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Impressive run rate to continue…
Graphite India Ltd (GIL) reported good set of numbers for Q2FY11.
Topline registered stellar growth (up 16% YoY and 25% QoQ) led by
increase in graphite electrode volumes (up 48% YoY and 34% QoQ).
This was backed by improved capacity utilisation levels at 78% and
stable electrode realisations. EBITDA margins also saw decent gains (up
~42% QoQ) but remained muted YoY (down ~23%). Increase in raw
material cost (up ~25% QoQ and 37% YoY), fuel cost (up 26% QoQ and
45% YoY) and one-time charge for the Bangalore plant restructuring led
to decline in margins. PAT grew ~ 43% QoQ primarily due to reduced
interest outgo on account of repayment of loans and conversion of
FCCBs. We expect good run to continue based on improved volumes
from EAF segment and stable electrode pricing regime. Also, we do not
expect any significant jump in needle coke prices based on yearly
contractual rates. We have revised our target price to Rs 107/share and
assigned BUY rating to the stock.
Capacity expansion, improved utilisation to drive volumes
Progress on expansion of Durgapur plant by 20,000 MT continued
as per schedule. It is expected to be complete by Q3FY12 taking the
total capacity towards 1,00,000 MT per annum. The new 50 MW
thermal power plant project is expected to be commissioned by
Q4FY12. Capacity utilisation levels jumped to ~78% for Q2FY11
from ~58% a year ago, thus lending credence to the upward bias on
the volume front.
Valuation
At CMP of Rs 94, stock is discounting its FY12E EPS by 11.6x and FY12E
EV/EBITDA by 4.8x. We expect company to operate at above 70%
capacity utilisation levels in FY12E due to improved demand scenario
from EAF based units and stable electrode pricing regime. We have
valued the stock at 5.5x FY12E EV/EBITDA (15% discount to global
average) to arrive at revised target price of Rs 107 and assigned BUY
rating to the stock.
Recent developments and our assumptions
• Average capacity utilisation levels (currently at 78%) are expected
to improve further due to expected increased demand for
graphite electrodes in line with the improving EAF-based steel
production globally
• Improved volume performance can be expected from FY12
onwards led by electrode capacity expansion plan of 20,000 MT
expected to be complete by Q3FY12. Also, 50 MW thermal power
plant at Durgapur will be commissioned by Q4FY12, thus taking
care of the power requirements of Durgapur plant post expansion
• Company implemented VRS scheme at its Bangalore facility,
which is expected to result in cost savings of approximately Rs 6
crore annually. VRS programme resulted in a one-time charge of
Rs 12.7 crore during Q2FY11
• Interest cost is expected to remain low as already seen in Q2FY11
due to retirement of long-term debt and conversion of most of the
outstanding FCCBs
• Strong balance sheet with low leverage and large cash reserves
along with steady cash flow generation provides flexibility for
organic and inorganic expansion going forward.
Outlook & Earnings Revision
Due to global economic recession, demand for electrodes is currently less
than the total installed capacity of 1.2 MT of which UHP capacity is 0.9
MT. Although global steel production continues to recover post
recession, there were signs of moderating growth during Q2FY11 (down
by ~ 6.7% QoQ at 339 MT). However, global steel production for the first
nine months of CY10 increased by 20.3% from 869 MT in CY09 to 1046
MT in CY10. This has benefited the graphite electrode industry with sales
volume continuing to rise. Also, China and Turkey showed increased
crude steel production in August 2010 on a YoY basis. US, Germany,
Italy, Brazil and Japan, however, are not yet back to the pre-crisis
production levels. Overall capacity utilisation in the steel industry was
74% in September 2010, a decline from peak utilisation of 82% in April
2010. Though there have been some concerns on the recovery process in
developed countries, we believe EAF-based steel production growth will
remain strong enough to help the graphite electrode industry see some
recovery during the later half of this fiscal. We have factored in the
concerns of slowdown in graphite demand into our estimates. Despite
that, however, we expect the company to showcase a decent
performance. We have maintained our estimates for FY11E PAT with
2.3% upside and revised our PAT estimates lower by 5.9% for FY12E.
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