PCBL’s entry into non-carbon black biz to buttress margin growth | Mint

PCBL’s entry into non-carbon black biz to buttress margin growth

PCBL plans to fully acquire Aquapharm Chemicals for a total consideration of Rs3,800 crore.
PCBL plans to fully acquire Aquapharm Chemicals for a total consideration of Rs3,800 crore.

Summary

  • Reasonable deal valuation and strong growth prospects have fetched brownie points for PCBL's acquisition of Aquapharm Chemicals, although debt remains a concern

Investors are visibly pleased with PCBL Ltd’s entry into the specialty chemicals segment. The company is set to acquire Aquapharm Chemicals Pvt. Ltd, whose key products include phosphonates, biodegradable chelating agents, polymers. Diversifying into non-carbon black business will help PCBL mitigate the risk of concentration in the tyre industry. Unsurprisingly, PCBL’s shares hit a 52-week high of Rs271.45 apiece on Wednesday, closing nearly 5% higher.

But its debt is set to inch up. The consideration of Rs3,800 crore for the acquisition would be funded mainly by debt. This implies a valuation of 9.1x Aquapharm’s FY23 Ebitda. The company estimates the multiple to be at 8.5x FY25 Ebitda.

To be sure, there were concerns that investor sentiment would be hurt owing to a likely rise in debt, and that the acquisition was in an unrelated area for PCBL. But the reasonable deal valuation and strong growth prospects seem to have fetched brownie points. PCBL said in a call with investors that Ebitda multiple for other specialty chemical companies averaged about 20 times.

PCBL aims to repay its debt in 30 months using the combined cash flow generated by both companies. Plus, it bodes well that Aquapharm’s portfolio has a higher margin, which could boost the earnings of the combined entity. For perspective, in the first half of FY24, Aquapharm’s Ebitda margin stood at nearly 19%. In comparison, the measure for PCBL stood at 15.8%. Further, PCBL expects the deal to be margin and earnings accretive in the first full year of acquisition.

But not everyone is convinced. Nuvama Research expects the deal to drag earnings in FY24/25 given industry weakness. “Expect net debt/Ebitda to cross 3.5x with debt/equity of about 1x in FY24," Nuvama said in a report.

For now, PCBL’s core business of manufacturing carbon black is on a strong footing. Abhijeet Bora, an analyst at Sharekhan by BNP Paribas, said the demand supply dynamics is favourable, especially as there is a shortage of carbon black. “Major markets like the US and Europe are seeing limited capacity additions compared to demand growth," he said.

This is a key factor that led to an impressive rally in the PCBL stock, which is up by almost 106% in 2023 so far. Even so, the stock trades at a reasonable valuation of 14.6 times its FY25 estimated earnings, according to Bloomberg data.

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