Graphite India (CAREVE) 74

es Result Update August 11, 216 Rating matrix Rating : Hold Target : 75 Target Period : 12 months Potential Upside : 1% What s Changed? Target Changed from 8 to 75 EPS FY17E Changed from 3.6 to 3.5 EPS FY18E Changed from 4.9 to 4.5 Rating Unchanged Quarterly Performance (Standalone) Q1FY17 Q1FY16 YoY (%) Q4FY16 QoQ (%) Revenue 275.2 322.5-14.7 349.3-21.2 EBITDA 1.5 32.2-67.3 32.2-67.3 EBITDA (%) 3.8 1. (62) bps 9.2 (54) bps PAT 11. 19.2-42.8 18.6-4.8 Key Financials ( Crore) FY15 FY16E FY17E FY18E Total Operating Income 171.7 1532.4 1348.9 1479.6 EBITDA 136.8 138.8 115. 148. Net Profit 57.6 61.5 68.7 87.7 EPS 2.9 3.1 3.5 4.5 Valuation summary FY15 FY16E FY17E FY18E PE (x) 25.1 23.5 21.1 16.5 Target PE (x) 25.3 23.8 21.3 16.6 EV/EBITDA (x) 1.3 9.4 1.2 6.5 P/BV (x).8.8.8.8 RoNW (%) 3.3 3.5 4. 5. RoCE (%) 4.4 4.4 3.9 5.7 Stock data Particular Amount Market Capitalisation 155 Crore Debt (FY15) 32 Crore Cash & Cash Equivalent (FY15) 437 Crore EV 137 Crore 52 week H/L 9/64 Equity capital 39.1 Crore Face value 2 Price performance (%) Return % 1M 3M 6M 12M HEG 5.3 11.2 24.9-11.4 Graphite India 3.4 2. 7.5 1.2 Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com Graphite India (CAREVE) 74 Margins disappoint Graphite India reported a subdued set of Q1FY17 numbers wherein EBITDA and PAT came in notably lower than our estimate. The muted performance during the quarter was on account of lowerthan-expected realisations across markets Capacity utilisation was at 68%, marginally higher than our estimate of 65% (capacity utilisation of 69% in Q1FY16 and 7% in Q4FY16). Gross income from operations for the quarter came in at 295.4 crore. After adjusting for excise duty net operating income was at 275.2 crore (down 14.7% YoY, 21.2% QoQ), lower than our estimate of 284.9 crore EBITDA came in at 1.5 crore (down 67.3% YoY, 67.4% QoQ), lower than our estimate of 3 crore. EBITDA margins were at 3.8%, lower than our estimate of 1.5% (EBITDA margin of 1.% in QFY16 and 9.2% in Q4FY16). Other income was at 17.8 crore, up 17% YoY. Subsequently, the ensuing PAT was at 11. crore (down 42.8% YoY and 4.9% QoQ), lower than our estimate of 14.5 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. On the back of a muted demand scenario, the global steel industry as a whole is undergoing challenging times. Consequently, a decline in steel produce through the EAF route adversely impacted the prospects of the graphite electrodes sector. A muted demand scenario has resulted in subdued realisations of graphite electrodes. Muted realisation to put downward pressure on EBITDA margins As iron ore prices are currently trading at multi-year lows, the EAF route of steelmaking is less economical for global steel producers vis-à-vis the blast furnace route. As a graphite electrode is a key input for the EAF route, subdued demand from the user industry resulted in a decline in graphite electrodes prices. Even during Q1FY17, operating margins of graphite electrodes (standalone operations) declined from 9.2% in Q4FY16 to 3.8% in Q1FY17. Going forward, we expect EBITDA margins to remain under pressure due to soft graphite electrode prices. Net cash status augurs well for company Better working capital management led to a reduction in debt levels for the company. On a consolidated basis, the company s net cash and cash equivalents has increased from 34 crore at the end of FY15 to 135 crore at the end of FY16. Going forward, we expect consolidated net cash and cash equivalents balance to increase to 277 crore at the end of FY17E and further to 483 crore at the end of FY18E. Operating performance disappoints Graphite India reported a Q1FY17 muted performance due to subdued graphite electrodes prices. We expect pricing pressure on graphite electrodes to continue over the short to medium term. Subsequently, we have downward revised our consolidated EBITDA margin to 8.5% for FY17E (from 1.% earlier) and to 1.% for FY18E (from 12.% earlier). We value the company at a discount of 2% to its global peer s CY18E average EV/EBITDA of 8.3x. Consequently, we value the company at 6.6x FY18E EV/EBITDA. We arrive at a target price of 75 and assign a HOLD rating to the stock. ICICI Securities Ltd Retail Equity Research

esv Variance analysis Q1FY17 Q1FY17E Q1FY16 YoY (%) Q4FY16 QoQ (%) Revenue 275.2 284.9 322.5-14.7 349.3-21.2 Topline came in lower than our estimate Other Income 17.8 4.9 8.6 17.2 8.4 112.4 Other income came in higher than our estimate Employee Expense 35.1 36. 35.5-1.2 31.7 1.6 Employee expense came in broadly in line with our estimate Raw Material Expense 122.9 137.6 159.5-23. 169.7-27.6 Power & Fuel Expense 52.6 45.4 53.2-1.1 4.6 29.5 Power and fuel expense came in higher than our estimate Other operating expenses 54.2 36. 42.1 28.6 75.2-27.9 Other operating expense came in higher than our estimate EBITDA 1.5 3. 32.2-67.3 32.2-67.3 EBITDA came in lower than our estimate EBITDA Margin (%) 3.8 1.5 1. (62) bps 9.2 (54) bps EBITDA margin came in lower than our estimate Depreciation 9.7 11.2 11.2-13.3 11. -11.6 Depreciation charge came in lower than our estimate Interest 1.4 2.1 2.1-31.8 2. -28. Exceptional Items... NA. PBT 17.2 21.6 27.5-37.4 27.6-37.6 PBT came in lower than our estimate Tax Outgo 6.2 7.1 8.3-24.8 9. -31.1 PAT 11. 14.5 19.2-42.8 18.6-4.8 PAT came in lower than our estimate Key Metrics Capacity Utilisation Level (%) ; Domestic Operations 68 65 69 7 Capacity utilisation came in marginally higher than our estimate Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 1,44.3 1,348.9-3.9 1,541.4 1,479.6-4. Estimates broadly revised downwards EBITDA 141. 115. -18.5 184.3 148. -19.7 EBITDA Margin (%) 1. 8.5 (15) bps 12. 1. (2) bps PAT 69.5 68.7-1.2 95.5 87.7-8.1 EPS ( ) 3.6 3.5-1.2 4.9 4.5-8.1 Assumptions Current Earlier FY16 FY17E FY18E FY17E FY18E Consolidated capacity utilisation 62 65 7 65 7 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, tonne per annum (TPA). The installed capacity in India is 8, tonne of which 54, tonne is in Durgapur, 13 tonne in Nashik and 13 tonne in Bangalore. GIL also owns a plant in Nurnberg (Germany) with an installed capacity of 18, tonne. The company commissioned its last capacity expansion in Q1FY14 wherein it installed a capacity of 2, tonne at its Durgapur plant while incurring a capex of 255 crore. Exhibit 1: Graphite electrode capacity production & utilisation rate (standalone basis) 1 12 On a standalone basis, we expect capacity utilisation of 67% in FY17E and 73% in FY18E tonne 6 4 2 96 95 6 576 6 5685 72 68 65 67 572 546 516 536 584 73 1 8 6 4 2 % FY212 FY213 FY214 FY215 FY216P FY217E FY218E Capacity (LHS) Production (LHS) Utilization rate (RHS) Exhibit 2: Capacity & utilisation rates (Consolidated basis) 1 1 On a consolidated basis, we expect capacity utilisation of 65% in FY17E and 7% in FY18E. The management has guided for a capacity utilisation of ~6-65% for FY17E tonne 6 4 2 98 66 66 644 98 6468 98 62 65 676 98 639 98 7 685 8 6 4 2 % FY214 FY215 FY216P FY217E FY218E Capacity (LHS) Production (LHS) Utilization rate (RHS) 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 (consolidated basis) For the standalone operations during Q1FY17 EBIT margins of graphite electrodes segment stood 2.3% while that of steel segment stood at 22.2% % 2. 15. 1. 14.7 11.3 17.5 13.8 7.7 8.9 5. 8.1 3.9. FY213 FY214 FY215 FY216P Graphite & Carbon Steel ICICI Securities Ltd Retail Equity Research Page 3

Net cash status augurs well for company Better working capital management led to a reduction in debt levels for the company. On a consolidated basis, the company s net cash and cash equivalents has increased from 34 crore at the end of FY15 to 135 crore at the end of FY16. Going forward, we expect consolidated net cash and cash equivalents balance to increase to 277 crore at the end of FY17E and further to 483 crore at the end of FY18E. Exhibit 4: Gross debt & net debt movement crore 8 6 4 2-2 -4-6 -8-1 -12 595 75 447 451 424 367 32 212 54 97 FY212 FY213 FY214 FY215-34 FY216P FY217E FY218E -135-277 -483 Gross Debt Net Debt ICICI Securities Ltd Retail Equity Research Page 4

Outlook and valuation Graphite India reported a Q1FY17 muted performance due to subdued graphite electrodes prices. We expect pricing pressure on graphite electrodes to continue over the short to medium term. Subsequently, we have downward revised our consolidated EBITDA margin to 8.5% for FY17E (from 1.% earlier) and to 1.% for FY18E (from 12.% earlier). We value the company at a discount of 2% to its global peer s CY18E average EV/EBITDA of 8.3x. Consequently, we value the company at 6.6x FY18E EV/EBITDA. We arrive at a target price of 75 and assign a HOLD rating to the stock. Exhibit 5: Peer comparison P/E EV/EBITDA Company CY16 CY17E CY18E CY16 CY17E CY18E SGL NA NA 94.7 23.4 12.4 9.7 Showa Denko 1. 8.9 8.1 7.1 6.7 6.8 Average 1. 8.9 8.1 15.3 9.6 8.3 CY18E Global Average EV/EBITDA 8.3 Source: Bloomberg, ICICIdirect.com Research Exhibit 6: Valuation matrix Revenue ( Cr) Growth (%) EPS ( ) Growth (%) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%) FY15 171.7-14.9 2.9-55.7 25.1 1.3 3.3 4.4 FY16 1532.4-1.4 3.1 6.7 23.5 9.4 3.5 4.4 FY17E 1348.9-12. 3.5 11.7 21.1 1.2 4. 3.9 FY18E 1479.6 9.7 4.5 27.8 16.5 6.5 5. 5.7 ICICI Securities Ltd Retail Equity Research Page 5

Recommendation history vs. consensus estimate ( ) 2 15 1 5 12. 1. 8. 6. 4. 2. (%) Jun-14 Sep-14 Nov-14 Feb-15 Apr-15 Jul-15 Sep-15 Dec-15 Feb-16 Apr-16 Jul-16. Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with HOLD Key events Date Event Feb-1 Fire breaks out in pipe unit factory yard of the company Mar-1 Converts bonds into shares. Sets bond conversion price at 55.3 Dec-1 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 ( 3 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 213 contracts Nov-13 Global players announce production cuts to support graphite electrode prices Feb-15 GOI imposed antidumping duty on graphite electrodes (all diameters) originating in or exported from China. The amount of anti-dumping duty ranges from USD 278.19 per MT to USD 922.3 per MT, depending upon the Chinese producer / exporter. Mar-16 Board declares interim dividend of 2./share Top 1 Shareholders Rank Name Latest Filing Date % O/S Position Change 1 Emerald Co., Ltd. 31-Mar-216.6 119.6M 5.8M 2 Fidelity Management & Research Company 31-Mar-216.1 11.2M 2.5M 3 SBI Funds Management Pvt. Ltd. 31-Mar-216. 7.5M 1.8M 4 Edgbaston Investment Partners LLP 31-Mar-216. 5.5M.2M 5 GKN PLC 31-Mar-216. 4.M 2.M 6 Life Insurance Corporation of India 31-Mar-216. 3.7M 7 CD Equifinance Pvt. Ltd. 31-Mar-216. 3.2M -.1M 8 The New India Assurance Co. Ltd. 31-Mar-216. 3.1M 9 Retail Employees Superannuation Pty. Ltd. 31-Mar-216. 2.5M 1 Patton International, Ltd. 31-Mar-216. 2.1M Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Promoter 65.3 65.3 65.3 65.2 65.2 FII 14.9 14.4 13.1 12.4 12.6 DII 3.5 4.7 3. 3.9 3.9 Others 16.3 15.6 18.6 18.5 18.3 Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Emerald Co., Ltd. 6.3M 5.8M Kiwi Investments, Ltd. -1.2M -9.4M Fidelity Management & Research Company 2.7M 2.5M Royce & Associates, LP -.9M -.9M GKN PLC 2.2M 2.M CD Equifinance Pvt. Ltd. -.1M -.1M SBI Funds Management Pvt. Ltd. 1.9M 1.8M Dimensional Fund Advisors, L.P. -.M -.M Bangur (Krishna Kumar) 1.5M 1.4M Goldman Sachs Asset Management (India) Private Ltd. -.M -.M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

Financial summary Profit and loss statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Total Operating Income 1,71.7 1,532.4 1,348.9 1,479.6 Growth (%) -14.9-1.4-12. 9.7 Raw Material Expenses 755.8 646.1 572.1 62.1 Employee Expenses 28. 21.8 174.7 191.7 Other expenses 61.1 545.7 487.1 537.9 Total Operating Expenditure 1,573.9 1,393.6 1,234. 1,331.6 EBITDA 136.8 138.8 115. 148. Growth (%) -45.3 1.5-17.2 28.7 Depreciation 43.5 49.2 4.1 4.7 Interest 15.8 9. 1.3 11.6 Other Income 35.1 28.9 6.2 66.8 PBT 112.5 19.5 124.8 162.5 Exceptional Item 5.6... Total Tax 49.3 48. 56.2 74.7 PAT 57.6 61.5 68.7 87.7 Growth (%) -55.7 6.7 11.7 27.8 EPS ( ) 2.9 3.1 3.5 4.5 Cash flow statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax 57.6 61.5 68.7 87.7 Add: Depreciation 43.5 49.2 4.1 4.7 (Inc)/dec in Current Asset 136.6 182.2 127. 32.1 Inc/(dec) in CL & Provision -124.5-69.3 21.4 118.8 Others -7.6-9.3.. CF from operating activities 15.7 214.3 257.1 279.4 (Inc)/dec in Investments 15.4-46.6-5. -5. (Inc)/dec in Fixed Assets 6.8-56.5-25. -25. Others.... CF from investing activities 22.2-13.1-75. -75. Issue/(Buy back) of Equity.... Inc/(dec) in loan funds -56.5-64.8-9. -115. Dividend paid & div. tax -125.7-47. -47. -47. Inc/(dec) in Share Cap 55.3-9.9-43. -1.7 Others.... CF from financing activities -126.9-121.6-179.9-163.7 Net Cash flow 1. -1.5 2.2 4.7 Opening Cash 3.5 31.5 21.1 23.3 Closing Cash 31.5 21.1 23.3 64. Balance sheet ( crore) (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital 39.1 39.1 39.1 39.1 Reserve and Surplus 1,77.3 1,712. 1,69.7 1,729.8 Total Shareholders funds 1,746.4 1,751.1 1,729.8 1,768.8 Total Debt 367.1 32.3 212.3 97.3 Deferred Tax Liability 82.1 72.8 72.8 72.8 Minority Interest / Others.... Total Liabilities 2,195.6 2,126.2 2,14.9 1,939. Assets Gross Block 1,387.7 1,444.2 1,469.2 1,494.2 Less: Acc Depreciation 74.9 79.1 83.2 87.9 Net Block 646.8 654.1 639.1 623.3 Capital WIP 2.5 2.5 2.5 2.5 Total Fixed Assets 649.4 656.7 641.6 625.8 Investments 369.3 416. 466. 516. Inventory 991.7 748.5 739.2 79.4 Debtors 432.6 484.8 314.1 283.8 Loans and Advances 16.4 112.3 167.3 197.3 Other Current Assets 14.2 17.1 15.1 13.1 Cash 31.5 21.1 23.3 64. Total Current Assets 1,576.4 1,383.7 1,258.9 1,267.5 Current Liabilities 293.4 27. 258.7 324.3 Provisions 16.1 6.2 92.8 146. Current Liabilities & Prov 399.5 33.1 351.5 47.3 Net Current Assets 1,177. 1,53.6 97.4 797.2 Others Assets.... Application of Funds 2,195.6 2,126.2 2,14.9 1,939. Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS 2.9 3.1 3.5 4.5 Cash EPS 5.2 5.7 5.6 6.6 BV 89.4 89.6 88.5 9.5 DPS 5.5 2. 2. 2. Cash Per Share 1.6 1.1 1.2 3.3 Operating Ratios (%) EBITDA Margin 8. 9.1 8.5 1. PBT / Total Operating income 6.6 7.1 9.3 11. PAT Margin 3.4 4. 5.1 5.9 Inventory days 211.6 2. 2. 175. Debtor days 92.3 82. 85. 7. Creditor days 62.6 68. 7. 8. Return Ratios (%) RoE 3.3 3.5 4. 5. RoCE 4.4 4.4 3.9 5.7 RoIC 4.5 4.4 3.9 6. Valuation Ratios (x) P/E 25.1 23.5 21.1 16.5 EV / EBITDA 1.3 9.4 1.2 6.5 EV / Net Sales.8.9.9.7 Market Cap / Sales.8.9 1.1 1. Price to Book Value.8.8.8.8 Solvency Ratios Debt/EBITDA 2.7 2.2 1.8.7 Debt / Equity.2.2.1.1 Current Ratio 3.9 4.2 3.6 2.7 Quick Ratio 1.5 1.9 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) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Graphite India 74 75 Hold 1446. 3.1 3.5 4.5 23.5 21.1 16.5 9.4 1.2 6.5 4.4 3.9 5.7 3.5 4. 5. HEG 168 15 Sell 671.3-3.8 1. 8. NA 169.5 2.9 1.4 1. 7.6 2.9 3. 5.3-1.6.4 3.4 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%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% 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 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9

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