Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Market leadership position in the domestic CB industry and increasing global footprint

PCBL is the largest player in the domestic CB market, with market share of about 41% in terms of capacity and the seventh largest manufacturer of CB globally. The company has production capacity of 603,000 TPA and plans to augment it by 150,000 TPA by end of fiscal 2023. It is the largest exporter of CB in India, operating in more than 40 countries. Exports contributed 32% of the revenue in fiscal 2022, up from around 20% in fiscal 2017, due to expansion of customer base across geographies.

PCBL manufactures over 60 grades of rubber CB and specialty black. Its focus remains on high-performance and high-margin products under both CB and specialty black. It has strategically aligned its product portfolio with the business needs of customers and works jointly with them for developing products and providing technical services. PCBL mainly caters to large tyre manufacturers and has established relationship with them. The company drew almost 62% of its revenue from the tyre segment in fiscal 2022. Large scale of operations, coupled with timely and high-quality service, supports the company in maintaining healthy relationship with key customers.

Healthy demand outlook for the end-user segments, majorly the domestic tyre industry, will drive revenue growth over the medium term. This growth will also be supported by enhanced specialty black capacity commissioned in fiscal 2021 and additional capacity of 40,000 TPA to be commissioned by fiscal 2023 end, which will solidify the company’s market position.

Healthy and improving operating efficiency

PCBL benefits from the strategic location of its manufacturing facilities. Its four facilities are near ports and have easy access to raw materials and lower logistic costs. PCBL imports 70-80% of its raw material and exports 32-35% of its revenue. PCBL also has power plants at all its facilities, which use tail gas generated in the thermal decomposition process for making CB. The company sells 50-60% of the power generated.

Although the EBITDA margin has fluctuated between 14% and 19% in the past five years, EBITDA per tonne has been healthy and reported an increasing trend to over Rs 14,000 per tonne in fiscal 2022 from Rs 11,000 per tonne in fiscal 2020.

The company is in the process of adding additional speciality CB capacities to be commissioned by March 2023. Speciality CB is a value-added product and gives a higher profit margin than regular CB products. The share of specialty black in sales volume rose to around 8.0% in fiscal 2022 from 1.4% in fiscal 2016 and is expected to gradually further increase in the coming fiscals; this increase should boost the operating margin. Considering the recovery in demand and calibrated capacity additions by the industry, the current spreads will sustain over the medium term and aid operating profitability.

Strong and improving financial risk profile

The financial risk profile has strengthened over time, supported largely by healthy cash generation. After sizeable capital expenditure (capex) of Rs 664 crore in fiscal 2017, the company undertook capex of ~Rs 900 crore in the four fiscals through 2022, during which cash generation was more than Rs 1,000 crore. Also, ~Rs 200 crore of the long-term debt was retired in the past four fiscals and prudent working capital management led to lower short-term borrowing. Therefore, total debt declined to Rs 684 crore as on March 31, 2022, from Rs 1,065 crore as on March 31, 2016. Consequently, gearing and debt to EBITDA ratio improved to 0.30 time and 1.00 time, respectively, as on March 31, 2022, from 0.67 time and 2.33 time as on March 31, 2017. Debt protection metrics were healthy, with interest coverage and net cash accrual to adjusted debt ratios of 17.0 times and 0.5 time, respectively, for fiscal 2022. The ratios are expected to be comfortable over the medium term as well.

PCBL is undertaking capex Rs 800 crore for greenfield CB expansion in Tamil Nadu, adding capacity of 150,000 TPA and investment of Rs 320 crore for brownfield expansion in Mundra (Gujarat), adding specialty CB capacity of 40,000 TPA. The capex will be partly funded through debt. Healthy cash generation will ensure debt protection metrics remain comfortable ' gearing is expected below 0.5 time and debt to EBITDA ratio at 0.9-1.2 times.

PCBL has exposure of around Rs 176.06 crore to group companies, because of restructuring between the promoters of the erstwhile combined RPG group. The exposure has been reducing and no material support is expected to be rendered to any of the group companies henceforth. Any substantial increase in exposure to group companies will remain a monitorable.

Weaknesses:

Susceptibility to volatility in crude oil prices and forex rates

CB feedstock (CBFS), derived from crude oil, is a major raw material for CB production. Any increase in crude oil prices may drive up CBFS prices, and thus increase the operating cost of players. Thus, the operating margin remained at 3.2-19.7% for the past 10 years. However, the company has a pricing formula linked to crude oil prices for the tyres segment, which accounts for a significant proportion of sales, thereby mitigating any risk to profitability. The company imports 70-80% of raw material and is vulnerable to volatility in forex rates. This is largely mitigated by a natural hedge because of export and a stringent hedging policy. Since fiscal 2016, the increasing share of specialty black in sales and improving yields and input-output ratio have helped reduce volatility in operating profitability.

Exposure to risks related to removal of anti-dumping duty on CB

The Government of India on November 18, 2015, imposed an anti-dumping duty on CB originating in or exported from China and Russia. The duty lapsed on January 5, 2021, and was not extended. However, this did not result in large scale dumping of CB by Chinese producers to India, as demand remained healthy. Moreover, cost of production increased sharply for Chinese players. The changing cost structure for Chinese players constrained supply in China due to plant shutdowns, and the threat from China is likely to remain limited in the near term. Furthermore, the basic customs duty on import for CB increased to 7.5%, which will keep the import of CB into India in check. Nevertheless, any effect on the business of PCBL, if Chinese imports turn cheaper, will be closely monitored.

High susceptibility to cyclicality in the automobile industry

Demand for domestic CB depends on growth of the tyre industry, as 73% of overall CB produced in India is consumed by tyre manufacturers. PCBL generated about 60% of its revenue from the tyre industry in fiscal 2022. Hence, CB revenue can be impacted by sluggish demand from tyre manufacturers, owing to slowdown in demand from automobile original equipment manufacturers (OEMs), or shutdown of tyre dealerships or automobile service stations, as seen during the Covid-19 pandemic, which affected aftermarket sales for tyres. That said, 70% of the tyres demand is from the aftermarket, which is generally more resilient than OEM demand. With revival in automotive demand and opening of markets for aftermarket sales, CB demand is expected to grow in fiscal 2023 after two consecutive years of decline.