry can directly impact the overall volume.

Product substitution risk: PCBL product directly compete with precipitated silica. Currently, carbon black enjoys cost advantage. However, any alternative materials or changing customer preference over carbon black, can have a negative impact on the earnings.

Disclaimer

The stock has been picked from the brokerage report of Kotak Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.