Result Update Rating matrix Rating : Buy Target : 94 Target Period : 12 months Potential Upside : 15% What s Changed? Target Changed from 105 to 94 EPS FY16E Changed from 7.4 to 6.5 EPS FY17E Changed from 9.6 to 8.6 Rating Unchanged Quarterly Performance Q4FY15 Q4FY14 YoY (%) Q3FY15 QoQ (%) Revenue 415.7 489.0-15.0 314.1 32.3 EBITDA 36.1 68.1-47.0 41.7-13.4 EBITDA (%) 8.7 13.9-525 bps 13.3-459 bps PAT 14.2 44.9-68.4 20.4-30.3 Key Financials ( Crore) FY14 FY15E FY16E FY17E Total Operating Income 2009.3 1710.7 1690.3 1867.8 EBITDA 250.1 131.8 202.6 254.7 Net Profit 129.9 52.6 127.9 167.8 EPS 6.6 2.7 6.5 8.6 Valuation summary FY14 FY15E FY16E FY17E PE (x) 12.3 30.4 12.5 9.6 Target PE (x) 14.1 34.8 14.3 10.9 EV/EBITDA (x) 6.6 12.7 7.5 5.2 P/BV (x) 0.9 0.9 0.9 0.9 RoNW (%) 7.4 3.0 7.4 9.2 RoCE (%) 8.8 4.2 7.9 11.2 Stock data Particular Amount Market Capitalisation 1602 Crore Debt (FY15P) 367 Crore Cash & Cash Equivalent (FY15P) 401 Crore EV 1568 Crore 52 week H/L 126/75 Equity capital 39.08 Crore Face value 2 Price performance (%) Return % 1M 3M 6M 12M HEG -4.9-1.6-24.0-6.7 Graphite India -0.4-0.1-5.7-0.7 Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com May 19, 2015 Graphite India (CAREVE) 82 Utilisation surprises; margins disappoint Graphite India (GIL) reported a mixed set of Q4FY15 numbers wherein the topline came in higher than our estimate while the EBITDA and reported PAT came in below our estimate Total operating income for Q4FY15 was 415.7 crore, down 15.0% YoY but up 32.3% QoQ & higher than our estimate of 332.6 crore. Total operating income came in higher than our estimate on the back of better-than-expected capacity utilisation level. Capacity utilisation during the quarter stood at 76%, higher than our estimate of 70% The EBITDA came in at 36.1 crore, down 47.0% YoY and 13.5% QoQ and lower than our estimate of 43.1 crore. The EBITDA margin came in at 8.7%, lower than our estimate of 12.9% Consequent PAT came in at 14.2 crore, down 68.4% YoY and 30.3% QoQ (our estimate: 20.9 crore). PAT for the quarter includes an exceptional item to the tune of 5.6 crore on account of provision for diminution in value of long-term investments Better placed to cater to volatile steel demand For relatively smaller capacity, the electric arc furnace (EAF) route of steel manufacturing is a preferred option for producing steel in the current volatile demand scenario. Unlike the blast furnace-basic oxygen furnace (BF-BOF) process, the EAF process can be started and stopped at will (operationally flexible) and also generates less carbon emissions. GIL s product i.e. graphite electrodes caters to this segment (EAF) of steel making and, hence, is better placed in the subdued demand scenario. In CY13, steel produced through the electric arc furnace (EAF) process constituted 27.4% of total crude steel production. On an average, ~1.5-2 kg of graphite electrode is used per tonne of steel manufacturing through the EAF route. Demand pressure exists The World Steel Association (WSA) estimates steel consumption growth at 0.5% in CY15 and 1.6% in CY16. With a subdued global demand scenario, GIL is witnessing demand pressure with subdued utilisation in FY15 (~66% on a consolidated basis). Closure of capacity globally likely to provide support to prices Recently, on the back of subdued profitability, globally some graphite electrode manufacturers have announced closure of their inefficient facilities (capacity ~110,000 tonne), which should support prices of electrodes, going forward. Performance to improve, going forward; maintain BUY Subdued graphite electrode realisations adversely impacted Graphite India s Q4FY15 performance. Subsequently, the company reported muted operating margins. Going forward, we expect the recently imposed antidumping duty on import of Chinese electrodes to support domestic graphite electrodes sales. Furthermore, GIL is also likely to be the key beneficiary of lower input costs as it has secured needle coke supplies until the end of FY16, which are lower compared to FY15. We have valued the company at a discount of 30% to its global peer s CY16E average EV/EBITDA of 8.7x (resultant FY17E EV/EBITDA at 6.1x). We arrive at a target price of 94 assigning a BUY rating to the stock. ICICI Securities Ltd Retail Equity Research
Variance analysis Q4FY15 Q4FY15E Q4FY14 YoY (%) Q3FY15 QoQ (%) Comments Revenue 415.7 332.6 489.0-15.0 314.1 32.3 Topline came in higher than our estimate on the back of better than expected capacity utilisation level Other Income 9.0 3.3 15.9-43.3 3.3 169.8 Other income came in higher than our estimate Employee Expense 34.9 34.0 37.3-6.3 33.5 4.2 Raw Material Expense 212.8 115.0 225.1-5.5 113.2 88.0 Raw material expense came in higher than our estimate Power & Fuel Expense 48.5 55.5 63.0-23.1 52.0-6.8 Other operating expenses 83.4 85.1 95.5-12.6 73.7 13.2 EBITDA 36.1 43.1 68.1-47.0 41.7-13.4 EBITDA came in lower than our estimate on the back of higher raw material cost EBITDA Margin (%) 8.7 12.9 13.9-525 bps 13.3-459 bps EBITDA margin came in lower than our estimate Depreciation 9.5 11.0 13.4-29.4 9.6-1.2 Interest 2.4 3.7 3.9-38.3 3.7-33.7 Exceptional Items -5.6 0.0 Exceptional item to the tune of 5.6 crore is on account of provision for diminution in value of long-term investments. PBT 27.6 31.7 66.7-58.6 31.8-13.1 Tax Outgo 13.4 10.8 21.8-38.4 11.4 17.5 PAT 14.2 20.9 44.9-68.4 20.4-30.3 PAT came in lower than our estimate Key Metrics Capacity Utilisation Level (%) ; Domestic Operations 76 70 83 63 Domestic capacity utilisation level came in higher than our estimate Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 1,926.1 1,690.3-12.2 2,120.4 1,867.8-11.9 Revised downwards EBITDA 232.7 202.6-12.9 291.2 254.7-12.5 Revised downwards EBITDA Margin (%) 12.1 12.0-10 bps 13.7 13.6-10 bps Revised downwards PAT 144.4 127.9-11.4 187.7 167.8-10.6 Revised downwards EPS ( ) 7.4 6.5-11.4 9.6 8.6-10.6 Revised downwards Assumptions Current Earlier FY15 FY16E FY17E FY16E FY17E Consolidated capacity utilisation 66 67 72 75 80 Revised downwards Comments ICICI Securities Ltd Retail Equity Research Page 2
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, 13000 tonne in Nashik and 13000 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) 100000 120 On a standalone basis we expect capacity utilisation of 75% in FY16E and 77% in FY17E tonne 60000 40000 20000 60000 46800 78 96 95 60000 57600 60000 56850 72 68 57200 54600 75 77 59600 61600 100 80 60 40 20 % 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 67% in FY16E and 72% in FY17E. The management has guided for a capacity utilisation of ~65-70% for FY16E tonne 160000 140000 120000 100000 60000 40000 20000 0 98000 66 66 64400 98000 64680 72 67 98000 65900 98000 70800 FY2014 FY2015 FY2016E FY2017E 78 73 68 63 58 % 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 % 40.0 30.0 20.0 10.0 0.0-10.0 32.8 20.1 20.2 17.0 18.0 13.2 11.3 17.5 10.7 0.8 8.1-5.0 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Graphite & Carbon Steel ICICI Securities Ltd Retail Equity Research Page 3
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. Exhibit 4: Gross debt & net debt movement crore 800 600 400 200 0-200 705 595 338 423 424 326 367 242 64 54 42 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E -34-131 -400 Gross Debt Net Debt -315 ICICI Securities Ltd Retail Equity Research Page 4
Outlook and valuation Subdued graphite electrodes realisations adversely impacted Graphite India s Q4FY15 performance. Subsequently, the company reported muted operating margins. Going forward, we expect the recently imposed antidumping duty on the import of Chinese electrodes to support domestic graphite electrodes sales. Furthermore, GIL is also likely to be the key beneficiary of lower input costs as it has secured needle coke supplies until the end of FY16, which are lower compared to FY15. We have valued the company at a discount of 30% to its global peer s CY16E average EV/EBITDA of 8.7x (resultant FY17E EV/EBITDA at 6.1x). We arrive at a target price of 94 and assign a BUY rating to the stock. Exhibit 5: Peer comparison P/E EV/EBITDA Company CY14 CY15E CY16E CY14 CY15E CY16E SGL NA NA 47.5 18.3 16.2 11.7 Graftec NA NA 62.0 NA 15.5 9.5 Tokai Carbon 25.4 26.0 19.5 7.5 7.9 6.8 Showa Denko 34.8 14.8 11.0 10.0 7.3 6.7 Global Average 30.1 20.4 35.0 12.0 11.7 8.7 CY16E Global Average EV/EBITDA 8.7 Source: Bloomberg, ICICIdirect.com Research Exhibit 6: Valuation matrix Revenue ( Cr) Growth (%) EPS ( ) Growth (%) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%) FY14 2009.3 3.1 6.6-3.4 12.3 6.6 7.4 8.8 FY15 1710.7-14.9 2.7-59.5 30.4 12.7 3.0 4.2 FY16E 1690.3-1.2 6.5 143.0 12.5 7.5 7.4 7.9 FY17E 1867.8 10.5 8.6 31.2 9.6 5.2 9.2 11.2 ICICI Securities Ltd Retail Equity Research Page 5
Company snapshot 140 120 100 Target Price: 94 80 60 40 20 0 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. 2-Feb-15 58.16 113.6 0.3 2 Kiwi Investments, Ltd. 31-Dec-14 4.82 9.4 0.0 3 Fidelity Management & Research Company 31-Dec-14 4.47 8.7-2.2 4 Edgbaston Investment Partners Limited 31-Dec-14 2.14 4.2 0.5 5 Life Insurance Corporation of India 31-Dec-14 1.87 3.7 0.0 6 CD Equifinance Pvt. Ltd. 31-Dec-14 1.77 3.5-0.3 7 Royce & Associates, LLC 31-Mar-15 1.62 3.2-0.4 8 SBI Funds Management Pvt. Ltd. 31-Dec-14 1.43 2.8 2.8 9 Retail Employees Superannuation Pty. Ltd. 31-Dec-14 1.27 2.5 0.0 10 The New India Assurance Co. Ltd. 31-Dec-14 1.07 2.1 0.0 Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Promoter 65.0 65.1 65.1 65.1 65.1 FII 15.7 14.9 14.9 14.4 14.9 DII 3.5 3.6 3.5 4.7 3.5 Others 15.8 16.4 16.6 15.8 16.6 Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares SBI Funds Management Pvt. Ltd. 4.03m 2.79m Likhami Leasing, Ltd. -85.91m -55.87m Edgbaston Investment Partners Limited 0.75m 0.52m Bond Co., Ltd. -26.35m -18.26m Emerald Co., Ltd. 0.41m 0.29m H L Investment Co., Ltd. -22.14m -14.40m Guardian Leasing, Ltd. -4.06m -2.64m Fidelity Management & Research Company -3.17m -2.20m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6
Financial summary Profit and loss statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Total Operating Income 2,009.3 1,710.7 1,690.3 1,867.8 Growth (%) 3.1-14.9-1.2 10.5 Raw Material Expenses 903.7 760.8 742.8 799.7 Employee Expenses 202.8 208.0 205.8 227.4 Other expenses 652.7 610.1 539.1 586.0 Total Operating Expenditure 1,759.2 1,578.9 1,487.7 1,613.2 EBITDA 250.1 131.8 202.6 254.7 Growth (%) -7.7-47.3 53.7 25.7 Depreciation 58.1 43.5 45.5 46.3 Interest 23.9 15.8 13.1 5.2 Other Income 44.7 35.1 38.7 36.5 PBT 212.8 107.5 182.7 239.7 Exceptional Item 0.0 5.6 0.0 0.0 Total Tax 82.9 49.3 54.8 71.9 PAT 129.9 52.6 127.9 167.8 Growth (%) -3.4-59.5 143.0 31.2 EPS ( ) 6.6 2.7 6.5 8.6 Cash flow statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax 129.9 52.6 127.9 167.8 Add: Depreciation 58.1 43.5 45.5 46.3 (Inc)/dec in Current Asset 273.4 136.6 93.3-12.3 Inc/(dec) in CL & Provision 83.6-124.5-4.5 84.8 Others -5.4-7.6 0.0 0.0 CF from operating activities 539.6 100.7 262.3 286.5 (Inc)/dec in Investments -119.9 15.4 90.0 25.0 (Inc)/dec in Fixed Assets -42.6 6.8-25.0-25.0 Others 0.0 0.0 0.0 0.0 CF from investing activities -162.5 22.2 65.0 0.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Inc/(dec) in loan funds -281.0-56.5-125.0-200.0 Dividend paid & div. tax -80.0-125.7-80.0-80.0 Inc/(dec) in Share Cap -2.4 60.1-59.4 1.7 Others 0.0 0.0 0.0 0.0 CF from financing activities -363.4-122.1-264.4-278.3 Net Cash flow 13.6 0.9 62.8 8.3 Opening Cash 16.9 30.5 31.4 94.3 Closing Cash 30.5 31.4 94.3 102.5 Balance sheet ( crore) (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital 39.1 39.1 39.1 39.1 Reserve and Surplus 1,720.2 1,707.2 1,695.7 1,785.2 Total Shareholders funds 1,759.3 1,746.3 1,734.8 1,824.3 Total Debt 423.6 367.1 242.1 42.1 Deferred Tax Liability 89.7 82.1 82.1 82.1 Minority Interest / Others 0.0 0.0 0.0 0.0 Total Liabilities 2,272.5 2,195.5 2,059.0 1,948.5 Assets Gross Block 1,394.5 1,387.7 1,412.7 1,437.7 Less: Acc Depreciation 697.4 740.9 786.4 832.7 Net Block 697.2 646.8 626.3 605.0 Capital WIP 2.5 2.5 2.5 2.5 Total Fixed Assets 699.7 649.4 628.8 607.5 Investments 384.7 369.3 279.3 254.3 Inventory 1,035.4 991.7 949.4 997.9 Debtors 472.3 432.6 393.6 409.4 Loans and Advances 154.6 106.4 96.4 46.4 Other Current Assets 19.2 14.2 12.2 10.2 Cash 30.5 31.4 94.3 102.5 Total Current Assets 1,712.1 1,576.3 1,545.8 1,566.4 Current Liabilities 380.4 293.4 287.1 358.2 Provisions 143.6 106.1 107.9 121.5 Current Liabilities & Prov 524.0 399.5 395.0 479.7 Net Current Assets 1,188.1 1,176.9 1,150.8 1,086.6 Others Assets 0.0 0.0 0.0 0.0 Application of Funds 2,272.5 2,195.5 2,059.0 1,948.5 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS 6.6 2.7 6.5 8.6 Cash EPS 9.6 4.9 8.9 11.0 BV 90.0 89.4 88.8 93.4 DPS 3.5 5.5 3.5 3.5 Cash Per Share 1.6 1.6 4.8 5.2 Operating Ratios (%) EBITDA Margin 12.4 7.7 12.0 13.6 PBT / Total Operating income 10.6 6.3 10.8 12.8 PAT Margin 6.5 3.1 7.6 9.0 Inventory days 188.1 211.6 205.0 195.0 Debtor days 85.8 92.3 85.0 80.0 Creditor days 69.1 62.6 62.0 70.0 Return Ratios (%) RoE 7.4 3.0 7.4 9.2 RoCE 8.8 4.2 7.9 11.2 RoIC 8.9 4.2 8.3 11.8 Valuation Ratios (x) P/E 12.3 30.4 12.5 9.6 EV / EBITDA 6.6 12.7 7.5 5.2 EV / Net Sales 0.8 1.0 0.9 0.7 Market Cap / Sales 0.8 0.9 0.9 0.9 Price to Book Value 0.9 0.9 0.9 0.9 Solvency Ratios Debt/EBITDA 1.7 2.8 1.2 0.2 Debt / Equity 0.2 0.2 0.1 0.0 Current Ratio 3.3 3.9 3.9 3.3 Quick Ratio 1.3 1.5 1.5 1.2 ICICI Securities Ltd Retail Equity Research Page 7
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 83 94 Buy 1622.8 2.7 6.5 8.6 30.4 12.5 9.6 12.7 7.5 5.2 4.2 7.9 11.2 3.0 7.4 9.2 HEG 208 225 Hold 831.8 9.8 17.3 24.9 21.3 12.0 8.4 8.5 7.5 6.2 6.8 7.3 9.3 4.1 7.1 9.7 ICICI Securities Ltd Retail Equity Research Page 8
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 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9
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