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Graphite India - Muted results for this quarter…
Graphite India Ltd (GIL) reported muted numbers for Q3FY11. The
topline registered some improvement (up 4% YoY and 21% QoQ) led by
an increase in graphite electrode volumes (up ~7% QoQ and 34% YoY)
aided by improved capacity utilisation levels at ~84% despite moderate
electrode realisations. EBITDA margins saw a sharp erosion (down
~440 bps QoQ and ~1510 bps YoY) due to a spike in raw material cost
(up ~15% QoQ and 65% YoY) partially led by rising non-needle coke
input costs, fuel cost (up 15% QoQ and 106% YoY) and one-time rise in
employee costs. PAT also fell ~ 10% QoQ and 29% YoY partially due to
lower other income component (down ~73% QoQ) and high
operational costs (up ~50% YoY and ~10% QoQ). We expect a stable
performance, going ahead, based on improved volumes from the EAF
segment and stable electrode pricing regime. Also, we expect some
nominal decline in needle coke prices based on yearly contractual rates
for FY12E as guided by the management. We have revised our target
price to | 91/ share and assigned an ADD rating to the stock.
Capex, improved volumes to be key driver
Progress on the expansion of the Durgapur plant by 20,000 MT
continues as per schedule. It is expected to be complete by Q3FY12
taking the total capacity towards 1,00,000 MTPA. The new 50 MW
thermal power plant project is expected to be commissioned by
Q4FY12. Capacity utilisation levels jumped to ~84% for Q3FY11
from ~58% a year ago, thus lending credence to the upward bias on
the volume front.
Valuation
At the CMP of | 83, the stock is discounting its FY12E EPS by 8.2x and
FY12E EV/EBITDA by 4.1x. We expect the company to operate at above
70% capacity utilisation levels in FY12E on an improved demand scenario
from EAF-based units and a stable electrode pricing regime. We have
valued the stock at 4x FY12E EV/EBITDA (35% discount to the global
average) to arrive at a revised target price of | 91. We have assigned an
ADD rating to the stock.
Result Analysis
Q3FY11 electrode volume growth increased by 34% YoY and 7% QoQ,
offset to some extent by a moderation in electrode prices. The
moderation in electrode prices, rising non-needle coke input costs and
one-time rise in employee costs impacted margins in Q3FY11. Net profit
margins were also impacted by lower electrode pricing and higher nonneedle
coke costs apart from reduced other income component.
Recent developments and our assumptions
• Average capacity utilisation levels (currently at 84%) are expected
to remain at ~70% levels in FY12 due to expected increased
demand for graphite electrodes in line with the improving EAF
based steel production globally
• An improved volume performance can be expected from FY12
onwards led by electrode capacity expansion plan of 20,000 MT
expected to be completed by Q3FY12 involving an outlay of ~|
255 crore
• Also, the 50 MW thermal power plant at Durgapur will be
commissioned by Q4FY12, thus taking care of power
requirements of the Durgapur plant post expansion involving an
outlay of ~| 214 crore
• It has reduced power costs through a tie-up with the Wardha
Power Co for the Nashik plant, which will be on stream from
Q1FY12
• 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
• A strong balance sheet with low leverage and large cash reserves
along with steady cash flow generation provides flexibility for
organic and inorganic expansion
Outlook & Earnings Revision
Due to the global economic recession, demand for electrodes is currently
less than total installed capacity of 1.2 MT of which UHP capacity is 0.9
MT. World crude steel production reached 1,414 million metric tonnes
(MMT) for 2010. This was an increase of 15% compared to 2009. All
major steel-producing countries and regions showed double-digit growth
in 2010. The EU and North America had higher growth rates due to the
lower base effect from 2009 while Asia and the CIS recorded relatively
lower growth. In December 2010, world crude steel production for the 66
countries reporting to the World Steel Association (worldsteel) was 116.2
MMT, an increase of 7.8% compared to December 2009. The crude steel
capacity utilisation ratio of the 66 countries in December 2010 declined
slightly to 73.8% compared to 75.2% in November 2010. Though there
have been some concerns on the recovery process in the 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 (currently accounting for ~31% of total
steel based capacity). We have factored in the concerns of some
slowdown in graphite demand into our estimates. Despite that, however,
we expect the company to showcase a stable performance. We have
provided our estimates for FY11E PAT with 19.5% upside and ~13.5%
upside for FY12E.
Valuations
At the CMP of | 83, the stock is discounting its FY12E EPS by 7.0x and
FY12E EV/EBITDA by 4.1x. We expect the company to operate at ~ 70%
capacity utilisation levels in FY12E on improved EAF based demand and
value the stock at 4.0x FY12E EV/EBITDA (35% discount to global
average). We have arrived at a revised target price of | 91 and assigned
an ADD rating to the stock.
Exhibit 6: Global peer valuation
(| Cr) FY12E
EBITDA (Cons.) 444.5
EV/EBITDA (x) 4
EV 1777.9
Less: Net debt -2.1
Total market cap 1779.9
No. of shares (Cr) 19.5
Total value/share (|) 91.1
Source: Company, ICICIdirect.com Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Graphite India - Muted results for this quarter…
Graphite India Ltd (GIL) reported muted numbers for Q3FY11. The
topline registered some improvement (up 4% YoY and 21% QoQ) led by
an increase in graphite electrode volumes (up ~7% QoQ and 34% YoY)
aided by improved capacity utilisation levels at ~84% despite moderate
electrode realisations. EBITDA margins saw a sharp erosion (down
~440 bps QoQ and ~1510 bps YoY) due to a spike in raw material cost
(up ~15% QoQ and 65% YoY) partially led by rising non-needle coke
input costs, fuel cost (up 15% QoQ and 106% YoY) and one-time rise in
employee costs. PAT also fell ~ 10% QoQ and 29% YoY partially due to
lower other income component (down ~73% QoQ) and high
operational costs (up ~50% YoY and ~10% QoQ). We expect a stable
performance, going ahead, based on improved volumes from the EAF
segment and stable electrode pricing regime. Also, we expect some
nominal decline in needle coke prices based on yearly contractual rates
for FY12E as guided by the management. We have revised our target
price to | 91/ share and assigned an ADD rating to the stock.
Capex, improved volumes to be key driver
Progress on the expansion of the Durgapur plant by 20,000 MT
continues as per schedule. It is expected to be complete by Q3FY12
taking the total capacity towards 1,00,000 MTPA. The new 50 MW
thermal power plant project is expected to be commissioned by
Q4FY12. Capacity utilisation levels jumped to ~84% for Q3FY11
from ~58% a year ago, thus lending credence to the upward bias on
the volume front.
Valuation
At the CMP of | 83, the stock is discounting its FY12E EPS by 8.2x and
FY12E EV/EBITDA by 4.1x. We expect the company to operate at above
70% capacity utilisation levels in FY12E on an improved demand scenario
from EAF-based units and a stable electrode pricing regime. We have
valued the stock at 4x FY12E EV/EBITDA (35% discount to the global
average) to arrive at a revised target price of | 91. We have assigned an
ADD rating to the stock.
Result Analysis
Q3FY11 electrode volume growth increased by 34% YoY and 7% QoQ,
offset to some extent by a moderation in electrode prices. The
moderation in electrode prices, rising non-needle coke input costs and
one-time rise in employee costs impacted margins in Q3FY11. Net profit
margins were also impacted by lower electrode pricing and higher nonneedle
coke costs apart from reduced other income component.
Recent developments and our assumptions
• Average capacity utilisation levels (currently at 84%) are expected
to remain at ~70% levels in FY12 due to expected increased
demand for graphite electrodes in line with the improving EAF
based steel production globally
• An improved volume performance can be expected from FY12
onwards led by electrode capacity expansion plan of 20,000 MT
expected to be completed by Q3FY12 involving an outlay of ~|
255 crore
• Also, the 50 MW thermal power plant at Durgapur will be
commissioned by Q4FY12, thus taking care of power
requirements of the Durgapur plant post expansion involving an
outlay of ~| 214 crore
• It has reduced power costs through a tie-up with the Wardha
Power Co for the Nashik plant, which will be on stream from
Q1FY12
• 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
• A strong balance sheet with low leverage and large cash reserves
along with steady cash flow generation provides flexibility for
organic and inorganic expansion
Outlook & Earnings Revision
Due to the global economic recession, demand for electrodes is currently
less than total installed capacity of 1.2 MT of which UHP capacity is 0.9
MT. World crude steel production reached 1,414 million metric tonnes
(MMT) for 2010. This was an increase of 15% compared to 2009. All
major steel-producing countries and regions showed double-digit growth
in 2010. The EU and North America had higher growth rates due to the
lower base effect from 2009 while Asia and the CIS recorded relatively
lower growth. In December 2010, world crude steel production for the 66
countries reporting to the World Steel Association (worldsteel) was 116.2
MMT, an increase of 7.8% compared to December 2009. The crude steel
capacity utilisation ratio of the 66 countries in December 2010 declined
slightly to 73.8% compared to 75.2% in November 2010. Though there
have been some concerns on the recovery process in the 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 (currently accounting for ~31% of total
steel based capacity). We have factored in the concerns of some
slowdown in graphite demand into our estimates. Despite that, however,
we expect the company to showcase a stable performance. We have
provided our estimates for FY11E PAT with 19.5% upside and ~13.5%
upside for FY12E.
Valuations
At the CMP of | 83, the stock is discounting its FY12E EPS by 7.0x and
FY12E EV/EBITDA by 4.1x. We expect the company to operate at ~ 70%
capacity utilisation levels in FY12E on improved EAF based demand and
value the stock at 4.0x FY12E EV/EBITDA (35% discount to global
average). We have arrived at a revised target price of | 91 and assigned
an ADD rating to the stock.
Exhibit 6: Global peer valuation
(| Cr) FY12E
EBITDA (Cons.) 444.5
EV/EBITDA (x) 4
EV 1777.9
Less: Net debt -2.1
Total market cap 1779.9
No. of shares (Cr) 19.5
Total value/share (|) 91.1
Source: Company, ICICIdirect.com Research
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