Graphite India Ltd. October 24, Unprecedented, sustainable windfall. CMP INR 448 Target INR 593 Result Update - BUY

Transcription

1 October 24, 2017 Graphite India Ltd. Unprecedented, sustainable windfall CMP INR 448 Target INR 593 Result Update - BUY Key Share Data Face Value (INR) 2.0 Equity Capital (INR Mn) Market Cap (INR Mn) 87, Week High/Low (INR) 492/70 6 months Avg. Daily Volume (BSE) 191,529 BSE Code NSE Code Reuters Code Bloomberg Code Shareholding Pattern (as on Sept 2017) 14% 21% Source: Company 65% Key Financials (INR Million) GRAPHITE Promoter FII/MF GRPH.NS GRIL:IN Puiblic & Other Particulars FY16 FY17 FY18E FY19E Net Sales 15, , , ,929.0 Growth (%) -10.4% -4.3% 45.2% 106.4% EBITDA 1, , ,716.2 PAT , ,073.3 Growth (%) 6.7% 11.6% 426.1% 179.1% EPS (INR) BVPS (INR) Key Financials Ratios Particulars FY16 FY17 FY18E FY19E P/E (x) P/BVPS (x) Mcap/Sales (x) EV/EBITDA (x) ROCE (%) 3.5% -0.3% 16.2% 38.2% ROE (%) 3.2% 3.5% 16.2% 35.0% EBITDA Mar (%) 9.1% 2.6% 23.8% 33.5% PAT Mar (%) 4.0% 4.7% 17.0% 22.9% Debt - Equity (x) Source: Company, SKP Research Analysts: Nikhil Saboo Tel No: ; Mobile: nikhil.saboo@skpmoneywise.com Anik Das Tel No: ; Mobile: anik.das@skpmoneywise.com Company Background & Product Highlights Graphite India Limited (GIL), incorporated in 1974, is promoted by Mr K K Bangur of Kolkata, is the largest graphite electrodes (GE) producer in India and third largest globally, with an installed capacity of 98,000 mtpa and co-generation power capacity of 33 MW (19.5 MW hydel capacity & 13.5 MW multi-fuel routes) spread over four locations viz. Durgapur (W.B.), Bangalore (Karnataka), Nasik (Maharashtra) and Nurnberg (Germany). GE are essential for making steel through electric arc furnace (EAF) route. Investment Rationale Global industry consolidation/capacity closures, recent environmental clamp down in China and rise of EAFs rapidly reversing demand-supply equilibrium, creates an unprecedented windfall, structurally taking graphite electrodes industry towards an unprecedented, yet sustainable boom. Global GE capacity has been ~ mtpa (ex-china) while demand was only ~ mtpa; resulting in not so happy times for the GE industry. In recent years, global GE industry witnessed supply side restructuring. Muted GE prices led to closure of ~190,000 mtpa GE capacity. Global industry consolidation has also resulted in capacity rationalisation. In 2015, Graftech (largest player) was acquired by Brookfield PE Fund. Germany s SGL s GE business, is being acquired by SDK of Japan. Recent environmental clampdown on China s polluting GE units has not only resulted in withdrawal of whatever low grade GE China was selling in global markets, it has also created additional global demand for GE to serve Chinese markets. China has also enforced shut down of its highly polluting and inefficient induction furnace based steel capacities by June 2017, which resulted in closure of ~100 million mtpa steel making capacity. To use its scrap steel, this capacity is now getting replaced with EAF route of steel making, requiring GE. Several countries like Turkey used billets, primarily sourced from China, in the intermediate stage of steel making. Environmental clamp down has led to withdrawal of ~20 million mtpa of Chinese billets from global markets. This has also lead to such countries moving towards EAF route of steel making, avoiding use of billets. Recently, Graftech has invoked force majeure suggesting disruption in GE supply during Nov/Dec17 due to Hurricane Harvey impacting its needle coke facilities in Texas. Result: Whilst global GE capacity is down to ~ MTPA (ex-china), demand has risen to ~ MTPA and is likely to exceed supply in the near future. Unprecedented spike in GE prices - an immediate and sustainable windfall, structurally taking GE industry to a completely new boom phase In our Initiating Coverage Report (March 17) and Q1/FY17 Results Update (Aug 17), prevailing price of GE was ~$2350/mt and we presumed it scaling upto $5000/mt by year end. Due to recent developments mentioned above, GE prices have already doubled to over $8000/mt and have given unprecedented pricing power to GE producers, making us believe that a major structural boom has just begun. With no fresh GE capacity expected to come up in near future, this may be a sustainable boom. Revival of global steel industry provides a tail wind. However, since GE prices are contracted a year in advance, we expect benefits of higher price to start only from Q3/FY18 and a full blown benefit from the subsequent quarter. Conservatively, average GE price for FY19 could be above $8000/MT. Meanwhile, taking benefit of the boom in the hitherto only consuming industry, the three Needle Coke (key raw material for GE) manufacturers in the world have also started raising prices. However, increase in GE prices, constituting a miniscule cost in steel production, will more than offset this price rise of needle coke. Strong quarter; CU and operational efficiencies to improve from current levels During Q2FY18, GIL reported net sales of Rs 4,619 mn, registering growth of ~44.5% y-o-y basis due to substantial improvement in realisations. Going forward, we expect GIL to report robust earnings growth led by significant higher pricing and higher volumes. We expect CU levels to improve from ~75% in FY17 to ~86% in FY19E and sales to grow at ~73% CAGR during FY17-19E to ~Rs 44 bn. Its margins are likely to improve significantly backed by improvement in utilization rate and operational efficiency. We expect GIL s EBITDA margins to improve to 33.5% by FY19E. Valuation GIL is well positioned to capitalize on the positive structural changes witnessed by the graphite electrode industry. GIL stock has seen an up move recently led by strong uptick in electrode prices. We believe there is still scope for re-rating due to the emerging structural and sustainable boom times. We have valued the stock on the basis of EV/EBITDA of 7x of FY19E EBITDA and recommend a BUY on the stock with a target price of Rs 593/- (~32% upside) in 18 months. SKP Securities Ltd Page 1 of 7

2 Q2FY18 Result Update: Exhibit: Q2FY18 Result Review (Figs. in Rs Million) Standalone Particulars Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%) 6MFY18 6MFY17 YoY (%) Net Sales 4, , % 3, % 8, , % Total Income 4, , % 3, % 8, , % Expenditure 3, , % 3, % 6, , % Material Consumed 1, , % 1, % 2, , % (as a % of *NS) 31.8% 42.2% 36.5% 33.8% 44.6% Changes in inventories (160.3) (4.9) (42.3) (202.6) (78.2) (as a % of *NS) -3.5% -0.2% -1.2% -2.5% -1.3% Employees Cost % % % (as a % of *NS) 9.7% 11.6% 11.7% 10.6% 12.1% Other Expenses 1, , % 1, % 3, , % (as a % of *NS) 33.8% 41.9% 42.9% 37.7% 40.5% EBITDA 1, % % 1, % EBITDA M argin (%) 28.1% 4.4% 2,372 Bps 10.1% 1,801 Bps 20.4% 4.1% 1,621 Bps Depreciation % % % EBIT 1, % % 1, % Other Income % % % Interest Expense % % % Profit Before Tax 1, % % 1, % Income Tax % % % Effective Tax Rate (%) 33.7% 35.2% % % 35.5% - Profit After Tax (PAT) % % 1, % PAT M argins (%) 19.4% 4.9% 1,445 Bps 8.26% 1,111 Bps 14.69% 4.45% 1,024 Bps Diluted EPS % % % Source: Company Data, SKP Research,*NS-Net Sales SKP Securities Ltd Page 2 of 7

3 Sensitivity Analysis: Exhibit: Sensitivity of GIL FY19E EBIDTA & EPS - With the change in Net Realization/tonne and Dispatch Volume (MT) % Change in Net Realization Change (%) -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% -3% 12, , , , , , ,677.6 EBITDA (Figs in Rs Million) -2% 12, , , , , , , % 13, , , , , , , % 13, , , , , , , % 13, , , , , , , % 14, , , , , , , % 14, , , , , , , % % EPS (Figs in Rs) -1% % % % % Source: Company Strong balance sheet augurs well; dividend payout attractive: GIL boasts a strong balance sheet with gross debt of Rs 1.8 bn and cash & cash equivalents of ~Rs 7.9 bn resulting in a net cash of ~Rs 6 bn at the end of Q2FY18. GIL has continuously rewarded shareholders in form of higher dividends, despite the cyclical nature of the business. For FY17, the company has paid a dividend of 100 percent (Rs 2/share), thereby delivering a current dividend yield of ~1.9 percent. Going forward, we believe GIL would continue to pay higher dividends, which would enhance overall returns of the shareholders. SKP Securities Ltd Page 3 of 7

4 Valuations GIL is well positioned to capitalize on the positive structural changes witnessed by the graphite electrode industry. GIL stock has seen an up move recently led by strong uptick in electrode prices. We believe there is still scope for re-rating due to the emerging structural and sustainable boom times. We have valued the stock on the basis of EV/EBITDA of 7x of FY19E EBITDA and recommend a BUY on the stock with a target price of Rs 593/- (~32% upside) in 18 months. Exhibit: Valuation Charts 50.0 Rolling forward EV/EBITDA(x) chart Oct-12 Dec-12 Mar-13 May-13 Jul-13 Oct-13 Dec-13 Feb-14 May-14 Jul-14 Sep-14 Nov-14 Feb-15 Apr-15 Jun-15 Sep-15 Nov-15 Jan-16 Apr-16 Jun-16 Aug-16 Oct-16 Jan-17 Mar-17 May-17 Aug-17 Oct-17 Fwd EV/EBITDA Mean EV/EBITDA EV/EBITDA+1sd Source: Company, SKP Research Risks & Concerns Lower than expected EAF production and electrode demand We expect the global steel production through EAF route to increase steadily in the next few years on increased availability of scrap as well as flexible production process. But, lowerthan-expected EAF steel production could potentially result in lower graphite electrode demand and affect the sales volume and profit of the graphite producers negatively. Limited supply of needle coke The supply of needle coke required to manufacture graphite electrodes remains scarce and is in the hands of three producers globally. Meanwhile, taking benefit of the boom in the hitherto only consuming industry, the Needle Coke (key raw material for GE) manufacturers in the world have also started raising prices, backed by them finding Lithium Batteries manufactured in China as an alternative consuming industry. Thus, sourcing adequate quantity of Needle Coke will remain a challenge going forward. Adverse currency movements The GIL has major dependence on exports of graphite electrodes to various steel players across the globe which exposes them to adverse currency risk despite the natural hedge to some extent on imported raw material and foreign currency liabilities. Any major fluctuations in currency can negatively impact the earnings of the company. SKP Securities Ltd Page 4 of 7

5 Exhibit: Income Statement Figures in INR Million Exhibit: Balance Sheet Figures in INR Million Particulars FY16 FY17 FY18E FY19E Particulars FY16 FY17 FY18E FY19E Total Income 15, , , ,929.0 Share Capital Growth (%) -10.4% -4.3% 45.2% 106.4% Reserve & Surplus 17, , , ,301.8 Expenditure 13, , , ,212.8 Shareholders Funds 17, , , ,692.5 Material Cost 5, , , ,814.5 Total Debt 3, , , Traded goods 1, Minority Interest Employee Cost 2, , , ,075.0 Total Liabilities 20, , , ,191.6 Admin & Other Exp. 5, , , ,884.0 EBITDA 1, , ,716.2 Net Block inc. Capital WIP Depreciation Deferred Tax (Net) EBIT , ,249.1 Non-Current Assets 16, , , ,306.6 Other Income ,054.3 Inventories 7, , , ,170.3 Interest Expense Sundry Debtors 4, , , ,462.6 Profit Before Tax (PBT) 1, , ,262.5 Cash & Bank Balance , ,463.9 Income Tax , ,189.3 Other Current Assets Profit After Tax (PAT) , ,073.3 Current Investments 3, , , ,990.1 Growth (%) 6.7% 11.6% 426.1% 179.1% Current Liabilities & Prov 2, , , ,974.7 Diluted EPS Total Assets 20, , , ,191.6 Exhibit: Cash Flow Statement Figures in INR Million Exhibit: Ratio Analysis Particulars FY16 FY17 FY18E FY19E Particulars FY16 FY17 FY18E FY19E Profit Before Tax (PBT) 1, , ,620.8 Earning Ratios (%) Depreciation EBITDA Margin (%) 9.1% 2.6% 23.8% 33.5% Finance Costs 90.4 (78.9) (49.7) (40.9) PAT Margins (%) 4.0% 4.7% 17.0% 22.9% Chg. in Working 3, , , ,031.6 ROCE (%) 3.5% -0.3% 16.2% 38.2% Capital Direct Taxes Paid (515.3) (12.9) (1,859.2) (5,307.2) ROE (%) 3.2% 3.5% 16.2% 35.0% Other Charges Per Share Data (INR) Operating Cash Flows 2, , , ,724.3 Diluted EPS Capital Expenditure (556.8) (59.1) (57.1) Cash EPS (CEPS) Investments (591.7) (2,427.4) (2,000.0) (1,680.0) BVPS Others ,054.3 Valuation Ratios (x) Investing Cash Flows (872.4) (1,969.9) (1,128.1) (684.0) P/E Changes in Equity Price/BVPS Inc / (Dec) in Debt (980.0) (510.0) (1,096.3) (1,087.5) EV/Sales Dividend Paid (inc tax) (930.6) (400.9) (400.9) (400.9) EV/EBITDA Financing Cash Flows (1,910.7) (910.9) (1,097.2) (1,488.4) Mcap/Sales (x) Net Cashflow (104.4) ,322.8 Balance Sheet Ratios Opening Cash Balance ,141.1 Debt - Equity Cashflow during the (104.4) ,322.8 Current Ratio year Closing Cash Balance , ,463.9 Asset Turn. Ratios Source: SKP Research SKP Securities Ltd Page 5 of 7

6 Notes: The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg and Thomson First Call. DISCLAIMER: This document has been prepared by SKP Securities Ltd, hereinafter referred to as SKP to provide information about the company(ies)/sector(s), if any, covered in the report and may be distributed by it and/or its affiliates. SKP Securities Ltd., offers broking and depository participant services and is regulated by Securities and Exchange Board of India (SEBI). It also distributes investment products/services like mutual funds, alternative investment funds, bonds, IPOs, etc., renders corporate advisory services and invests its own funds in securities and investment products. We declare that no material disciplinary action has been taken against SKP by any regulatory authority impacting Equity Research Analysis. As a value addition to its clients, it offers its research services and reports in various formats to its clients and prospects. As such, SKP is making these disclosures under SEBI (Research Analysts) Regulations, Terms & Conditions and Other Disclosures: This research report ( Report ) is for the personal information of the selected recipient(s), does not construe to be any investment, legal or taxation advice, is not for public distribution and should not be copied, reproduced or redistributed to any other person or in any form without SKP s prior permission. The information provided in the Report is from publicly available data, which we believe, are reliable. While reasonable endeavours have been made to present reliable data in the Report so far as it relates to current and historical information, but SKP does not guarantee the accuracy or completeness of the data in the Report. Accordingly, SKP or its promoters, directors, subsidiaries, associates or employees 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 and views and opinions expressed in this publication. Past performance mentioned in the Report should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by SKP and are subject to change without notice. The price, value of and income from any of the securities mentioned in this report can rise or fall. The Report includes analysis and views of individual research analysts (which, hereinafter, includes persons reporting to them) covering this Report. The Report is purely for information purposes. Opinions expressed in the Report are SKP s or its research analysts current opinions as of the date of the Report and may be subject to change from time to time without notice. SKP or any person connected with it does not accept any liability arising from the use of this document. Investors should not solely rely on the information contained in this Report and must make investment decisions based on their own investment objectives, judgment, risk profile and financial position. The recipients of this Report may take professional advice before acting on this information. SKP, along with its affiliates, are engaged in various financial services and so might have financial, businesses or other interest in other entities, including the subject company or its affiliates mentioned in this report, for which it might have received any compensation in the past twelve months. SKP does not provide any merchant banking or market making service and does not manage public offers. However, SKP encourages independence in preparation of research reports and strives to minimize conflict in preparation of research reports. SKP and its analysts did not receive any compensation or other benefits from the subject company mentioned in the Report or from a third party in connection with preparation of the Report. Accordingly, SKP and its Research Analyst do not have any material conflict of interest at the time of publication of this Report. SKP s research analysts may provide input into its other business activities. Investors should assume that SKP and/or its affiliates are seeking or will seek business assignments from the company(ies) that are the subject of this material and that the research analysts who are involved in preparing this material may educate investors on investments in such businesses. The research analysts responsible for the preparation of this document may interact with trading desk/sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research analysts are paid on the profitability of SKP, which may include earnings from business activities for which this Report is being used, but not for the preparation of this report. SKP generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any company(ies) that the analyst covers. Additionally, SKP generally, prohibits its analysts and persons reporting to analysts from serving as an officer, director or advisory board member of any companies that the analyst cover. The following Disclosure of Interest Statement, clarifies it further: SKP and/or its Directors/or its affiliates or its Research Analyst(s) engaged in preparation of this Report or his/her relative (i) do not own 1% or more of the equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report (ii) do not have any financial interests in the subject company mentioned in this report (iii) do not have any other material conflict of interest at the time of publication of the research report. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. SKP Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014 having registration no. INH SKP Securities Ltd Page 6 of 7

7 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst about the subject securities or issues, which are subject to change without prior notice and does not represent to be an authority on the subject. No part of the compensation of the research analyst was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst in this report. The research analysts, strategists, or research associates principally responsible for preparation of SKP research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. Disclosure of Interest Statement Analyst ownership of the stock Served as an officer, director or employee NIL NIL SKP Securities Ltd Contacts Research Sales Mumbai Kolkata Mumbai Kolkata Phone Fax Institutional & Retail Broking Wealth Advisory & Distribution Investment Banking Member: NSE BSE NSDL CDSL INB/INF: , NSECDS NSE , BSE INB: , CDSL DPID: , IN-DP , NSDL DP ID: IN302646, IN-DP-NSDL: , ARN: 0006 SKP Securities Ltd Page 7 of 7