Multi Baggers

Graphite India Limited

Company Overview:

Incorporated in 1974 Graphite India Limited (GIL) is a part of K.K. Bangur Group. The company mainly manufactures graphite electrode and has a capacity of 98,000 metric tons. Besides it is engaged in the manufacturing of impervious graphite equipments, high speed steel (HSS), alloy steel, GRP/ERP (glass-reinforced plastic/ pipes and tanks and also has power generation capacity of 33 MW. It is the leading graphite electrode manufacturer in India (including German subsidiary) and 5th largest player across the globe.

GIL manufactures the full range of graphite electrodes but stays focused on the higher margin, large diameter, ultra-high power ("UHP") electrodes. It also manufactures Calcined Petroleum Coke ("CPC") for use in electrode manufacturing. It is enhancing its presence in value added graphite products for the auto, aerospace, chemical, pharmaceutical, metallurgical and machine tool industries.

Client base: Graphite India's impressive and diversified client base includes few of the most respected names in the steel industry, such as Alta Steel, North Star Bluescope, Nucor Group, SDI Group, Sterling Steel, Acerinox, ArcelorMittal, Beltrame, Riva, Tata Corus, Al Ezz Group, Emirates Steel, Qatar Steel, Essar Steel, JSPL, JSW Steel, SAIL, Tata Steel (India), Hyundai Steel, Perwaja Steel, Posco Steel etc.

Financial Analysis:

Softer growth: In Q3FY14, Graphite India reported softer revenue growth mainly due to flat export volumes as operating revenue increased by 1.25 percent YoY but decreased by 1.46 percent QoQ to Rs 4344.5mn.

Margins and profit: EBITDA margin was 15.76 percent as against 15.54 percent in Q3FY13 and 18.6 percent in Q2FY14 as EBITDA was Rs 684.9mn which was up by 2.73 percent YoY but was down by 16.27 percent QoQ. Backed by lower interest and tax PAT grew by 22.17 percent YoY but it witnessed sequential drop of 5.28 percent.

Capacity utilization: As of Q3FY14, YTD capacity utilization rate for FY14 was 68 percent.

Positives:

Increasing popularity of EAF manufacturing facilities: Steel manufacturing companies with electric arc furnace (EAF) are the only consumers of graphite electrodes and popularity of EAF manufacturing practice is increasing due to awareness for environment, significant lower pollution, low capital costs for EAF production and lower fixed costs of production.

With global steel producers shifting to EAF manufacturing route, the share of steel produced via the EAF process is projected to contribute over 50 percent of global steel production by 2020 from the current level of 30 percent.

Higher barrier to entry: Manufacturing of the high end UHP electrodes is technology intensive process and is a major barrier for new entrants in the industry.

Improving global economy: US economy is improving and Euro Zone is also coming on track.

Strong balance sheet: As on September 2013, the net debt stood at Rs. 2.13bn and thus GIL seems to be well placed to meet any additional capital requirement for organic as well as inorganic growth when opportunities arise.

Valuations:

The stock is trading at Rs 86.90 which is 12.5 times FY13 EPS. Based on the potential of better growth in future we give a buy recommendation for the stock at target price of Rs 110 that values the stock at 14.9x FY14E EPS and 13.3x FY15E EPS.