Initiating Coverage
Graphite India Ltd
Buy
Target Price: Rs113
CMP: Rs83.8
Upside: 34.7%
Strong operations with niche capabilities
We view Graphite India Ltd (GIL) as a global graphite electrodes manufacturer having strong operations with niche capabilities and excellent track record of earnings and related dividends. We note that the company i) has achieved smart build-up in capacity and is expected to witness steady volume growth, ii) has plants at strategic port based locations and captive CP coke which provides cost benefits, iii) possesses strong balance sheet with good dividend payout record and iv) has diversification benefits from high speed steel & other businesses. We expect EBITDA CAGR of 10% during FY12-15E and initiate coverage with a BUY rating and a target price of Rs113.
m Higher volumes through expansion; stable pricing seen ahead: GIL has achieved a smart build-up in capacity at its manufacturing facility in Durgapur through the Brownfield route and we expect 9% YoY increase in consolidated volumes to 75000 tonne in FY14E from 68700 tonne in FY13E. Prices of graphite electrodes are expected to remain flat to marginally positive whereas needle coke prices are expected flat for CY13E.
m Strategic plant locations and CP coke capacity provide key cost savings: Port based plant locations of GIL and CP coke capacity of 30000 tonne (60% merchant sales and rest captive use) results in key cost savings and provides key competitive edge. GIL has been able to keep costs under tight control despite raw material cost escalations and has maintained strong margins.
m Oligopolistic graphite electrode industry provides future scope: Graphite electrodes industry is highly oligopolistic in nature with only a handful of players having access to the guarded manufacturing technology. With share of EAF route in global steelmaking expected to increase due to cheap availability of scrap, electrode demand is expected to remain robust in the next 5-7 years. New EAF capacity set up expected in China & Middle-East provides future scope.
m Strong balance sheet and attractive track record: GIL boasts of a strong balance sheet with net debt:equity at 0.2x. Free cash flow generation is expected to remain strong as capex program is getting completed by the end of FY13E. GIL has maintained a strong track record of earnings in the past and has outperformed its domestic and global peers operationally. Dividend payout is attractive with 30% payout ratio and ~4% dividend yield.
m Diversification through high speed steel & other businesses: Apart from graphite electrodes and carbon business, GIL has diversified into other businesses of high speed steel (HSS), impervious graphite equipments (IGE) and GRP pipes & tanks. Steel and other businesses have accounted for 15-20% of overall EBIT for GIL in the last few years. This provides GIL with key business diversification and reduces volatility of earnings.
m Valuations – attractive, initiate with a Buy: GIL currently trades at attractive valuations despite having sound fundamentals and scope of higher volumes through expansion and cost savings through economies of scale. We have valued the company using average of EV/EBITDA & P/E methodology. We initiate coverage with a target price of Rs113 and recommend Buy.
m Key Risks: Lower demand of electrodes due to fall in EAF steel production, increase in needle coke prices, sharp fall in electrode prices and sharp adverse currency movements.
m Strategic plant locations and CP coke capacity provide key cost savings: Port based plant locations of GIL and CP coke capacity of 30000 tonne (60% merchant sales and rest captive use) results in key cost savings and provides key competitive edge. GIL has been able to keep costs under tight control despite raw material cost escalations and has maintained strong margins.
m Oligopolistic graphite electrode industry provides future scope: Graphite electrodes industry is highly oligopolistic in nature with only a handful of players having access to the guarded manufacturing technology. With share of EAF route in global steelmaking expected to increase due to cheap availability of scrap, electrode demand is expected to remain robust in the next 5-7 years. New EAF capacity set up expected in China & Middle-East provides future scope.
m Strong balance sheet and attractive track record: GIL boasts of a strong balance sheet with net debt:equity at 0.2x. Free cash flow generation is expected to remain strong as capex program is getting completed by the end of FY13E. GIL has maintained a strong track record of earnings in the past and has outperformed its domestic and global peers operationally. Dividend payout is attractive with 30% payout ratio and ~4% dividend yield.
m Diversification through high speed steel & other businesses: Apart from graphite electrodes and carbon business, GIL has diversified into other businesses of high speed steel (HSS), impervious graphite equipments (IGE) and GRP pipes & tanks. Steel and other businesses have accounted for 15-20% of overall EBIT for GIL in the last few years. This provides GIL with key business diversification and reduces volatility of earnings.
m Valuations – attractive, initiate with a Buy: GIL currently trades at attractive valuations despite having sound fundamentals and scope of higher volumes through expansion and cost savings through economies of scale. We have valued the company using average of EV/EBITDA & P/E methodology. We initiate coverage with a target price of Rs113 and recommend Buy.
m Key Risks: Lower demand of electrodes due to fall in EAF steel production, increase in needle coke prices, sharp fall in electrode prices and sharp adverse currency movements.
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