Multibagger stock: PCBL delivered over 650% return in 4 years, zoomed 4250% in 10 years; is it still a ’buy’?

Shares of PCBL (formerly Phillips Carbon Black), a prominent carbon black manufacturer, has delivered phenomenal returns to its shareholders with a steady rally over the past four years. 

Starting from a trading price of ₹31.35 per share in March 2020, the shares have surged to the current market price of ₹246, marking a remarkable growth of 684%. In comparison, the Nifty small cap 100 index has witnessed a gain of 158% during the same period.

Looking at their long-term performance, the shares have exhibited substantial growth, climbing from ₹5.65 apiece to their current level, thereby rewarding long-term investors with an impressive return of 4253%.

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In terms of yearly performance, the shares closed positively in 7 out of the last 10 years (2013–2023). Among these, CY17 marked the highest yearly gain at 338%, followed by CY23 with a gain of 94%.

The company is one of the largest carbon black manufacturers in India and a strong global player with a significant customer base in more than 45 countries. Carbon black, which is the main raw material in the production of automotive tyres, is produced using carbon black feedstock (CBFS) and tar oil.

More rally ahead

Global brokerage firm JM Financial, in its recent note, maintained its positive outlook on the stock with a 'buy' rating and a target price of ₹335 apiece, citing the stock's recent correction and a favourable outlook for the company. 

Increase in the CBO-CBFS differential is positive for Indian players: The brokerage highlights the positive impact of the increase in the CBO-CBFS (carbon black oil-carbon black feedstock) differential for Indian players. 

It notes that during 4QFY24TD, the CBO-CBFS differential has risen by 8% compared to 3QFY24, attributed to an 8% decrease in CBFS prices and a 2% decrease in CBO prices over the same period. 

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This increase, as per the brokerage, in the differential is influenced by the reduced utilisation of China’s blast furnace capacity due to maintenance and China’s crackdown on coal tar distillation units. 

It says that CBFS-based players like PCBL are expected to maintain a competitive edge over Chinese CBO-based carbon black producers.

Reversal of product spreads to long-term averages: According to brokerage analysis, the spreads of various grades of carbon black have returned to their historical averages. Additionally, with PCBL expected to utilise its additional capacities more efficiently, the benefit of operating leverage is likely to persist. 

Consequently, the brokerage anticipates a potential improvement in PCBL’s EBITDA per kilogram in 4QFY24E, compared to ₹20.5/kg in 3QFY23. It suggests that if this trend continues, there could be upward revisions to their current estimates, as their FY25/26 projections currently assume an EBITDA per kilogram of ₹18/kg.

Imminent European sanctions could aid exports: According to industry reports cited by the brokerage, the EU's import dependence on Russia decreased to 40% of overall imports in CY23, down from 55% in CY22 and 75% in CY21. 

India had already secured a 5-7% and 10-12% market share of EU imports during CY22 and CY23, respectively. With the sanctions against Russia set to begin in July 2024, the brokerage anticipates further growth in India's market share. 

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Strong outlook: PCBL completed the acquisition of Aquapharm in January 2024. Hence, it may not see the full benefits of that in 4QFY24, as there could be one-off costs. However, given the strong outlook for Aquapharm’s products, the brokerage expects PCBL to start reaping the benefits in FY25.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.