Rating: Hold; Target Price: Rs93; CMP: Rs89; Upside: 4.6%
Margins dip due to weak realizations; maintain hold
We maintain Hold rating on Graphite India Ltd (GIL) with a target
price of Rs93 as operating environment remains challenging for the
company with subdued demand and weak pricing due to increased
competition among global electrode players. FY14 results disappointed
due to sharp drop in realizations and EBITDA was lower by 7.7% YoY on
a consolidated basis as overseas subsidiary recorded losses. We cut
our consolidated EBITDA estimates by 5.4%/6.1% for FY15E/16E on
account of lower realizations and higher costs. Reduction in debt led
by working capital release, strong balance sheet and good dividend
yield are key positives, but valuations at 6.1x FY15E EV/EBITDA leave
limited upside. Recommend a switch to Vesuvius India.
$ Utilizations pick up QoQ, but realizations dip sharply: Capacity
utilization for Q4 stood at 83% (up from 70% in Q3) but realizations
fell by ~9% QoQ due to severe competition among electrode producers
globally for greater market share. Global steel production growth
remains subdued (ex-China) despite improvements in Europe and
management commentary of various producers indicate further weakness
in realizations going ahead.
$ EBITDA margin drops sharply, working capital release reduces debt:
EBITDA was flat QoQ at Rs682mn (vs exp: Rs767mn) and margin dropped by
160bps QoQ to 14.3% (vs exp: 16.6%) due to sharp fall in electrode
realizations and higher other expenses. Cons EBITDA in FY14 was lower
by ~7.7% YoY led by subdued standalone performance and losses at the
European subsidiary. GIL reduced its gross debt on a consolidated
basis from ~Rs7.1bn to Rs4.3bn on the back of working capital release
(led mainly by inventory reduction of needle coke).
$ Earnings revised downwards due to lower realizations: Management has
guided for capacity utilization of ~70% in FY15 while realizations are
expected to remain muted due to high competition. We see pressure on
volumes and realizations due to weak demand and high competition and
reduce our consolidated EBITDA estimates by 5.4%/6.1% for FY15E/16E.
We build in capacity utilizations of 70%/72% for standalone operations
and 55%/60% for overseas subsidiary for FY15E/16E. We factor in lower
debt and reduced working capital requirements going ahead.
$ Valuations – maintain Hold: We like the strong balance sheet and
good dividend yield of the company, but see current valuation at 6.1x
FY15E EV/EBITDA offering limited upside potential, particularly in a
weak global demand environment. We maintain Hold with a revised target
price of Rs93 (based on 6x FY16E EV/EBITDA) as the stock lacks
positive triggers. Recommend a switch to Vesuvius India in steel
consumables space. 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
��
Margins dip due to weak realizations; maintain hold
We maintain Hold rating on Graphite India Ltd (GIL) with a target
price of Rs93 as operating environment remains challenging for the
company with subdued demand and weak pricing due to increased
competition among global electrode players. FY14 results disappointed
due to sharp drop in realizations and EBITDA was lower by 7.7% YoY on
a consolidated basis as overseas subsidiary recorded losses. We cut
our consolidated EBITDA estimates by 5.4%/6.1% for FY15E/16E on
account of lower realizations and higher costs. Reduction in debt led
by working capital release, strong balance sheet and good dividend
yield are key positives, but valuations at 6.1x FY15E EV/EBITDA leave
limited upside. Recommend a switch to Vesuvius India.
$ Utilizations pick up QoQ, but realizations dip sharply: Capacity
utilization for Q4 stood at 83% (up from 70% in Q3) but realizations
fell by ~9% QoQ due to severe competition among electrode producers
globally for greater market share. Global steel production growth
remains subdued (ex-China) despite improvements in Europe and
management commentary of various producers indicate further weakness
in realizations going ahead.
$ EBITDA margin drops sharply, working capital release reduces debt:
EBITDA was flat QoQ at Rs682mn (vs exp: Rs767mn) and margin dropped by
160bps QoQ to 14.3% (vs exp: 16.6%) due to sharp fall in electrode
realizations and higher other expenses. Cons EBITDA in FY14 was lower
by ~7.7% YoY led by subdued standalone performance and losses at the
European subsidiary. GIL reduced its gross debt on a consolidated
basis from ~Rs7.1bn to Rs4.3bn on the back of working capital release
(led mainly by inventory reduction of needle coke).
$ Earnings revised downwards due to lower realizations: Management has
guided for capacity utilization of ~70% in FY15 while realizations are
expected to remain muted due to high competition. We see pressure on
volumes and realizations due to weak demand and high competition and
reduce our consolidated EBITDA estimates by 5.4%/6.1% for FY15E/16E.
We build in capacity utilizations of 70%/72% for standalone operations
and 55%/60% for overseas subsidiary for FY15E/16E. We factor in lower
debt and reduced working capital requirements going ahead.
$ Valuations – maintain Hold: We like the strong balance sheet and
good dividend yield of the company, but see current valuation at 6.1x
FY15E EV/EBITDA offering limited upside potential, particularly in a
weak global demand environment. We maintain Hold with a revised target
price of Rs93 (based on 6x FY16E EV/EBITDA) as the stock lacks
positive triggers. Recommend a switch to Vesuvius India in steel
consumables space. 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
No comments:
Post a Comment