Graphite India BUY. Performance Highlights. CMP Target Price `88 `109. 1QFY2012 Result Update Capital Goods

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1 1QFY2012 Result Update Capital Goods July 25, 2011 Graphite India Performance Highlights Y/E March (` cr) 1QFY2012 4QFY2011 % chg (qoq) 1QFY2011 % chg (yoy) Net sales EBITDA EBITDA (%) (9)bp 23.0 (371)bp PAT (17.2) For 1QFY2012, Graphite India (GIL) posted top line of `319cr (`258cr), registering an increase of 23.3% yoy, which was below our expectation owing to the lockdown in its Powmex Steel Division. EBITDA margin contracted by 371bp yoy to 19.3%. Despite contraction in OPM, PAT increased by 7.2% to `37cr (`34cr), owing to higher sales. Going ahead also, the scenario is positive, as steel production has started again in June and is showing a strong rising trend. We maintain our Buy recommendation on the stock. BUY CMP Target Price Investment Period Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code `88 ` Months Capital goods 1, / , ,871 5,680 GRPH.BO GRIL@IN Strong sales growth but margin declines: GIL reported strong sales growth in 1QFY2012. Revenue increased by 23.3% yoy and 5.1% qoq to `319cr, despite a lockdown in its steel division, which started production post June this quarter. The steel division s revenue declined by 58.4% yoy to `9cr. OPM declined marginally by 9bp qoq to 19.3%. PAT increased by 7.2% yoy but declined by 17.2% qoq on the back of lower other income. Consequently, PAT margin declined by 312bp qoq to 11.6% (14.7%). Outlook and valuation: We remain positive on the prospects of GIL, owing to strong demand from steel manufacturers. Realisations are also set to increase, as global players have hiked their prices recently. Overall, we expect sales to post a 19.2% CAGR over FY E and PAT to increase at a 26.2% CAGR over the same period. At the CMP, the stock is trading at attractive valuations of 0.9x its FY2013E BV, respectively. We have valued the stock at its five-year median of 1.2x from earlier 1.3x one-year forward book value to arrive at a target price of `109 (`123). We maintain our Buy recommendation on the stock Key financials (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E Net sales 1,347 1,444 1,721 2,053 % chg (10.1) Net profit % chg 0.3 (19.5) EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Shareholding Pattern (%) Promoters 57.2 MF / Banks / Indian Fls 14.9 FII / NRIs / OCBs 18.0 Indian Public / Others 9.9 Abs.(%) 3m 1yr 3yr Sensex (3.6) Graphite (8.9) (14.7) 53.6 Sharan Lillaney Ext: 6811 Sharanb.lillaney@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 1QFY2012 performance (Standalone) Y/E March (` cr) 1QFY2012 4QFY2011 % chg (qoq) 1QFY2011 % chg (yoy) FY2011 FY2010 % chg Net Sales ,223 1, Consumption of RM (% of Sales) bp bp bp Staff Costs (4.8) (% of Sales) (68)bp 7.5 (102)bp bp Other Expenses (% of Sales) (91)bp bp bp Total Expenditure Operating Profit (27.2) OPM (9)bp 23.0 (371)bp (1,092)bp Interest 3 3 (5.4) (52.0) Depreciation (0.5) Other Income 7 17 (59.0) PBT (excl. Extr. Items) (11.4) (25.2) Extr. Income/(Expense) (13) - PBT (incl. Extr. Items) (11.4) (28.8) (% of Sales) Provision for Taxation (34.3) (% of PBT) Reported PAT (17.2) (25.8) PATM (312)bp 13.3 (174)bp (643)bp Equity shares (cr) EPS (`) (17.2) 2.0 (6.2) (35.0) Adjusted PAT (17.2) (20.3) Segment-wise performance The graphite and carbon segment posted a 28.3% yoy increase in revenue to `272cr (`212cr). Sequentially, the increase was decent, with sales increasing by 8.3% qoq. The segment posted an EBIT margin of 18.8% (22.3%), down 350bp yoy, but only marginally declined by 68bp qoq. The power segment posted a 13.4% yoy decline in revenue to `6cr (`7cr). Generation of power at hydro electrical plants is seasonal in nature. EBIT margin for the segment came in at 63.4%, up by 615bp yoy. The steel segment s sales declined by 58.4% yoy to `9cr (`22cr), as the plant was locked down from March 2011 to June 2011 due to labour-related incidents. Consequently, the segment posted a loss of `1.8cr at the EBIT level, compared to a profit of `0.3cr. However, the plant has started production once again from June and, thus, we believe in the coming quarters the company s revenue as well as margin will improve. Sale of others segment increased by 52.9% yoy to `39cr (`25cr). EBIT margin contracted by 391bp yoy to 18.8% (22.7%). July 25,

3 Exhibit 2: Segment-wise performance Y/E March (` cr) 1QFY2012 4QFY2011 1QFY2011 % chg (qoq) % chg (yoy) Total Revenue A) Graphite & Carbon B) Power (43.9) (13.4) C) Steel (6.1) (58.4) D) Others (12.4) 52.9 Total Less: Inter-Segmental Rev (42.4) (6.9) Net Sales EBIT Margin (%) A) Graphite & Carbon (68)bp (350)bp B) Power (358)bp 615bp C) Steel (19.9) (6.3) 1.3 (1,364)bp (2,123)bp D) Others (987)bp (391)bp Strong revenue growth at 23.3% yoy GIL has maintained a strong growth rate in sales over the past few quarters. In 1QFY2012, the top line increased by 23.3% yoy to `319cr, despite negligible contribution from the steel division. However, the steel division has started production in June and, thus, we expect the company to resume its sales growth in the quarters to come, with the outlook for world steel production remaining strong over the next few years. Exhibit 3: Sales trend (` cr) QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 (%) 4QFY11 1QFY12 EBITDA (LHS) OPM (RHS) OPM flat on a qoq basis EBITDA increased by 3.4% yoy and 4.6% qoq to `61cr on the back of higher revenue during the quarter. OPM declined by mere 9bp on a qoq basis during the quarter to 19.3% (19.4%). We expect OPM margin to increase in the coming quarters, with the steel division starting production once again. The division reported EBIT loss during the quarter, which will not be the case in the coming quarters. July 25,

4 Exhibit 4: OPM trend (` cr) QFY10 3QFY10 4QFY10 1QFY11 2QFY11 (%) 3QFY11 4QFY11 1QFY12 EBITDA (LHS) OPM (RHS) PAT increases yoy but margin declines PAT for the quarter came in at `37cr compared to `34cr in 1QFY2011, up 7.2%. PAT margin declined by 174bp yoy despite higher OPM contraction during the quarter on the back of higher other income and lower tax provision. Other income increased by 140% yoy to `7cr (`3cr). Tax rate declined to 17.5% from 20.1%. Exhibit 5: PAT trend QFY10 3QFY10 4QFY10 1QFY11 2QFY11 (` cr) 3QFY11 4QFY11 1QFY12 July 25,

5 Investment arguments GIL set to ride on the industry's rebound: The graphite electrodes industry is expected to grow faster, compared to EAF steel production over the next few years, as the de-stocking of graphite electrodes inventory at the steel manufacturers' end is expected to reverse. GIL, with a capacity expansion from 78,000mt/year to 98,000mt/year, to be completed by FY2012E, is well poised to reap the benefits of this growth. We expect GIL s market share to increase to 9.7% by FY2013E and top line to grow at a 19.3% CAGR over FY E due to this expansion. Strong labour cost advantages: GIL has strong labour cost advantages compared to its global peers, as other companies have their plants in locations where labour costs are significantly higher compared to India. SGL Carbon SE, the largest global player, has plants located mainly across Europe and North America. GrafTech Ltd., the world s second largest player, has plants located in France, Spain, South Africa, Brazil and Mexico. In FY2011, GIL's employee cost was ~9% of sales, whereas it was almost 27% (CY2010) for SGL. Historically, GIL has passed on a part of this advantage to gain market share. However, with the rate of market share addition expected to slow down, we expect GIL to retain a larger part of this cost advantage and, thereby, improve its margins over historical average levels. Strong entry barriers: The global graphite electrodes industry is characterised by a high level of consolidation, with the top six players accounting for over 70% of the world s total installed capacity. The balance capacity is owned by motley of small players. The highly consolidated nature of the industry is due to the barriers for new entrants. For instance, only the top global players have the technology to manufacture high-quality ultra high power (UHP) graphite electrodes. The industry is marked by a relationship and referral-based model. A new entrant has to prove the quality of its products by supplying to a steel manufacturer and then get referral and word-of-mouth publicity for the products from the manufacturer. Another barrier for new as well as some of the existing players is the high cost of setting up a greenfield graphite electrodes manufacturing facility. Outlook and valuation We remain positive on the prospects of GIL, owing to strong demand from steel manufacturers. Realisations are also set to increase, as global players have hiked their prices recently. Overall, we expect sales to post a 19.2% CAGR over FY E and PAT to increase at a 26.2% CAGR over the same period. At the CMP, the stock is trading at attractive valuations of 0.9x its FY2013E BV, respectively. We have valued the stock at its five-year median of 1.2x from earlier 1.3x one-year forward book value to arrive at a target price of `109 (`123). We maintain our Buy recommendation on the stock July 25,

6 Exhibit 6: One-year forward P/BV band Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Price (`) Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Price 0.2x 0.5x 0.8x 1.1x 1.5x Source: Company, Bloomberg, Angel Research July 25,

7 Profit and loss (consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E Gross sales 1,388 1,558 1,394 1,501 1,814 2,165 Less: Excise duty Net Sales 1,331 1,498 1,347 1,444 1,721 2,053 % chg (10.1) Total Expenditure 1,054 1, ,136 1,327 1,528 Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (22.3) (% of Net Sales) Depreciation& Amortisation EBIT % chg (25.1) (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg (20.7) (21.4) Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Prior period items (0) (1) PAT after MI (reported) ADJ. PAT % chg (3.2) (19.5) (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (36.2) 43.9 (6.6) (9.6) July 25,

8 Balance sheet (consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus 725 1,085 1,249 1,483 1,623 1,810 Shareholders Funds 755 1,119 1,283 1,522 1,662 1,849 Total Loans Deferred Tax Liability (Net) Total Liabilities 1,444 1,709 1,681 1,924 2,466 2,653 APPLICATION OF FUNDS Gross Block ,010 1,047 1,267 1,507 Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets 1,133 1,336 1,230 1,448 1,761 2,073 Cash Loans & Advances Inventories ,079 1,288 Debtors Other Current liabilities Net Current Assets 798 1, ,084 1,330 1,561 Total Assets 1,444 1,709 1,681 1,924 2,466 2,653 July 25,

9 Cash flow statement (consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E Profit before tax Depreciation (Inc.)/ Dec. in Working Capital (92) (103) (23) (140) (172) 205 Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (21) (165) (21) (119) (350) 22 (Inc.)/ Dec. in Investments 5 5 (86) (38) - - (Inc.)/ Dec. in loans and advances 10 (24) 13 (28) (28) 34 Other income Cash Flow from Investing 23 (158) (62) (150) (344) (22) Issue of Equity Inc./(Dec.) in loans (86) (91) (204) Dividend Paid (Incl. Tax) Others (11) 1 - Cash Flow from Financing (111) 120 (264) (114) Inc./(Dec.) in Cash (25) 111 (97) (32) 46 (9) Opening Cash balances Closing Cash balances July 25,

10 Key ratios (consolidated) Y/E March FY08 FY09 FY10 FY11 FY12E FY13E Valuation Ratio (x) P/E (on FDEPS) P/E (on basic, reported EPS) P/CEPS P/BV Dividend yield (%) Market cap. / Sales EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value ROE Decomposition (%) EBIT margin Tax retention ratio ROCE (Post Tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC ROE Turnover ratios (x) Asset Turnover (Gross Block) Asset Turnover (Net Block) Operating Income / Invested Capital Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) July 25,

11 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Graphite India 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) July 25,