Graphite India - Q3FY14 Result Update - Sharp fall in realization disappoints; maintain Hold : Centrum

Rating: Hold; Target Price: Rs77; CMP: Rs69.5; Upside: 10.8%



Sharp fall in realization disappoints; maintain Hold



We maintain Hold rating on Graphite India Ltd (GIL) with a target
price of Rs77 as operating environment remains challenging for the
company with increased competition among global electrode players
(despite oligopolistic nature of the industry). Q3 results
disappointed despite marginally better volumes due to sharp
realization fall (~4.5% QoQ) which led to EBITDA fall of ~16% QoQ. We
cut our consolidated EBITDA estimates by 4.7%/7.9% for FY14E/15E on
account of lower realizations and higher other expenses.  Reduction in
working capital debt, strong balance sheet and good dividend yield are
key positives but valuations at 5.6x FY15E EV/EBITDA leave limited
upside.

$ Realizations dip sharply, volumes remain muted: Capacity utilization
stood at 70% (up from 66% in Q2) thereby keeping electrode volumes
muted (marginally lower YoY). Realizations fell by ~4.5% QoQ due to
severe competition among producers and discounts offered by global
majors in order to capture greater market share. Global steel
production growth remained subdued (ex-China) and management indicated
that substantial demand improvements were required from the developed
world for ensuring pricing discipline by producers.

$ EBITDA margin drops sharply but inventory clearance picks up speed:
EBITDA fell by ~16% QoQ to Rs685mn (vs exp: Rs797mn) and margin
dropped by 310bps QoQ to 15.9% (vs exp: 17.9%) due to sharp fall in
electrode realizations and higher other expenses (increase in freight
charges and commissions for export sales). GIL has indicated that
working capital was being brought down through clearance of high
needle coke inventories and no new purchases of needle coke are being
undertaken. This has resulted in debt reduction of ~Rs0.9bn during the
quarter.

$ Earnings revised downwards due to lower realizations: High
competition among producers (despite oligopolistic nature of the
industry) is resulting in lower than expected realizations. Domestic
operations capacity utilization guidance remains muted at ~65% while
the overseas subsidiary is operating at sub 50% utilization. We see
pressure on volumes and realizations due to weak demand and high
competition and reduce our consolidated EBITDA estimates by 4.7%/7.9%
for FY14E/15E. We however, reduce our estimates of working capital
requirements and build faster debt reduction on account of strong cash
flow generation and no incremental capex.

$ Valuations - Upside remains capped: We like the strong balance sheet
and good dividend yield of the company but see current valuation at
5.6x FY15E EV/EBITDA offering limited upside potential, particularly
in a weak global demand environment. We shift our valuation base to
Dec'15E and continue to value the company at 5.5x EV/EBITDA to arrive
at a target price of Rs77. Maintain Hold. Key upside risks are better
volumes & higher realizations while downside risks are further
investments at the overseas subsidiary to fund losses and lower
realizations.



Thanks & Regards

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