What does an investor’s textbook dream company look like –market leader, reasonable valuations, low debt, great management, good industry, high growth prospects, stable/growing margins. The list could be expanded but then it would probably be called fantasizing.
Many of these attributes like market leadership, valuations, debt etc are data driven and can easily be ascertained by looking at numbers.
Couple of subjective factors like management quality and industry longevity are somewhat fuzzy to figure out but can be put behind if the target company belongs to a respectable group and is dealing in products that have a big addressable market with little foreseeable challenges.
The most critical components for investing success are growth and margin trajectory. They also happen to be the most challenging to guess. Besides in-depth knowledge and extensive experience, dollops of luck are also required for the guesstimate to behave well.
PCBL, belonging to RP Sanjiv Goenka group, seems to tick all the boxes including the elusive growth and margin test. Before delving into the easily knowable characteristics of PCBL, it is perhaps more gripping to hear what Sanjiv Goenka himself has to say about them in a July 2024 interview (click here).
The interview is about all the companies of the RP Sanjiv Goenka group (PCBL, CESC, First Source etc) but he talks about PCBL in the first few minutes and exudes confidence about being able to grow its profits 5 times in 5 years. In percentages, this translates to a CAGR of 38%!
Coming to the more ‘knowable’ attributes of the company. PCBL makes carbon black (over 90% contribution to business) used in tyre manufacturing. It also makes performance chemicals, speciality chemicals and has a power plant which sells power in the open market. PCBL is the leader in carbon black in India with over 40% market share and is seventh largest player globally. It is trading at not too expensive PE of 25 with ROE of over 16%. The RP Sanjiv Goenka group is one of the most respected industrial groups in the country. PCBL debt is around 1.5x. Industry addressable market size is vast and there seems to be no substitute for tyres or carbon black to make them yet.
PCBL has recently acquired Aquapharm, a speciality chemical company, for 3850 cr and management’s confidence about growth is coming from this acquisition. It aspires to grow the share of specialty chemicals in PCBL’s overall business to 60% in the coming five years which will also lead to higher margins. The success of the speciality chemical vertical is expected to drive the 5x growth in profits.
Time to deliberate on the negatives also. PCBL will have to integrate and improve Aquapharm’s margins. It will also have to take debt to fund the acquisition. While the management is positive about the acceptability and high growth of its products, there could be many twists and turns in the story. After all, if the future was so certain, there would be no Vijay Mallayas or Naresh Goels.
All said and done, if luck doesn’t play nasty, PCBL seems like a good thing for the next few years.