Graphite India Ltd: Strong operations with niche capabilities :: Centrum

Strong operations with niche capabilities
We interacted with the management (Mr. S. Chaudhary, SVP,
Corporate) of Graphite India Ltd (GIL) to get recent updates on the
business and market for graphite electrodes globally. Key takeaways
are as follows:

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Graphite electrodes and carbon division remains the key segment for GIL and
contributed ~85% of revenues in FY12. This is expected to see more than 10%
growth in FY13E and account for ~90% of revenues in FY13E on account of increase
in graphite electrode sales. Steel, impervious graphite equipment and other divisions
accounted for the remaining 15% of revenues in FY12.
The company expects graphite electrode volumes to grow by more than 10% YoY in
FY13E on the back of expansion in capacity by 20000 tonne at its Durgapur plant.
Durgapur expansion is expected to be on-stream in H2FY13E and contribute ~5000
tonne in FY13E. On the existing 60000 tonne capacity in India, the company expects
~100% capacity utilization in FY13E.
GIL is catering to the European market solely from its subsidiary in Germany (Cap:
18000 tonne) and expects lower capacity utilization in FY13E due to slowdown in
demand. Capacity utilization in the German subsidiary stood at 70% in FY12.
Graphite electrode prices for FY13E are expected to be higher by ~10% YoY based on
bookings done for H1FY13E. New order bookings for H2FY13E have slowed down
but prices have not come down and only stagnated at higher levels than FY12.
The company has built up significant inventories of key raw material Needle Coke
during the last two years and has also tied up for its FY13E requirements with global
suppliers at new contract prices, which have been settled at ~20% higher YoY. GIL
expects to benefit in cost from earlier low cost inventories of needle coke.
Power is procured by GIL from state SEBs and power purchase cost at Durgapur plant
is ~Rs4.2/unit and at Nasik plant above Rs6/unit.
Gross debt at Rs6bn is expected to remain stable in FY13E and come down in FY14E.
Cash balance is strong at ~Rs2.6bn. Average cost of debt is ~6% due to low interest
ECB debt of US$30mn (LIBOR + 2.1%), debt for German subsidiary of ~Rs1bn at ~4%
and working capital debt in the form of PCFC (packing credit in foreign currency) at
~3%. Total working capital debt stands at ~Rs2.8bn and Yield on cash balance is
~9%.
GIL has no further expansions planned after commissioning 20000 tonne capacity at
Durgapur and is expected to incur only maintenance capex of ~Rs200mn going
ahead.
Overall, the company is guiding towards maintaining FY12 operating margins and
revenue and expects profit growth to continue in FY13E on the back of higher sales
volumes of graphite electrodes.
Updates on Graphite Electrode Industry by GIL
o EAF production share in China’s overall production is increasing steadily due to
higher availability of scrap and this is expected to make up for the shortfall in
EAF production from developed markets (particularly Europe).
o Demand from Middle-East, Asia and domestic market remains robust due to
increasing EAF production share.
o No new capacity in graphite electrodes is slated to be on-stream in the next few
years. Only a relocation of existing capacity by SGL to Malaysia is expected going
ahead.
o Chinese graphite electrode producers don’t have the technology to produce
UHP grade electrodes and are present only in the outdated HP electrodes.
Valuations - At the CMP of Rs88, the stock is trading at 8.1x FY12E cons. EPS of Rs10.9.
Dividend for FY12 stood at Rs3.5/share (yield of ~4% and ~30% of PAT). We currently
don’t have a rating on the stock.