PCBL : Transcript of Q2 FY 2024 Earnings Conference Call

"PCBL Limited

Q2 FY2024 Earnings Conference Call"

October 17, 2023

ANALYST: MR. SANJESH JAIN - ICICI SECURITIES

MANAGEMENT: MR. KAUSHIK ROY - MANAGING DIRECTOR - PCBL

LIMITED

MR. RAJ GUPTA - CHIEF FINANCIAL OFFICER - PCBL

LIMITED

MR. SAKET SAH - HEAD - INVESTOR RELATIONS - PCBL

LIMITED

MR. PANKAJ KEDIA - VICE PRESIDENT - INVESTOR

RELATIONS - PCBL LIMITED

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PCBL Limited

October 17, 2023

Moderator:Ladies and gentlemen, good day and welcome to Q2 FY2024 results conference call of PCBL Limited hosted by ICICI Securities Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing "*" then "0" on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain. Thank you and over to you Mr. Jain!

Sanjesh Jain:Good afternoon, everyone. Thank you for joining on the PCBL Limited's Q2 FY2024 Results Conference Call. We have PCBL management on the call represented by Mr Kaushik Roy -Managing Director, Mr. Raj Gupta, Chief Financial Officer; Mr. Saket Sah, Head Investor Relations; Mr. Pankaj Kedia, Vice President, Investor Relations. I would like to invite Mr. Kaushik Roy to initiate the call with his opening remarks, post which we will have a Q&A session. Over to you Sir!

Kaushik Roy: Thank you so much and good afternoon, everyone and a very, very warm welcome to each one of you to this call. First of all, I would like to wish a happy festive season ahead and additionally I would like to say that some of the points, some of the statements made in this call maybe forward looking and a disclaimer to this has been included in the investor update shared with you.

Now coming to the performance of the organization. PCBL reported a strong quarter with the highest ever volumes and best ever quarterly financial performance despite the worsening geopolitical scenario and economic issues. During the quarter, our consolidated sales volume was 1,30,111 metric tonnes, which is up by around 14% on year-on-year basis. While consolidated revenue from operation was Rs.1487 Crores, the drop in revenue is primarily on account of drop in crude price from an average of $112 a barrel to $88 a barrel year-on-year basis. EBITDA grew by around 25% year-on-year to Rs.240 Crores translating to an EBITDA margin of 16%. PBT stood at Rs,172 Crores while PAT increased to 123 Crores. Consolidated EBITDA/MT stood at Rs.18,427. We have already shared with you that we have commenced our commercial production of the final phase of Chennai plant which is 84,000 metric tonne per annum. With this our total installed capacity of the company now stands at 7,70,000 MTPA gross. We have also commissioned the cogeneration captive power plant at Tamil Nadu site having a capacity of 12 megawatt. With this the total cogeneration power capacity stands at 110 megawatt. During this quarter PCBL Tamil Nadu achieved production volume of 9410 metric tonne and a sales volume of 9008 metric tonne which is roughly 50% of capacity available during the quarter. We expect further ramp up of Tamil Nadu facility with approvals from major customers

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PCBL Limited

October 17, 2023

expected over a period of next few weeks. Of the total sales volume domestic sales volume stood at 82,276 metric tonnes while international sales volume stood at 47,835 metric tonnes.

Moving on to our segmental performance, tyre accounted for 79,793 metric tonnes. Performance chemicals reported sales volume of 34,744 metric tonnes. We also achieved specialty sales volume of 15,574 metric tonnes, which is the highest ever in our history. We continue to expand our product portfolio and customer base. The volume with our recently launched Energia brand is gradually picking up. Samples have also been sent to one of the major EV battery manufacturers for bulk trial purposes. We also achieved the highest ever power generation and sales volume during the quarter. Power generation increased from 156 MU in Q2 FY2023 to 167 MU during the quarter with external sales volume of 103 MU as against 95 MU in Q2 FY2023. PCBL's average realization stood at Rs.4.06/kWh. With commissioning of 12 megawatt CPP at Tamil Nadu, power generation and sales volume would increase further going forward. PCBL also secured two patents in relation to oxidized and surface-modified grades, which further strengthens the specialty portfolio of the company. Oxidized grades have applications in ink and coating applications while the surface-modified grades improve fuel efficiency and tyre life. Long-term prospects of specialty segment look very positive and we believe that there would be adequate business potential to sustain the growth momentum. Considering the changes in global supply chain and consumption pattern, demand and margins in this segment should continue to remain strong. Structurally we are increasing resource allocation to this segment.

Let me now talk about current market scenario and outlook. Domestic tyre segment demand continues to remain robust on the back of healthy performance of both OEM and replacement segment. We expect the upcoming festive season to provide further boost to auto sales. Industry's long-term demand supply scenario continued to look favorable. The industry is going to remain in a tight supply situation for years to come. Only one major concern that remains in the worsening geopolitical scenario while we do not have much trade with conflicting countries there may be indirect impact due to trade route disruptions, high oil prices and inflation. We remain watchful of the developing situation and continue to work on strengthening our supply chain, improvement in our product mix, and cost optimization initiatives within the company. With this I conclude and open the floor for your queries. Thank you so much.

Moderator:Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Aditya Khetan from SMIFS Institutional. Please go ahead.

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PCBL Limited

October 17, 2023

Aditya Khetan: Yes, thank you for the opportunity. Sir first question is onto the specialty black volume on quarter-on-quarter basis there is almost a 30% jump into specialty black volume but despite this our gross spread has been almost flattish like I believe this is commanding almost two times the gross margins as compared to the conventional grade so this jump in volumes has not been translated into your gross spreads?

Raj Gupta:The gross spread has gone up. What you are looking at is the consolidated numbers and Tamil Nadu still is not fully operational. Though we commissioned the line towards the end of September we still do not have approvals from major customers. It is more of spot market sales and realization is a tad less than what normally we get in PCBL so that is also kind of having a pulling down effect on the gross margin. But having said that overall gross margin has gone up on a standalone basis, and which will be more reflective of the change in product mix. Our gross margin per tonne has gone up from roughly Rs.33,700 to Rs.34,700, so there is around Rs.1000 improvement in the gross margin.

Aditya Khetan: On quarter-on-quarter basis also the domestic sales volume has been flattish so what is the reason for that?

Raj Gupta:Domestic market continues to remain a little oversupplied, lot of capacities came up in last two years and therefore we are pushing more material in overseas market.

Aditya Khetan: Any recent competitors which have expanded the capacity recently?

Raj Gupta:In last two years most of the manufacturers added capacity, Epsilon capacity came up, Continental added capacity, Himadri added some capacity, BKT added capacity and we also added capacity.. if you look at our performance from overall capacity utilization perspective, we are almost operating, if you leave aside the Tamil Nadu plant which has got recently commissioned) most of our facilities at almost full capacity.

Aditya Khetan: On to the gross spread guidance like you had said earlier that that would improve by Rs.1 per kilo for the next 2 to 3 years so does that hold right now because currently only we are standing at a very high spread number so that will remain constant or how you see that going ahead?

Raj Gupta:Long-term guidance remains as is. There is no change in long-term guidance and we believe that we should be able to deliver that.

Aditya Khetan: Last question from my side. On to the export market I believe we are selling almost 15% to 20% to Europe and some of the quantities also into the United States so we are facing some issues like demand issues or any sort of short-term hiccups which is like holding back your

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	PCBL Limited
	October 17, 2023
	volumes over there and that could improve over the short term like how is the trend and
	demand into this international market?
Raj Gupta:	This should be looked at from two different point of view. One is long-term strategy of the
	company - so in Europe we did not have much of the market and structurally we are trying
	to become big in Europe. So going forward if you are talking about next four to five years
	perspective, Europe certainly has lot of potential and going to become big market for us. In
	short term, because of all the volatilities which are there in the market, our objective is to
	ensure high capacity utilization. So whichever geographies offers scope and potential we
	will move our materials there.
Aditya Khetan:	So currently the markets are weak or..
Raj Gupta:	Geography wise … in the interim I think, but structurally we are focusing big way on
	Europe and therefore we have also opened up our own offices in a number of countries
	there.
Aditya Khetan:	Thank you. That is it from mine.
Moderator:	Thank you. The next question is from the line of Riya from Aequitas Investments. Please go
	ahead.
Riya:	Thank you for giving me the opportunity and congratulation on good volumes and specialty
	after a long time. My first question is in regards with demand coming from the international
	market, we are seeing volume growth here so which geography are we seeing this
	particularly I suppose you just mentioned about Europe so could you elaborate more?
Raj Gupta:	We are present in more than 50 countries now. Like I said all geographies are important for
	us but we are trying to focus more on markets which holds bigger potential and where our
	market share is still not as high as we would have wanted. In the interim, till the time these
	global trade disruptions or slowdown is continuing we will have to ensure higher capacity
	utilization by looking at opportunities wherever it is available and structurally in some of
	the geographies we see big potential where we are investing in our own supply chain
	capability which will create foundation for larger volume in these geography for us.
Riya:	Right so this particular quarter no one geography contributed majorly for the growth?
Raj Gupta:	No, it is a mix of all the countries and Asia Pacific still remains big for us.
Riya:	Asia Pacific was the major?
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	PCBL Limited
	October 17, 2023
Raj Gupta:	Yes it is major. It is accounts almost 70% of market of overseas market.
Riya:	In terms of specialty black, newer capacity and additional 20,000 phase two when do we
	expect that to come?
Raj Gupta:	It will take I guess about a year's time.
Riya:	So maybe around October 2024?
Raj Gupta:	Yes around four quarters' time.
Riya:	Do we see this kind of 16,000 tonnes quarterly run rate for specialty to sustain?
Raj Gupta:	We will hold on to our yearly guidance. I think we should be able to deliver that.
Riya:	Because I think for Q4 we had guided for 16,000 so we have already achieved that so just
	wanted to have a true sense for it.
Raj Gupta:	As I said we hold on to our guidance.
Riya:	In terms of margins like specialty since we have got two new patents could you elaborate
	more on that, what kind of process patents are there, any quantitative numbers if you could
	give across that what kind of cost saving or something like that value added would give us?
Raj Gupta:	These are kind of newer grades in the market and the potential for volumes in these grades
	would increase gradually. As of now based on our capability, we see may be volume of
	6,000 tonnes annually. In terms of market potential, I am talking about us specifically, so
	initially it will be about 2000-3000 tonnes and in two to three years time we expect to reach
	6-7,000 tonnes.
Riya:	Thank you. That is it from mine.
Moderator:	Thank you. The next question is from the line of Jatin Damania from Svan Investment
	Managers. Please go ahead.
Jatin Damania:	Thank you for the opportunity and congrats on good set of numbers. Sir carrying on to the
	previous participant's questions in terms of the patented products , now since you indicated
	that the volume will be6000 per tonne but can you help us in understanding what would be
	the margin or the EBITDA per tonne as compared to the current product mix on the
	patented product?
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Raj Gupta:	I can give you an indication because it is a recently launched grade. We have just patented it
	and just introduced it in the market. Our expectation is that it will be around maybe $1200
	to $1300 kind of contribution per tonne.
Jatin Damania:	So that will be about 4-5x at the current base rate you can assume it right?
Raj Gupta:	Yes roughly.
Jatin Damania:	Second question now with the ramp up of Tamil Nadu and the Chennai facility that will be
	starting in October 2024 so if one were to look at the longer term horizon of 4 years to 5
	years down the line what are the volume growth drivers one should assume, are we
	planning to look at some acquisitions or looking at some another round of expansion of
	Tamil Nadu or Chennai for the base grade and the specialty grade?
Raj Gupta:	With the kind of potential, which is there in the market, we believe that we will have to
	keep adding capacity every year. Sometimes it can be through Brownfield, sometime it
	could be Greenfield. And in terms of inorganic opportunity if something comes up, there is
	nothing available in the market as such, but if something comes up at a valuation which is
	acceptable to us and if the portfolio is right, we may also consider that.
Jatin Damania:	With the current land bank what we have, what is the incremental expansion we can carry
	on in the base grade and the specialty grade?
Kaushik Roy:	I will tell you both rubber black as well as specialty. Down south in Tamil Nadu we can add
	another 90,000 tonnes of Brownfield capacity. It will be mostly rubber grade for tyre
	application and industrial application. As far as specialty is concerned, we are already
	working on this additional capacity in Mundra which should be ready within a year's time
	and in parallel we have started to look at the possibility to add something more over there.
	We have still not decided on the exact capacity or the reactor design so cannot make any
	comment beyond that at this point of time on specialty.
Jatin Damania:	So as of now you can probably go with 20,000 tonnes of specialty until October 2024 and
	rubber black of incremental 90,000 whenever we decide in the future, right?
Kaushik Roy:	90,000 additional rubber black facility over a period of say next year or two years' time
	maximum.
Jatin Damania:	Sure Sir. Thank you. That is all from my side. I will come back in the queue.

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	PCBL Limited
	October 17, 2023
Moderator:	Thank you. The next question is from the line of Sanjesh Jain from ICICI Securities. Please
	go ahead.
Sanjesh Jain:	Good afternoon, Sir. Thanks for taking my question. Starting with our energized brand
	which is a battery chemical earlier I think a quarter or two back you said that we are very
	close and now we have supplied the sample can you can you elaborate more particularly in
	battery chemical what is the component we are looking at it, what is the present
	opportunity, how critical that element is and what does our internal assessment talks about
	our ability and what are the other opportunity within the battery if at all we are looking
	beyond this product?
Raj Gupta:	So Sanjesh in market currently there are three types of battery technology. One is the old
	technology, which is dry cell, the second one is lead acid battery which is second generation
	battery technology and the latest one is lithium-ion technology which is the ion batteries
	with high power storage and all. We already have done great work catering to the first-
	generation battery dry cell. What we have developed now is going to cater to the second
	generation and the third-generation battery. See there are different kind of grades which can
	be manufactured and we are targeting grades with more capacity so the grade that we have
	launched is kind of interim capacity or little less than where we would have wanted the
	conductivity in these particles. While this will cater to lithium-ion batteries also but this will
	be like low end of lithium batteries not the really high end Tesla kind of batteries. Those
	grades are still at the lab level in our R&D lab and this Energia grade that we have
	launched, we have already given the samples to one of a very large EV manufacturers who
	also is into battery cell manufacturing. Lab level testing was successful at their end and now
	they are testing it at industrial scale.
Sanjesh Jain:	Fair enough, fair enough that is quite useful. The second one is on the specialty there has
	been a sharp acceleration in the volume what is driving it more of a coating or pigment
	which is rubber what within the specialty is driving this growth and what are in the catalyst
	because it has been a very smooth and steady growth but it looks like there is a step of jump
	this quarter can you elaborate more on that?
Raj Gupta:	One is we got additional capacities Sanjesh during the quarter. This Mundra specialty line
	getting commissioned, that gave us this capacity cushion. Second, generally demand for
	high end things have gone up, be it fabric, be it automotive and all so that is where specialty
	gets consumed. Moreover our market penetration has also increased. We have added a
	number of customers. The foundation was already laid when we gave the annual guidance

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	about the volumes, etc. Most of the work was already done so now that we have capacity,
	we are able to sell more volume.
Sanjesh Jain:	The guidance was that we will sell 10,000 metric tonne more versus previous quarter and in
	one quarter we have sold 5000 more it appears that we are way ahead of our guidance.
Raj Gupta:	Our annual guidance Sanjesh for 50,000 to 55,000 tonnes of specialty and we remain on
	track so the first 6 months volume is about close to that 27,500 tonnes.
Sanjesh Jain:	The number is 10,000 additional but got the point and number three on the operating cost
	particularly now that the Tamil Nadu has come in but our total operating cost sequentially
	has come down. Can you explain that Raj how is that?
Raj Gupta:	Our operating cost structure remains very lean and cost structures if we were to discuss not
	only operating but overall cost structure, we expect about Rs.45 Crores of depreciation on a
	full year basis roughly about Rs.35 Crores of interest cost and another 40 odd crore of plant
	maintenance cost, manpower etc.
Sanjesh Jain:	If you look at other expenses last quarter was Rs.149 Crores this quarter is Rs.144 Crores
	while we have operated the first phase of Chennai plant for the full whole quarter this
	quarter this was not here for the last quarter and yet our other expenses has declined by 5
	Crores.
Raj Gupta:	You are talking about the other expenses right so last quarter there were some fees, etc.,
	also which was paid during the quarter and which appeared here which was more of a one-
	off.
Sanjesh Jain:	Got it so this Rs.144 Crores is a steady state from here on or because of phase two there will
	be a little bit more increase?
Raj Gupta:	So, the current quarter is reflective of the annual run rate.
Sanjesh Jain:	This will be for the full operational plant, right?
Raj Gupta:	Yes.
Sanjesh Jain:	We were supposed to commission 24 megawatt of power we have started with 12, the other
	12 should commission soon?
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Raj Gupta:	It should take us about 3 to 4 months more.
Sanjesh Jain:	That is fair and one last question on the global market. Europe is supposed to remove that
	quota of buying from Russia starting I think if I remember like July of next year are we in
	active discussion with the large player European to have long-term contract for buying
	carbon black and hence ramping up Chennai facility faster than what we thought. I think
	even in this quarter we are already at a 50% utilization which I think is a very good run rate
	to start with, you expect this ramp up to be much sooner than what we have earlier
	anticipated?
Raj Gupta:	The major hurdle now in way of capacity utilization, I would say, is approval from major
	tyre customers. And it is more of the process, which is taking time, not any problem as such
	which is delaying the process. The normal process itself takes about two to three quarters
	time for all the approvals to come by and tyre accounts for almost 65% of volumes. We
	believe in next three to four quarters' time we should reach 80% capacity utilization and we
	expect gradual ramp up from here on so whatever volume we have been able to do in
	current quarter, next quarter volume should be better from the current quarter and fourth
	quarter should be even better.
Sanjesh Jain:	So, the emphasis is what more domestic customer or more European customer, Chennai is a
	sweet spot for us right considering the port we are very close to the port?
Raj Gupta:	Geographical mix Sanjesh would remain more or less similar, so maybe about two third is
	domestic market and one third is international market. In the interim, till the time we have
	approval from all the tyre customers in the domestic market, we are just trying to utilize
	capacity by selling more in international market.
Sanjesh Jain:	Got it. Fair enough. Thanks for answering all my questions and best of luck for the coming
	quarters.
Moderator:	Thank you. The next question is from the line of Dhiral from Phillip Capital PCG. Please go
	ahead.
Dhiral:	Good evening, Sir. Thanks for the opportunity. Sir in next three to four quarters you talked
	about Tamil Nadu plant will reach 80% utilization am I right?
Raj Gupta:	Yes.
Dhiral:	So, this is overall 147,000 tonne you are talking about?
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