Graphite India (CAREVE) 75

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 318.3 397.3-19.9 322.5-1.3 EBITDA 46.4 39.8 16.6 33.3 39.5 EBITDA (%) 14.6 10.0 460 bps 10.3 430 bps PAT 27.7 20.1 38.4 16.3 70.7 Key Financials ( Crore) FY14 FY15E FY16E FY17E Total Operating Income 2009.3 1710.7 1487.5 1596.9 EBITDA 250.1 136.8 185.2 232.0 Net Profit 129.9 57.6 105.9 156.4 EPS 6.6 2.9 5.4 8.0 Valuation summary FY14 FY15E FY16E FY17E PE (x) 11.3 25.4 13.8 9.4 Target PE (x) 12.8 28.8 15.7 10.6 EV/EBITDA (x) 7.8 13.9 7.1 5.1 P/BV (x) 0.8 0.8 0.9 0.8 RoNW (%) 7.4 3.3 6.2 8.8 RoCE (%) 8.8 4.4 7.8 10.3 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 4.4-13.6-24.4-45.2 Graphite India 4.1-10.3-15.9-25.8 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 318.3 crore, down 19.9% YoY and 1.3% QoQ and broadly in line with our estimate of 310.1 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

Variance analysis Q2FY16 Q2FY16E Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue 318.3 310.1 397.3-19.9 322.5-1.3 Topline came in broadly in line with our estimates Other Income 8.7 4.6 4.6 88.9 4.5 93.1 Other income came in higher than our estimate due to favorable exchange rate movements Employee Expense 33.6 33.9 35.1-4.3 35.8-6.2 Raw Material Expense 124.0 133.0 186.6-33.5 134.7-7.9 Raw material expense came in lower than our estimate Power & Fuel Expense 46.8 54.9 54.6-14.3 53.2-12.0 Power and fuel expenses came in lower than our estimate Other operating expenses 67.5 51.0 81.2-16.9 65.6 2.9 Other operating expenses came in higher than our estimate EBITDA 46.4 37.3 39.8 16.6 33.3 39.5 EBITDA came in higher than our estimate EBITDA Margin (%) 14.6 12.0 10.0 460 bps 10.3 430 bps EBITDA margin came in higher than our estimate Depreciation 11.1 11.6 10.6 4.9 11.2-0.7 Depreciation charge came in line with our estimate Interest 2.1 2.3 2.6-16.5 2.0 6.5 Exceptional Items 0.0 0.0 0.0 NA 0.0 PBT 41.8 28.0 31.3 33.9 24.6 70.4 PBT came in higher than our estimate Tax Outgo 14.1 9.2 11.2 25.9 8.3 69.9 PAT 27.7 18.7 20.1 38.4 16.3 70.7 The ensuing PAT came in higher than our estimate Key Metrics Capacity Utilisation Level (%) ; Domestic Operations 63 65 70 69 Capacity utilisation came in marginally lower than our estimate Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 1,548.9 1,487.5-4.0 1,621.9 1,596.9-1.5 Broadly maintained topline estimates EBITDA 163.3 185.2 13.5 224.6 232.0 3.3 EBITDA revised upwards due to lower raw material costs EBITDA Margin (%) 10.5 12.5 200 bps 13.8 14.5 70 bps EBITDA margin revised upwards due to lower needle costs PAT 94.3 105.9 12.3 148.7 156.4 5.2 PAT revised upwards EPS ( ) 4.8 5.4 12.3 7.6 8.0 5.2 Assumptions Current Earlier FY15 FY16E FY17E FY16E FY17E Consolidated capacity utilisation 66 65 70 65 70 Maintained estimates 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 67% in FY16E and 73% in FY17E tonne 60000 40000 20000 60000 46800 78 96 95 60000 57600 60000 56850 72 68 67 57200 54600 53800 58600 73 100 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 65% in FY16E and 70% in FY17E. The management has guided for a capacity utilisation of ~65-70% for FY16E tonne 160000 140000 120000 100000 60000 40000 20000 0 70 66 66 65 98000 64400 98000 64680 98000 63700 98000 68500 FY2014 FY2015 FY2016E FY2017E 78 68 58 48 38 28 18 8-2 % 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. 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 800 600 400 200 0-200 -400 705 595 447 451 338 424 367 109 54 77 27 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E -34-226 -302 Gross Debt Net Debt ICICI Securities Ltd Retail Equity Research Page 4

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 30.5 17.2 16.1 11.7 Tokai Carbon 32.4 45.7 28.5 6.7 7.8 7.1 Showa Denko 39.1 22.2 10.9 7.9 6.8 6.3 Global Average 35.7 34.0 23.3 10.6 10.3 8.4 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(%) FY14 2009.3 3.1 6.6-3.4 11.3 7.8 7.4 8.8 FY15 1710.7-14.9 2.9-55.7 25.4 13.9 3.3 4.4 FY16E 1487.5-13.0 5.4 83.9 13.8 7.1 6.2 7.8 FY17E 1596.9 7.4 8.0 47.7 9.4 5.1 8.8 10.3 ICICI Securities Ltd Retail Equity Research Page 5

Company snapshot 140 120 100 Target Price: 85 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. 30-Sep-15 58.22 113.7 0.1 2 Kiwi Investments, Ltd. 30-Sep-15 4.82 9.4 0.0 3 Fidelity Management & Research Company 30-Sep-15 4.47 8.7 0.0 4 Edgbaston Investment Partners Limited 30-Sep-15 2.55 5.0 0.0 5 SBI Funds Management Pvt. Ltd. 30-Sep-15 2.05 4.0 0.0 6 Life Insurance Corporation of India 30-Sep-15 1.87 3.7 0.0 7 CD Equifinance Pvt. Ltd. 30-Sep-15 1.70 3.3 0.0 8 The New India Assurance Co. Ltd. 30-Sep-15 1.56 3.1 0.0 9 Retail Employees Superannuation Pty. Ltd. 30-Sep-15 1.27 2.5 0.0 10 Royce & Associates, LLC 30-Sep-15 1.16 2.3-0.6 Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter 65.1 65.1 65.3 65.3 65.3 FII 14.9 14.4 12.7 12.7 11.8 DII 3.5 4.7 5.3 5.6 6.2 Others 16.6 15.8 16.7 16.4 16.8 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. -85.91m -55.87m Emerald Co., Ltd. 0.11m 0.11m H L Investment Co., Ltd. -22.14m -14.40m Guardian Leasing, Ltd. -4.06m -2.64m SCL Investments Pvt. Ltd. -2.17m -1.41m Royce & Associates, LLC -0.61m -0.59m 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 1,487.5 1,596.9 Growth (%) 3.1-14.9-13.0 7.4 Raw Material Expenses 903.7 755.8 577.1 626.8 Employee Expenses 202.8 208.0 200.4 206.8 Other expenses 652.7 610.1 524.8 531.2 Total Operating Expenditure 1,759.2 1,573.9 1,302.3 1,364.8 EBITDA 250.1 136.8 185.2 232.0 Growth (%) -7.7-45.3 35.5 25.3 Depreciation 58.1 43.5 45.5 46.3 Interest 23.9 15.8 9.6 1.7 Other Income 44.7 35.1 21.1 33.1 PBT 212.8 112.5 151.3 217.2 Exceptional Item 0.0 5.6 0.0 0.0 Total Tax 82.9 49.3 45.4 60.8 PAT 129.9 57.6 105.9 156.4 Growth (%) -3.4-55.7 83.9 47.7 EPS ( ) 6.6 2.9 5.4 8.0 Cash flow statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax 129.9 57.6 105.9 156.4 Add: Depreciation 58.1 43.5 45.5 46.3 (Inc)/dec in Current Asset 273.4 136.6 287.1-85.0 Inc/(dec) in CL & Provision 83.6-124.5-12.9 32.7 Others -5.4-7.6 0.0 0.0 CF from operating activities 539.6 105.7 425.6 150.4 (Inc)/dec in Investments -119.9 15.4 40.0 40.0 (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 15.0 15.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Inc/(dec) in loan funds -281.0-56.5-290.0-50.0 Dividend paid & div. tax -80.0-125.7-91.4-91.4 Inc/(dec) in Share Cap -2.4 55.3-54.6 1.7 Others 0.0 0.0 0.0 0.0 CF from financing activities -363.4-126.9-436.0-139.7 Net Cash flow 13.6 1.0 4.6 25.7 Opening Cash 16.9 30.5 31.5 36.1 Closing Cash 30.5 31.5 36.1 61.9 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 1,707.3 1,667.2 1,733.9 Total Shareholders funds 1,759.3 1,746.4 1,706.3 1,773.0 Total Debt 423.6 367.1 77.1 27.1 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 2,195.6 1,865.5 1,882.2 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 384.7 369.3 329.3 289.3 Inventory 1,035.4 991.7 815.1 831.2 Debtors 472.3 432.6 334.2 350.0 Loans and Advances 154.6 106.4 96.4 151.4 Other Current Assets 19.2 14.2 12.2 10.2 Cash 30.5 31.5 36.1 61.9 Total Current Assets 1,712.1 1,576.4 1,293.9 1,404.7 Current Liabilities 380.4 293.4 277.1 297.5 Provisions 143.6 106.1 109.5 121.8 Current Liabilities & Prov 524.0 399.5 386.6 419.3 Net Current Assets 1,188.1 1,177.0 907.4 985.4 Others Assets 0.0 0.0 0.0 0.0 Application of Funds 2,272.5 2,195.6 1,865.5 1,882.2 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS 6.6 2.9 5.4 8.0 Cash EPS 9.6 5.2 7.7 10.4 BV 90.0 89.4 87.3 90.7 DPS 3.5 5.5 4.0 4.0 Cash Per Share 1.6 1.6 1.8 3.2 Operating Ratios (%) EBITDA Margin 12.4 8.0 12.5 14.5 PBT / Total Operating income 10.6 6.6 10.2 13.6 PAT Margin 6.5 3.4 7.1 9.8 Inventory days 188.1 211.6 200.0 190.0 Debtor days 85.8 92.3 82.0 80.0 Creditor days 69.1 62.6 68.0 68.0 Return Ratios (%) RoE 7.4 3.3 6.2 8.8 RoCE 8.8 4.4 7.8 10.3 RoIC 8.9 4.5 8.0 10.7 Valuation Ratios (x) P/E 11.3 25.4 13.8 9.4 EV / EBITDA 7.8 13.9 7.1 5.1 EV / Net Sales 1.0 1.1 0.9 0.7 Market Cap / Sales 0.7 0.9 1.0 0.9 Price to Book Value 0.8 0.8 0.9 0.8 Solvency Ratios Debt/EBITDA 1.7 2.7 0.4 0.1 Debt / Equity 0.2 0.2 0.0 0.0 Current Ratio 3.3 3.9 3.3 3.4 Quick Ratio 1.3 1.5 1.2 1.4 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 75 85 Buy 1465.5 2.9 5.4 8.0 25.4 13.8 9.4 13.9 7.1 5.1 4.4 7.8 10.3 3.3 6.2 8.8 HEG 163 185 Hold 650.9 15.3 9.5 17.5 10.6 17.0 9.3 7.5 7.4 6.0 6.8 6.5 8.6 4.1 4.1 7.2 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

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. INH000000990. 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. 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