Graphite India (CAREVE) 75

Transcription

1 Result Update Rating matrix Rating : Buy Target : 85 Target Period : 12 months Potential Upside : 13% What s Changed? Target Changed from 90 to 85 EPS FY16E Changed from 4.8 to 5.4 EPS FY17E Changed from 7.6 to 8.0 Rating Unchanged Quarterly Performance (Standalone) Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key Financials ( Crore) FY14 FY15E FY16E FY17E Total Operating Income EBITDA Net Profit EPS Valuation summary FY14 FY15E FY16E FY17E PE (x) Target PE (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalisation 1466 Crore Debt (FY15P) 186 Crore Cash & Cash Equivalent (FY15P) 401 Crore EV 1250 Crore 52 week H/L 95/64 Equity capital 39.1 Crore Face value 2 Price performance (%) Return % 1M 3M 6M 12M HEG Graphite India Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com Performs well November 10, 2015 Graphite India (CAREVE) 75 Graphite India reported a healthy set of Q2FY16 numbers wherein the topline came in broadly in line with our estimate while EBITDA and PAT came in notably higher than our estimates. Healthy performance for the quarter was primarily driven by lower raw material costs Topline for the quarter came in at crore, down 19.9% YoY and 1.3% QoQ and broadly in line with our estimate of crore EBITDA came in at 46.4 crore, up 16.6% YoY, 39.3% QoQ and was than our estimate of 37.3 crore. The EBITDA margin came in at 14.6%, up 430 bps QoQ, 460 bps YoY and better than our estimate of 12%. Operating margins benefited from lower input costs, mainly in needle coke prices Other income came in at 8.7 crore, up 88.9% YoY and 93.1% QoQ and better than our estimate of 4.6 crore. Other income came in higher than our estimate due to favourable exchange rate movement during the quarter Ensuing PAT for the quarter came in at 27.7 crore, up 38.0% YoY, 70.2% QoQ and better than our estimate of 18.7 crore Realisations under pressure on account of muted demand scenario Globally, steel is produced via two main routes: the blast furnace - basic oxygen furnace (BF-BOF) route and electric arc furnace (EAF) route. Graphite electrodes are used in the EAF route of steel making. In CY13, steel produced through the electric arc furnace (EAF) process constituted ~27.4% of total crude steel production. On the back of a slowdown in China, the global steel Industry is undergoing challenging times. A decline in steel produce through the EAF route has adversely impacted the prospects of the graphite electrodes sector. A muted demand scenario has resulted in subdued realisations of graphite electrodes. Decline in needle coke to aid margin expansion Despite muted graphite electrode prices, Graphite India s operating margin is likely to improve due to a steep decline in prices of needle coke, a key raw material used in graphite electrode manufacturing. On the back of a decline in prices of key raw material viz. needle coke, we expect consolidated EBITDA margins to increase from 8.0% in FY15 to 12.5% in FY16E and further to 14.5% in FY17E. Debt reduction augurs well for company Better working capital management led to a reduction in debt levels for the company. On a consolidated basis, the company has become a net cash company from a net debt company at the end of FY14. We expect consolidated net cash and cash equivalents balance to increase to 226 crore at the end of FY16E and further to 302 crore an the end of FY17E. Operating margins to remain healthy Graphite India reported a healthy Q2FY16 performance on the back of lower raw material costs, primarily needle coke. Going forward, we expect Graphite India s operating margin to remain healthy as it secured needle coke supplies until the end of FY16, which are at lower prices compared to FY15. We value the company at a discount of 30% to its global peer s CY16E average EV/EBITDA of 8.4x (declined from 8.9x earlier). Consequently, we value the company at 5.9x FY17E EV/EBITDA. We arrive at a target price of 85 assigning a BUY rating to the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY16 Q2FY16E Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue Topline came in broadly in line with our estimates Other Income Other income came in higher than our estimate due to favorable exchange rate movements Employee Expense Raw Material Expense Raw material expense came in lower than our estimate Power & Fuel Expense Power and fuel expenses came in lower than our estimate Other operating expenses Other operating expenses came in higher than our estimate EBITDA EBITDA came in higher than our estimate EBITDA Margin (%) bps bps EBITDA margin came in higher than our estimate Depreciation Depreciation charge came in line with our estimate Interest Exceptional Items NA 0.0 PBT PBT came in higher than our estimate Tax Outgo PAT The ensuing PAT came in higher than our estimate Key Metrics Capacity Utilisation Level (%) ; Domestic Operations Capacity utilisation came in marginally lower than our estimate Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 1, , , , Broadly maintained topline estimates EBITDA EBITDA revised upwards due to lower raw material costs EBITDA Margin (%) bps bps EBITDA margin revised upwards due to lower needle costs PAT PAT revised upwards EPS ( ) Assumptions Current Earlier FY15 FY16E FY17E FY16E FY17E Consolidated capacity utilisation Maintained estimates Comments ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis The company is a leading manufacturer of graphite electrode with an installed capacity of 98,000 tonne per annum (TPA). The installed capacity in India is 80,000 tonne of which 54,000 tonne is in Durgapur, tonne in Nashik and tonne in Bangalore. GIL also owns a plant in Nurnberg (Germany) with an installed capacity of 18,000 tonne. The company commissioned its last capacity expansion in Q1FY14 wherein it installed a capacity of 20,000 tonne at its Durgapur plant while incurring a capex of 255 crore. Exhibit 1: Graphite electrode capacity production & utilisation rate (standalone basis) On a standalone basis, we expect capacity utilisation of 67% in FY16E and 73% in FY17E tonne % 0 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E 0 Capacity Production Utilization rate Exhibit 2: Capacity & utilisation rates (Consolidated basis) On a consolidated basis, we expect capacity utilisation of 65% in FY16E and 70% in FY17E. The management has guided for a capacity utilisation of ~65-70% for FY16E tonne FY2014 FY2015 FY2016E FY2017E % Capacity Production Utilization rate Segmental performance Apart from operating the graphite electrode facility, the company also operates a carbon paste facility, calcined petroleum coke facility and some graphite equipment facility. GIL also possesses a high speed steel and alloy steel facility. Exhibit 3: Graphite electrode & steel segment EBIT performance (standalone basis) EBIT margins of the graphite electrode segment declined from 18.0% in FY14 to 10.7% in FY15. EBIT margins of the steel segment declined from 17.5% in FY14 to 8.1% in FY15 % FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Graphite & Carbon Steel ICICI Securities Ltd Retail Equity Research Page 3

4 Debt reduction augurs well for company Better working capital management has led to a reduction in debt levels for the company. On a consolidated basis, the company has become a net cash company from a net debt company at the end of FY14. We expect consolidated net cash and cash equivalents balance to increase to 226 crore at the end of FY16E and further to 302 crore at the end of FY17E. Exhibit 4: Gross debt & net debt movement crore FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E Gross Debt Net Debt ICICI Securities Ltd Retail Equity Research Page 4

5 Outlook and valuation Graphite India reported a healthy performance for Q2FY16 on the back of lower raw material costs, primarily needle coke. Going forward, we expect Graphite India s operating margin to remain healthy as it secured needle coke supplies until the end of FY16, which are at lower prices compared to FY15. We value the company at a discount of 30% to its global peer s CY16E average EV/EBITDA of 8.4x (declined from 8.9x earlier). Consequent, we value the company at 5.9x FY17E EV/EBITDA. We arrive at a target price of 85 assigning a BUY rating to the stock. Exhibit 5: Peer comparison P/E EV/EBITDA Company CY14 CY15E CY16E CY14 CY15E CY16E SGL NA NA Tokai Carbon Showa Denko Global Average CY16E Global Average EV/EBITDA 8.4 Source: Bloomberg, ICICIdirect.com Research Exhibit 6: Valuation matrix Revenue ( Cr) Growth (%) EPS ( ) Growth (%) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%) FY FY FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 5

6 Company snapshot Target Price: Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Aug-08 Global financial crisis adversely impacts construction sector and capital spending. Production cuts taken across the globe on subdued demand Mar-09 The company acquires Powmex Steels (specialty steel business) unit from GKW Feb-10 Fire breaks out in pipe unit factory yard of the company Mar-10 Converts bonds into shares. Sets bond conversion price at 55.3 Dec-10 European Union renews tariffs on graphite electrodes from India (tariff at 9.4%) Mar-11 GIL declares lockout at Titlagarh unit post labour unrest at its plant site Jun-11 Titlagarh unit resumes production post settlement with labour unions including increase in wages & other benefits Mar-12 GIL sells its entire stake in its subsidiary Carbon International (engaged in trading activities only) for 4.6 million ( 30 crore) Jul-12 Karnataka State Pollution Control Board orders the company to shut operations in its Bangalore plant till further orders, citing environmental pollution Aug-12 GIL resumes operations at its Bangalore plant after obtaining stay on the pollution control board order for closure of its plant at Bangalore Sep-12 The company's international peer Graftech expected to hike electrode prices for 2013 contracts Nov-13 Global players announce production cuts to support graphite electrode prices Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Emerald Co., Ltd. 30-Sep Kiwi Investments, Ltd. 30-Sep Fidelity Management & Research Company 30-Sep Edgbaston Investment Partners Limited 30-Sep SBI Funds Management Pvt. Ltd. 30-Sep Life Insurance Corporation of India 30-Sep CD Equifinance Pvt. Ltd. 30-Sep The New India Assurance Co. Ltd. 30-Sep Retail Employees Superannuation Pty. Ltd. 30-Sep Royce & Associates, LLC 30-Sep Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Daiwa Asset Management (India) Private Limited 0.52m 0.50m Likhami Leasing, Ltd m m Emerald Co., Ltd. 0.11m 0.11m H L Investment Co., Ltd m m Guardian Leasing, Ltd m -2.64m SCL Investments Pvt. Ltd m -1.41m Royce & Associates, LLC -0.61m -0.59m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary Profit and loss statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Total Operating Income 2, , , ,596.9 Growth (%) Raw Material Expenses Employee Expenses Other expenses Total Operating Expenditure 1, , , ,364.8 EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional Item Total Tax PAT Growth (%) EPS ( ) Cash flow statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax Add: Depreciation (Inc)/dec in Current Asset Inc/(dec) in CL & Provision Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & div. tax Inc/(dec) in Share Cap Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet ( crore) (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus 1, , , ,733.9 Total Shareholders funds 1, , , ,773.0 Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities 2, , , ,882.2 Assets Gross Block 1, , , ,437.7 Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory 1, Debtors Loans and Advances Other Current Assets Cash Total Current Assets 1, , , ,404.7 Current Liabilities Provisions Current Liabilities & Prov Net Current Assets 1, , Others Assets Application of Funds 2, , , ,882.2 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 7

8 ICICIdirect.com coverage universe (Graphite Electrodes) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) ROCE(%) ROE(%) Sector/Company ( ) TP ( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Grahite India Buy HEG Hold ICICI Securities Ltd Retail Equity Research Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9

10 ANALYST CERTIFICATION We /I, Dewang Sanghavi, MBA (FIN) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Dewang Sanghavi, MBA (FIN) research analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Dewang Sanghavi, MBA (FIN) research analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. ICICI Securities Ltd Retail Equity Research Page 10