PCBL Chemical Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. The first question is from the line of Sailesh Raja from B&K Securities. Please go ahead.

Thanks for the opportunity. Sir, my first question is in the Rubber Carbon Black segment, next pricing cycle negotiations are scheduled to begin in the month of August with the revised price set to take effect from October month. So, considering the uncertainty around the U.S. potential tariff and the elevated inventory levels and the customer, there is likely to be a pricing pressure. So how do you see this scenario playing out in the near term?

See, at this point of time, you're right, there is some strong headwind and there is a lot of uncertainty in the market. As such, the economies were not very strong and on top of that, the uncertainty got created because of Mr. Trump's initiatives, what is going on at this point of time. So, headwind is definitely very strong. We know that this might have some impact on the pricing. But at the same time, you need to understand there are markets where supply is less than demand and U.S., Europe are examples for that. So, there will still be opportunities in this market. There will be imports into this region from Asia. So, we'll be looking at that opportunity. As far as specific to the pricing, of course, it will depend on when we finally get into a discussion and negotiation and what is the economic situation at that point of time. And at the same time by that time, hopefully, there will be more clarity on the tariff side. Once those clarities are there and we have got another 2-3 months' time before we get into a final negotiation with all big tyre companies across the globe, which will be effective 1st of January next year. So that will continue. But the other thing is, as an organization, to take care of the situation in terms of performance, we are taking a lot of initiatives internally, which are in our own hand in terms of improvement in efficiency across all functions, trying and improving our working capital management so that overall, the organization's performance remains strong financially. So, this is our strategy. And at the same time, we continue to grow and be ready for future because we are quite confident and optimistic about this that eventually the market will turn positive going forward. Maybe it will take some time, but we are quite po sitive and optimistic about it.

Sir, for the whole year, can we see this EBITDA per kg to be maintained at INR17-18 per kg?

As I said, I don't want to give you any guidance for this. But as I said that there's a lot of focus internally in the organization for improvement in efficiency. And I'm quite hopeful that will bring a lot of value on the table. So, I can't give you a number or guidance, but yes , we are positive. Why should only talk about maintain, maybe at some point of time, we'll talk about improvement from here on.

Okay, sir. Sir, my second question on the exports front. So, our volumes to Europe and U.S. that has grown significantly in the last 3 years from 9,000 tons to 85,000 tons. So , with increasing consolidation in the global Carbon Black industry, how do you see our mix going up in the next 1-2 years? Given the current exports contributing, it is around 41 % of the overall volumes. So how do you see that mix going up? And within U.S. and Europe today, it is around 35% of overall exports. So how do you see that mix to go up in the next 2-3 years?

Again, I'll not put a number how much it will go up by but I can generally tell you about our strategy. As I said that we'll be continuously growing in all segments, value-added as well as our regular Rubber Black . Now in regular Rubber Black, as you already know that in India, the supply-demand situation is in favour of the customer because supply is almost 1.8 million tons, whereas demand is just about 1.1- 1.2 million. So, India should be looked at as a manufacturing hub for the globe. And we are already a very strong player in India. We are the leader. So, we'll continue with our leadership. But at the same time, the major growth will come in the international market, where there is a lot of headroom for us. The market share of PCBL there is not as high as what we have in domestic market. So naturally, there is a lot of headroom over there. We're looking at the international market as a growth opportunity for us. Entire Asia, European Union as a whole and, of course, U.S.A., subject to the tariff situation doesn't go out of control completely because the logistics cost is obviously a little higher for U.S.A. and on top of that, if tariff goes haywire, then of course, there is a concern. But then at the same time, the tariff, if it is applicable in India, I'm sure the tariff rates will be even higher for some of the other countries. So maybe net , we will be in a beneficial position. So, as we see the international market growth will be very sharp going forward. And with new capacities which are coming up, Brownfield in Tamil Nadu and eventually after that, in Andhra Pradesh, a major share will definitely go to the international market. But at no point of time, we'll be ignoring or neglecting domestic market. We are a leader and we'll continue to be the leader.

Okay. Sir, you said 1.8 million tons supply in the India market. Of that, how much it is coming from China and Russia imports?

That's not much. India in totality imports about 9,000- 10,000 tons a month. So, India net-net is an exporter.

Okay. Last question. In Aquapharm, last year and 1Q it was muted EBITDA. But how do you see the performance to pan out in the next three quarters in terms of volume as well as the margin? Also, this business is diluting the overall ROCE. So, what kind of ROCE you are targeting internally over the next 2-3 years? What are the steps that we are taking in terms of customer acquisition, then raw material sourcing and improving the conversion cost? Also, the capital allocation policy in Aquapharm, can you please discuss?

Last few quarters, a lot of work has been done towards market building, creating higher bandwidth in our sales and marketing team, expanding the product portfolio. And these have started yielding results. Maybe this will be more visible in subsequent 3 -4 quarters. We expect this year to be significa ntly better than last year. And, of course, this business has significant potential to grow from here. Now in terms of ROCE, see the internal expectation is always that , whatever investment we make, whether organic capacities or inorganic, these acquisitions, etcetera, that we have, at least 17-18% kind of minimum return on invested capital, but it takes time to reach to those numbers. In 3-4 years' time, this business as it becomes bigger in terms of top line, we'll start getting better and better returns on capital. Hopefully in 3-4 years' time, we should be there.

How much capex we have, sir, in this business?

In totality, during the quarter, we have done about INR112 crores of capex.

Only in Aquapharm, I mean?

Aquapharm is not much. Aquapharm, it was ongoing. So, a good part of capex has already been incurred in last year. This year, in the first quarter, it was about INR15-16 crores.

Okay, sir. Thank you, sir.

Thank you. T he next question is from the line of Sanjesh Jain from ICICI Securities Limited. Please go ahead.

First on the Orion plant closure. Any sense is that the plants were old and not efficient or do you see that Europe and North America, it's becoming incrementally less viable for them to produce at those cost level and become competitive versus India and China? What's playing out in market of Europe and North America?

Yes, you are right, absolutely, Sanjesh. That is precisely what is the reality. I think the cost structure is such for them in U.S.A. and Europe and these plants are very old plants. And what we understand that our intelligence says that they're trying to close down the Rubber Black lines. I mean, so -called not the high value -added lines they are trying to stop. And put that money, whatever they save from there, more on the specialty lines. That is their target. And indications are there, out of these five what they're talking about, possibly two to three will be in U.S.A. and a couple will be there in Europe. That is the indication. And this is clearly indication that competition -wise or competitiveness- wise, India and China are definitely ahead of them today from those regions. It is difficult for them to compete and that is what is reflecting. And this is hon estly an opportunity for organizations like PCBL for growth. Definitely, there's an opportunity for us.

And do you expect more such closure to come? Is it fair to assume that in net -net every year, there will be less of addition and more of closure.

Yes, addition for sure will not be there. A ddition for sure is ruled out for the regular black. Specialty, something may happen. But Specialty, possibly what will happen, they'll convert some of these lines to Specialty. They may not add anything new, but they will be converting some of the conventional lines to Specialty but that also requires a lot of capex, it will be a call of those companies. But you'll definitely be not seeing any addition. So, therefore, this gap between demand and supply will only grow in future, which will be, in a way, advantage for Asia.

Very clear. Second, on the Specialty, now including acetylene and the 1,000 metric ton in the superconductive grade, is it fair to assume that the growth will accelerate with all these products coming up next year in the Carbon Black side and eventually that should lead to a much better EBITDA per kg, right?

You are right, absolutely. I'll tell you, as an organization, our strategy is on one side, looking at continuous growth on the conventional items where we supply largely to tire companies and some of the non-tyre rubber companies. So that continues to grow through expansions in Tamil Nadu, in AP Greenfield, etcetera. But at the same time, to keep an eye on the profitability improvement, we have taken all these initiatives like Acetylene Black, superconductive, then Nanovace, the battery thing. So , both will continue in parallel. So, we are going to grow. At the same time, profitability also will improve. And I think rest Raj can add from the point of view of finance, what is his thinking on that.

All these things will take some time. The real reflection of all these new technologies on our bottom line would be more visible from FY '28.

We will have some benefit, but the approval process, etcetera will also take some time, Sanjesh. So, the real reflection, I'm not talking about the marginal reflection, but the real reflection would come with a time lag.

Got it. Raj, so that Carbon Black oil used to trade at a premium in China. Has the situation changed with slowdown?

Yes. The gap between the feedstock that we use and that of our Chinese counterparts use, that has come down a bit. Currently, it is about USD 130.

Okay. And any reason why China dumping has come down. Sir you mentioned in your opening remarks that the dumping intensity in India has come down. Is that the freight cost not available or domestic or matching and or the grade is not right for India? Any particular reason why there is a sudden drop in the intensity by Russian?

Russian import intensity has not changed much. It all started a couple of quarters back and Russia continues to sell in India but the quantities are not very significant. They are doing about 2,000 tons a month out of roughly 9,000 -9,500 tons which is coming in India. And mostly this is being imported by small time traders. So, none of the tyre companies are buying directly from Russia because of the quality concerns and also because of the sanctions on Russian material. So, it is mostly on spot market where this is being traded.

So where are Russians selling right now, the quantities?

China, mostly China.

Okay. And then last question on the Aquapharm. I think since we took over the EBITDA has been consistent at INR50 crores. When should we see this trajectory changing? We were expecting INR 300 crores plus kind of an EBITDA this year. Will Q2 show that trajectory changing for us in the Aquapharm?

See, we are still maintaining that guidance of INR300 crores for the current year. And first quarter was also marked by all this U.S. first announcing tariffs and then withdrawing it. And the level of import in U.S. significantly increased during the quarter because of the announcement and then withdrawal of that. So, this quarter, again, is not a normal quarter from a performance point of view. Second quarter onwards, you will start seeing the numbers.

Thank you. The next question is from the line of Aditya Khetan from SMIFS Institutional Equities. Please go ahead.

Yes. Thank you for the opportunities. Si r, my first question is on to the power business. Sir, since last quarter, so sequentially we have seen power business EBIT contribution has gone up. So, some INR25 crores incremental EBIT has been added in power business alone, whereas Aquapharm and Carbon Black seems to be flattish only. Sir, what has changed since last quarter? Because I was checking the volumes, they have not gone up much like on QoQ basis. So, what explains this INR25 crores jump?

So, there is increase in both volume as well as realization. Our power volumes have gone up to 13 crores unit from roughly 10 crores unit in the previous quarter. And realization also has improved by roughly INR0.50 paisa per unit. So that explains the increase in the bottom line.

Okay. And sir, so this power business contribution has gone up, but other businesses seem to remain muted only, sir. For the last few quarters, we have seen like a muted.

Yes. So Aquapharm business and also the Carbon Black business, the performance was kind of flattish during the quarter.

Got it. Sir, what explains this dip in the spreads of Aquapharm? Because I believe we had mentioned earlier as volumes increase, operating leverage benefits the EBITDA. But the realization is spreads of Aquapharm has declined. Is this because of higher imports from China are we facing today or any other reason?

It is not imports from China. I mean, the reason for profitability to be not reflecting in the current quarter. One reason is higher freight cost that they had to incur because of all this geopolitical disruption.

Okay. But sir, freight cost, like it could have gone up by almost around 30- 40% in a quarter's time frame?

The impact of freight cost is around INR6 crores during the quarter.

I'll explain something to you. While you're talking about numbers, we can definitely talk about specific numbers. But I think you need to understand the overall perspective of business. Now last quarter and this quarter i.e. Q4 and Q1, possibly are the 2 most difficult quarters and most probably it will continue for a little more time. The whole economy has gone upside down across the whole world. None of the big economies are doing well today. You look at U.S.A., you look at Europe, you look at Asia as a whole and within that, India and China, none of them doing too well. And on top of that, these policy changes which were announced by Mr. Trump created further confusion and uncertainty in the whole system. So today, if some company is at least able to hold on to their performance of previous quarter or previous year, then I think it is reasonably good achievement, I'll put it that way. You need to see the overall perspective and then kind of analyse the whole situation. So that is my suggestion to you to kindly look at it that way. Within that, of course, we can talk about specific numbers to analyse and understand more. That is fine.

Got it, sir. Thank you, sir, for that explanation. At Aquapharm, so we have commissioned 11,500 tons in this quarter. So, the remaining capacity would be completed by FY '26?

This should come up in next 2-3 months' time.

Okay. Sir, any idea like for the next 2 - 3 years, how much capacity in Carbon Black would be added and in which country? And roughly how much expected closure could be there?

There is very little coverage on industry, but the historical trend has been… every year about 300,000-400,000 tons of new capacity get added.

Okay. Okay, got it. Thank you, sir.

We'll take our next question from the line of Madhav Marda from FIL.

Hi, good evening. Thank you so much for your time. Sir, I just wanted to understand, if I look at the Carbon Black margins for us, we had a very strong improvement just after COVID had improved until last year. So, could you give some colour in terms of the softness which you've seen this quarter? If you could break it down in terms of maybe domestic versus export market or how we should best understand sort of the impact on margins this quarter? I understand the global macros are quite weak, but just some more colour for our understanding would be great.

Madhav, there has not been much difference in terms of margins in different markets. I mean international market, domestic market, more or less margins have been in parity. The challenges that we are facing primarily is in the spot market trades, not the contractual trades, where because of little oversupply and plus all these global macroeconomic conditions weighing down on businesses, which is impacting margins.

Sir, could you remind me like what is our spot volume mix versus the contracted volume mix for PCBL today?

We are doing about 60% to tyre companies and roughly around 10% on the specialty side. The balance 30% kind of remains in spot market or under short-term contracts.

Okay. Got it. Understood, understood. And the competition is there like in the spot market is from the Russian producers or sort of who are the players who are kind of creating the pressure or is it just some demand softness, which is leading to temporary margin pressure here? What's happening here?

See, in recent past, capacity addition has been at a little higher pace as compared to the demand growth in industry. And that certainly is one of the reasons. A good part of the new capacities are in Asia, primarily India. And then, of course, Russia, because of sanctions, they are not being able to sell in Europe. So, they are also dumping it in some of the Asian countries. And Asia, in totality is still very big for us. We do about 60% volumes in India and then another roughly about 24-25% in rest of Southeast Asia. So, all this Russian dumping and rapid capacity addition has impacted. And of course, the demand growth has not kept pace with capacity addition. So that's, of course, one more factor.

Okay. And the Orion plant closure, sir, what is the capacity which is shut down there? Any ballpark number like the sort of 2-3 facilities in U.S. and a couple of them in Europe? How much would that be?

We don't have exact details so far. We are trying to get some more details. Our sense is that it could be somewhere around 250,000-300,000 tons.

We do not know really how much it will be and by when. They're indicating by end of this year, but it has not happened yet. So, we have to wait and watch for a while.

Okay, okay. Got it. And sir, just one more question was on the capital allocation. Could you give some sense in terms of capex in the next couple of years? How much do we plan to spend in the Carbon Black business and then Acetylene Black and Nanovace? If you could give some breakup, that would be great. Thank you.

Acetylene Black and Nanovace would not require much investment. These are low investment businesses. Carbon Black, I mean, between all the businesses that we have, Aquapharm, PCBL and the Nanovace now, on an average, we would be doing about INR600-odd crores every year.

Okay. And how much of that would go into Carbon Black versus non-Carbon Black businesses?

Total commitment for Nanovace will be around INR200 -250-odd crores. I'm talking about the residual portion. And Aquapharm would require roughly about INR100- 125 crores on an average every year. The rest will be for Carbon Black.

. And the Acetylene Black project, how much capacity do we plan to add? You're saying it's not capex intensive. So, any outlook in terms of what capacity you want to add and by when?

Initially, we are planning 4,000-5,000 tons but we will be creating higher cushion upstream and downstream. And in between, the reactors are kind of small reactors of 1,000 tons. So, we can keep on adding reactors based on our market seeding and all.

Yes. Hi, sir. Thank you for taking my questions. Sir, did you give Carbon Black offtake guidance for FY '26 and per kg EBITDA guidance, which stood at, let's say, INR17.4 a kg ex of other income?

No, we have not given any guidance, Krishan. If you have seen our current quarter's number, you would see that we are already operating at 96 -97% capacity. I think we will reach almost full capacity this year. We'll maintain this kind of capacity utilization a little higher. And realization would also depend on movement in crude prices.

Yes. Okay. So basically, you are at 154 kt run rate, and annualizing it, you would be closer to 616 kt-odd and then probably some incremental. So, 630-635 kt should be a fair assumption?

Maybe a little more. We are also about to commission one small line in Tamil Nadu in the next, 2-3 weeks. And that will be available for a good part of the year.

Got it. And so, realization, I understand it's crude linked, but from the spread perspective, I was asking like, let's say, per kg EBITDA, I think you had indicated in the last call that your overall or 2-3-year aspiration is to be at INR20-22 per kg EBITDA. For F '26, where do you stand?

I would not talk about current year's numbers, but we are on track to achieve targeted EBITDA per ton. We spoke about some INR4-5 increase from the current level in next 4 -5 years' time. And that will come because of the product portfolio expansion, moving up the value chain. Some part of it will come from operating leverage and also a good part will come from all the work that we are doing towards conversion efficiency improvement. So, we are on track to achieve that. I mean the business environment volatility is very high every quarter, there's some or other development, which is negative for our industry.

Got it. Coming to Aquapharm, we can see your volume has gone up. However, your EBITDA has not gone anywhere. So, what actually happened there?

We just spoke about that. So, first quarter, again, I mean, we were talking about US announcing tariff and then again deferring it by a quarter, which kind of resulted in the US importing a lot more during this quarter from China and some other countries, which impacted our business volume. So, this is again not a usual quarter for this segment’s performance. But the guidance that we gave for Aquapharm for the current year, we are holding on to that.

Yes. That I got it. I mean, I think you said volumes were impacted, but I'm saying that the volume did go up, but your EBITDA went down. So, something had to give, right? I mean or was it costs were high or was it the realization went down or you were holding some inventory? Because volume, we can see its material.

No. So, the product mix also changed and also there was pressure on pricing, which resulted into lower margins. Additionally, freight costs during the quarter went up because of this trade route disruption.

Yes, that is probably explains the INR204 crores other expense went up to INR231 crores. That is fine. And I think you mentioned that you are holding on to your guidance of INR300 crores. So just wanted to understand what will drive almost like INR80 crore s kind of a quarterly run rate if you were to just take it for the next 3 quarters. What will change to give you a INR30 crores uptick from the coming quarters?

We are operating at low capacity. Operating leverage is going to give us that improvement in the subsequent 3 quarters. We are planning to increase capacity utilization.

Okay. So, I thought your capacities are closer to 130 KTPA plus you added 11 KTPA. So probably 140 and you're already running at 110 KTPA kind of a run rate. Is that fair...

So, we are going to get about 38,000 tons from the new facility, out of which only 12,000 tons have been commissioned so far. And we had 130,000 tons before this capacity addition. So, in totality, we will have about close to 170,000 tons.

Yes. But isn't that the case like in the initial quarters or initial couple of months, the opex is higher until your plant stabilizes. So, are you still confident of operating leverage playing out just from this quarter and then the next quarter or operati ng leverage play out could happen probably 2-3 quarters down the line?

The pricing this quarter was also not the usual pricing.

Yes. And that has changed?

Right. So, I mean, we can't extrapolate current quarter for the full year's profitability. We are already seeing some improvement in the current quarter. And hopefully, every quarter, you will see improvement going forward.

Got it. And just the last bit, if you may allow me. So, what led to the increase in the interest expenses this quarter?

Interest expense is going down. It is one capitalization which happened in the last quarter of last year. So, for one of our unit s, PCBL Tamil Nadu, where we are putting up this brownfield expansion, there was some interest expense, which I mean, for the capex that we are incurring. And ideally, that should have been capitalized in the first 3 quarters, but capitalization for the whole year happened in the fourth quarter. And consequently, fourth quarter interest cost went down to that extent. And on that base, current quarter interest cost is looking higher. But actually, in terms of overall cash outflow for interest payments, it has gone down in this quarter. And every quarter from here on, you will see further reduction.

Okay. And on this continuation, what was your gross and net debt at end June '25? If you have that number in mind, yes.

There is some, we don't publish balance sheet in first quarter, but there is some reduction.

Yes, I was just saying just a ballpark number if you have handy, but in case you don't, that's fine.

The next question is from the line of Yash Sinha from MIPL Family Office.

I had a bit of a unit economics question around the Carbon Black business. Just wanted to understand the difference in realization between your Specialty Carbon Black, Performance Carbon Black and your normal Carbon Black?

It would depend on grade to grade. I mean we have a portfolio of some 100-odd grades between these 3 portfolios. At the portfolio level, we are getting about roughly 25% higher realization in Specialty, 25 -30%, and about roughly 7 -10% kind of higher realization in the performance segment.

Yes, I was asking if after this Orion plant closure announcement, any of the larger export clients have intimated to you that they would be providing slightly larger orders going forward?

It is little early for that. Of course, we expect to get some benefit out of it going forward, but it is going to take time. And these plants are still running. Orion has announced that they will close by the end of this year. So, I mean, there's still some time before we start getting concrete benefit out of this.

The next question is from the line of Aditya Khetan from SMIFS Institutional Equities.

Yes. Thank you, sir, for the follow-up. Sir, the new Carbon Black greenfield line like which we have planned, any idea, sir, when we are planning to start the construction and when it would be fully completed?

It takes about roughly 18 months to get the plant ready once we have all the necessary approvals in place. But the approval process is a little lengthy. We expect all the approvals to be in place in next 4 quarters. So, from now, maybe around roughly 2.5-3 years.

Sir, my question was on to the Specialty Carbon Black line, which we are planning in the next 3-4 quarters. Sir, our current capacity utilization is around 50%. I think that would be fully operated by in the next 1-2 years. So, this capacity addition, any outlook like we are adding on to the same capacity into the similar grade and what will be the capex?

Okay. So first of all, there would always be a gap between the rated capacity and the actual achievable capacity based on the product mix. And in Specialty, we can reach maximum around 64-65%. I mean that's the maximum that we can achieve. So, against 112,000 tons, maybe we can reach about 70,000-75,000 tons. And we are already operating at a run rate of 16,000 tons plus every quarter, which is very close to kind of full capacity utilization or in a year's time, we are going to achieve that. And therefore, we require more capacity. And to get this line commissi oned will take about 4 quarters' time. The second question, I think you asked about the capex for this line. Is that right?

Yes, sir.

Okay. So, it will be somewhere around INR85-90-odd crores.

Okay. And sir, the grades are similar like which we are manufacturing today, it is into the similar grade’s expansion?

This will be mostly similar, some new grades come in the category of ink and coating.

Thank you. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.