Petro Carbon & Chemicals Ltd - Value Pick or Just bloated for IPO

Petro Carbon and Chemicals Limited (PCCL) Company Report

Overview:

Petro Carbon and Chemicals Limited (PCCL) is an Indian company focused on the production and sale of calcined petroleum coke (CPC). Originally incorporated as a private limited company in 2007, it transitioned to a public limited company on 23 February 2024. PCCL’s equity shares are listed on the NSE Emerge Platform as of 2 July 2024. The company operates as a single business segment entity, concentrating solely on CPC and functions as a B2B supplier to industries such as aluminium, steel, and titanium.

  • Registered Office: Avani Signature, 6th Floor, 91A/1, Park Street, Kolkata - 700 016.
  • Manufacturing Plant: Haldia Oil Refinery, Haldia - 721606, Dist. Purba Medinipur, West Bengal
  • Email: pccl@athagroup.in
  • Investor Grievance Email: investorgrievance.pccl@athagroup.in
  • Website: www.pccl.in
  • Corporate Identification Number (CIN): U24110WB2007PLC120212

Business Operations:

PCCL’s primary product is CPC, a critical component in the aluminium, steel, and titanium smelting industries. The company procures raw materials, mainly raw petroleum coke (RPC), and processes it into CPC. PCCL uses an in-house railway track system for efficient product transportation. A significant portion of raw materials (over 90%) is sourced from international vendors, exposing the company to foreign exchange risks. To mitigate this, PCCL implements a hedging policy and maintains long-term relationships with diverse suppliers. The production process includes calcination, blending, quality control, packaging, and distribution. Notably, water used in production becomes flash steam, eliminating the need for process effluent treatment. The company has a licensed manufacturing capacity of 93,744 MT.

Financial Overview:

PCCL’s financial year runs from 1 April to 31 March. The company utilises forex LCs for imports and converts site LCs to SBLCs to match the operating cycle. Working capital is supported by a consortium of banks offering both fund-based (CC) and non-fund-based limits (LC, SBLC & BG). PCCL employs accounting software with an audit trail feature for maintaining records and is regular in filing quarterly returns with banks. Financial statements adhere to Indian GAAP.

The company has not accepted any public deposits.

  • No transactions were entered into that were not at arm’s length basis.
  • Remuneration paid to directors is in accordance with company policy.
  • The company has not defaulted on loan repayments and has not been declared a wilful defaulter.
  • Section 177 and 188 of the Companies Act relating to transactions with related parties are adhered to.
  • An internal audit system is in place.
  • Proper records are maintained for property, plant and equipment (PPE) and intangible assets.
  • There are no material uncertainties regarding the company’s ability to meet its liabilities within a year of the balance sheet date.
  • PCCL spent more than required on CSR activities and did not need to transfer any amount to a fund specified in schedule (VII).
  • PCCL has no unspent amount under section 135 (5) of the Companies Act.
  • Trade payables as of 30 September 2023, were ₹3,537.42 Lakhs.

Financial Performance (as of September 30, 2023):

  • Profit After Tax: ₹5,028.58 lakhs (compared to ₹672.65 lakhs in fiscal year 2023, ₹570.99 lakhs in fiscal year 2022 and ₹11.64 lakhs in fiscal year 2021)
  • Earnings per share: ₹19.34 (compared to ₹2.59 in fiscal year 2023, ₹2.20 in fiscal year 2022 and ₹0.04 in fiscal year 2021)
  • Net Asset Value per equity share: ₹33.77 (compared to ₹14.43 in fiscal year 2023, ₹11.85 in fiscal year 2022 and ₹9.65 in fiscal year 2021)
  • Total borrowings: ₹12,412.94 lakhs (compared to ₹17,582.78 lakhs in fiscal year 2023, ₹19,418.00 lakhs in fiscal year 2022 and ₹8,182.43 lakhs in fiscal year 2021)
  • Basic and diluted earnings per share: ₹19.34 (compared to ₹2.59 for the fiscal year 2023, ₹2.20 for fiscal year 2022 and ₹0.04 for fiscal year 2021)
  • EBITDA: ₹7,456.81 lakhs (compared to ₹1,622.68 lakhs in fiscal year 2023, ₹1,205.43 lakhs in fiscal year 2022 and ₹284.82 lakhs in fiscal year 2021)
  • Net worth: ₹8,781.39 lakhs (compared to ₹3,752.81 lakhs in fiscal year 2023, ₹3,080.17 lakhs in fiscal year 2022 and ₹2,509.17 lakhs in fiscal year 2021)
  • Return on Net Worth: 57.26% (compared to 17.92% for fiscal year 2023, 18.54% for fiscal year 2022 and 0.46% for fiscal year 2021)

Initial Public Offering (IPO):

PCCL’s IPO was a 100% book-built offer, with the company’s equity shares listed on the Emerge Platform of the National Stock Exchange of India Limited (NSE) on 2 July 2024. The Draft Red Herring Prospectus (DRHP) was filed on 22 March 2024. The offer was for up to 6,617,600 equity shares with a face value of ₹10 each. GYR Capital Advisors Private Limited served as the Book Running Lead Manager (BRLM). The minimum application size for the IPO was ₹1,00,000. The company has a market maker for its shares. The offer was 100% underwritten, and all bidders were required to use the Application Supported by Blocked Account (ASBA) process. The Draft Red Herring Prospectus was not filed with SEBI.

Corporate Governance and Compliance:

PCCL has appointed Patnaik & Patnaik, Company Secretaries for secretarial audit and maintains a structured digital database for recording unpublished price-sensitive information (UPSI), ensuring compliance with applicable Secretarial Standards. The company has proper board processes and compliance mechanisms in place. The company has adequate notice periods for board and committee meetings, with detailed agendas provided in advance. Board decisions are generally unanimous. The company has an internal audit system commensurate with its size and nature of business. PCCL complies with the Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013, and has not received any complaints. Corporate governance requirements under SEBI regulations are not fully applicable as the company is listed on the NSE Emerge Platform.

Risk Management:

PCCL faces risks including raw material price volatility, foreign exchange risk, and interest rate risk. To manage foreign exchange risks, the company implements a forex policy, and it monitors bank charges and interest rates to control interest rate risk. There is a risk of loss of business if PCCL fails to comply with customer specifications and quality standards, alongside the risk of insufficient raw material procurement. Reductions in product demand could lead to underutilisation of manufacturing capacity. There are also risks and losses for which the company is not insured.

Management and Personnel:

  • Vishal Atha is the Managing Director.
  • Rudra Sen Singh is the Whole-Time Director.
  • Arun Kumar Kedia is the Chief Financial Officer.
  • Manisha Somani is the Company Secretary.
  • The board comprises executive and independent directors.
  • The company has a Nomination and Remuneration Policy and a policy for familiarisation programmes for independent directors.

Corporate Social Responsibility (CSR):

PCCL has a CSR policy focused on creating social, environmental, and economic value, supporting initiatives such as eradicating hunger and poverty, healthcare, education, and social business projects.

Additional Points:

  • PCCL does not have any subsidiary companies, associate companies, or joint ventures.
  • There are no loans or advances to promoters, directors, KMPs, or related parties.
  • The company has not issued equity shares for consideration other than cash.
  • PCCL has not undertaken a split or consolidation of equity shares in the last year.
  • There are no pending criminal cases/investigations/offences filed against the directors of the company.

Strengths:

  • Strategic plant location.
  • Efficient operations and a track record of growth.
  • Adequate internal financial controls.
  • Strong customer relationships.

Weaknesses:

  • Single product company.
  • Dependence on a few large customers.
  • Exposure to fluctuating raw material prices that are dependent on international crude oil prices.

Opportunities:

  • Lower operating costs.
  • Indian aluminium majors expanding capacities.

India rating and research report

Rating: IND BBB/Stable
Here are the most important points from the page:

  • Rating assigned: India Ratings has assigned a rating of ‘IND BBB’/Stable to Petro Carbon and Chemicals Limited’s (PCCL) bank facilities.
  • Strengths: Experienced promoters, sustained improvement in revenue, and moderate credit metrics are strengths supporting the rating.
  • Weaknesses: Volatile profitability due to fluctuations in raw material prices and forex exposure are weaknesses that could impact the rating.
  • Improvement in revenue: PCCL’s revenue improved to INR5,155.07 million in FY23, driven by increased realisation of calcined petroleum coke (CPC) and volume sales.
  • Credit metrics: PCCL’s credit metrics are moderate, with interest coverage of 1.61x in FY23 and net leverage of 6.29x.
  • Liquidity: PCCL’s liquidity is adequate, with a cash balance of INR241 million at FYE23 and no debt repayment obligations for FY24 and FY25.

Financial Comparison (Half-Yearly Results - Figures in Rs. Crores)

The following table compares the operating profit, operating profit margin (OPM), interest, depreciation, profit before tax (PBT), tax percentage, and earnings per share (EPS) for different half-yearly periods1:

Metric Mar 2023 Sep 2023 Mar 2024 Sep 2024
Operating Profit 305 349 190 176
OPM % 5% 22% 26% 5%
Interest 1 1 1 1
Depreciation 9 5 4 3
Profit Before Tax 7 71 46 6
Tax % 31% 29% 30% -34%
EPS in Rs 1.90 19.27 13.10 3.35
  • There is a significant increase in operating profit and profit before tax from March 2023 to September 2023.
  • The OPM also shows a marked increase in September 2023 and March 2024, before falling back to 5% in September 2024.
  • The tax percentage fluctuates, with a negative tax rate in Sep 2024, which could indicate tax benefits or adjustments.
  • EPS shows a similar trend, peaking in September 2023 and subsequently declining.

Financial Performance (Annual - Figures in Rs. Crores)

The following table highlights key financial metrics from 2018 through the trailing twelve months (TTM):

Metric Mar 2018 Mar 2019 Mar 2020 Mar 2021 Mar 2022 Mar 2023 Mar 2024 TTM
Operating Profit 25 21 19 3 13 24 126 60
OPM % 11% 10% 10% 2% 5% 5% 23% 16%
Profit before tax -0 9 7 0 8 9 117 52
EPS in Rs -0.33 2.39 1.97 0.17 2.20 2.54 33.38 16.45
Compounded Sales Growth 3 Years 52% -44%
Compounded Profit Growth 3 Years 500% -27%
Return on Equity Last Year 67%
  • There is a significant increase in operating profit, OPM, profit before tax and EPS in the year ending March 2024.
  • The three year compounded sales and profit growth rates are high, but the latest TTM figures show a decline.
  • Return on equity is very high for the last year.

Pros of Petro Carbon & Chemicals Ltd (PCCL)

  • Reduced Debt: The company has successfully reduced its debt.
  • Good Profit Growth: PCCL has demonstrated strong profit growth, with a 67.7% Compound Annual Growth Rate (CAGR) over the last 5 years.
  • Strong Return on Equity (ROE): The company has a good track record of ROE, with a 3-year ROE of 34.2%3 and a last year ROE of 67%
  • Reduced Working Capital Requirements: The company has reduced its working capital requirements from 122 days to 76 days.
  • Free Cash Flow Yield: 11.3% [Frankly speaking this blew my head off]

Cons of Petro Carbon & Chemicals Ltd (PCCL)

  • No Dividend Payout: Despite reporting repeated profits, the company is not paying out any dividends.
  • Possible Capitalization of Interest Cost: The company might be capitalizing its interest costs. This could mean that the company is adding borrowing costs to the value of its assets, which can inflate profits on paper.
  • Increased Debtor Days: The number of days it takes for the company to collect payments from its debtors has increased from 29.9 to 41.9 days. This means it is taking longer to receive money for goods and services sold.

Additional Points

  • Current Market Metrics: As of the latest update, the current stock price is ₹200, with a high of ₹383 and a low of ₹193. The stock’s P/E ratio is 12.2, and its book value is ₹68.7.
  • ROCE: The company has a Return on Capital Employed of 50.6%.
  • Shareholding Pattern: The majority of shares (73.21%) are held by promoters, with the remaining shares held by the public and others.

Disclosure

I do not invest in SME but this looks promising, hadn’t take the position yet but inclined to take one.

References

https://www.indiaratings.co.in/pressrelease/69252
https://www.screener.in/company/PCCL/

Thanks for the effort.
Although Co appears delivered on growth and other return ratios, few points are still monitorable for me.
a. The profitability and margins have been very volatile due to fluctuations in raws.
b. The Co carries significant client concentration, as 90-95% of revenues are derived from just 2 clients (Hindalco & Nalco) with short term order pipeline up to 5 months only.
c. Forex risk you have already covered. It is to be noted that it made forex losses in the last 3 fiscals.
d. There is limited information available as the management does not provide any investor presentation or investor calls.

Discl: Not invested / Will not invest