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 319 303 5.1 258 23.3 EBITDA 61 59 4.6 59 3.4 EBITDA (%) 19.3 19.4 (9)bp 23.0 (371)bp PAT 37 45 (17.2) 34 7.2 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 `109 12 Months Capital goods 1,713 0.6 109 / 79 128,285 2 18,871 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 FY2011 13E 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) 7.2 19.2 19.3 Net profit 235 189 232 301 % chg 0.3 (19.5) 22.6 29.9 EBITDA (%) 29.5 21.4 22.9 25.6 EPS (`) 10.7 9.7 11.9 15.4 P/E (x) 8.2 9.1 7.4 5.7 P/BV (x) 1.2 1.1 1.0 0.9 RoE (%) 19.6 13.5 14.6 17.2 RoCE (%) 20.5 14.4 15.4 18.0 EV/Sales (x) 1.2 1.5 1.2 0.8 EV/EBITDA (x) 4.0 6.9 5.4 3.3 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) 4.1 32.2 Graphite (8.9) (14.7) 53.6 Sharan Lillaney +91 22 3935 7800 Ext: 6811 Sharanb.lillaney@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 1QFY2012 performance (Standalone) Y/E March (` cr) 1QFY2012 4QFY2011 % chg (qoq) 1QFY2011 % chg (yoy) FY2011 FY2010 % chg Net Sales 319 303 5.1 258 23.3 1,223 1,131 8.1 Consumption of RM 167 154 8.6 127 31.5 475 417 13.8 (% of Sales) 52.4 50.7 168bp 49.1 326bp 38.8 36.9 197bp Staff Costs 21 22 (4.8) 19 6.5 84 74 13.6 (% of Sales) 6.5 7.2 (68)bp 7.5 (102)bp 6.9 6.6 33bp Other Expenses 70 69 0.9 53 32.3 387 261 48.4 (% of Sales) 21.9 22.8 (91)bp 20.4 147bp 31.7 23.1 862bp Total Expenditure 257 244 5.2 199 29.3 947 752 25.8 Operating Profit 61 59 4.6 59 3.4 276 379 (27.2) OPM 19.3 19.4 (9)bp 23.0 (371)bp 22.6 33.5 (1,092)bp Interest 3 3 (5.4) 1 407.7 5 10 (52.0) Depreciation 10 10 0.7 10 0.1 39 40 (0.5) Other Income 7 17 (59.0) 3 139.9 37 31 21.3 PBT (excl. Extr. Items) 56 63 (11.4) 52 7.6 269 359 (25.2) Extr. Income/(Expense) - - - (13) - PBT (incl. Extr. Items) 56 63 (11.4) 52 7.6 256 359 (28.8) (% of Sales) 17.5 20.8 20.1 20.9 31.8 Provision for Taxation 19 19 2.7 18 8.3 84 127 (34.3) (% of PBT) 34.0 29.3 33.8 32.6 35.4 Reported PAT 37 45 (17.2) 34 7.2 172 232 (25.8) PATM 11.6 14.7 (312)bp 13.3 (174)bp 14.1 20.5 (643)bp Equity shares (cr) 19.5 19.5 17.1 19.5 17.1 EPS (`) 1.9 2.3 (17.2) 2.0 (6.2) 8.8 13.6 (35.0) Adjusted PAT 37 45 (17.2) 34 7.2 185 232 (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, 2011 2
Exhibit 2: Segment-wise performance Y/E March (` cr) 1QFY2012 4QFY2011 1QFY2011 % chg (qoq) % chg (yoy) Total Revenue A) Graphite & Carbon 272 251 212 8.3 28.3 B) Power 6 10 7 (43.9) (13.4) C) Steel 9 10 22 (6.1) (58.4) D) Others 39 44 25 (12.4) 52.9 Total 326 316 266 3.2 22.5 Less: Inter-Segmental Rev. 7 13 8 (42.4) (6.9) Net Sales 319 303 258 5.1 23.3 EBIT Margin (%) A) Graphite & Carbon 18.8 19.4 22.3 (68)bp (350)bp B) Power 63.4 67.0 57.2 (358)bp 615bp C) Steel (19.9) (6.3) 1.3 (1,364)bp (2,123)bp D) Others 18.8 28.6 22.7 (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) 120 100 80 60 40 20 0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2QFY10 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, 2011 3
Exhibit 4: OPM trend (` cr) 120 100 80 60 40 20 0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2QFY10 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 80 70 60 50 40 30 20 10 0 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 (` cr) 3QFY11 4QFY11 1QFY12 July 25, 2011 4
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 FY2011 13E 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 FY2011 13E 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, 2011 5
Exhibit 6: One-year forward P/BV band 160 140 120 100 80 60 40 20 0 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, 2011 6
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 57 60 47 57 93 112 Net Sales 1,331 1,498 1,347 1,444 1,721 2,053 % chg 19.1 12.6 (10.1) 7.2 19.2 19.3 Total Expenditure 1,054 1,135 950 1,136 1,327 1,528 Net Raw Materials 468 487 480 535 602 719 Other Mfg costs 321 381 243 358 433 460 Personnel 130 135 122 131 158 191 Other 134 132 105 112 134 159 EBITDA 278 363 397 308 393 525 % chg 23.5 30.8 9.3 (22.3) 27.5 33.5 (% of Net Sales) 20.9 24.2 29.5 21.4 22.9 25.6 Depreciation& Amortisation 41 44 50 49 55 66 EBIT 237 319 347 260 339 460 % chg 26.4 34.9 8.7 (25.1) 30.4 35.7 (% of Net Sales) 17.8 21.3 25.7 18.0 19.7 22.4 Interest & other Charges 43 35 14 8 27 44 Other Income 29 25 32 34 34 34 (% of PBT) 13.2 8.2 8.8 12.0 10.0 7.7 Recurring PBT 223 309 365 286 346 450 % chg (20.7) 38.6 17.9 (21.4) 20.8 29.9 Extraordinary Expense/(Inc.) 0 58 1 13 - - PBT (reported) 223 251 364 274 346 450 Tax 81 18 129 85 114 148 (% of PBT) 36.2 7.3 35.5 30.9 33.0 33.0 PAT (reported) 142 233 235 189 232 301 Prior period items (0) (1) - - - - PAT after MI (reported) 142 233 235 189 232 301 ADJ. PAT 142 234 235 189 232 301 % chg (3.2) 64.5 0.3 (19.5) 22.6 29.9 (% of Net Sales) 10.7 15.6 17.4 13.1 13.5 14.7 Basic EPS (`) 9.6 15.1 13.7 9.7 11.9 15.4 Fully Diluted EPS (`) 8.0 11.5 10.7 9.7 11.9 15.4 % chg (36.2) 43.9 (6.6) (9.6) 22.6 29.9 July 25, 2011 7
Balance sheet (consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E SOURCES OF FUNDS Equity Share Capital 30 34 34 39 39 39 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 619 528 324 341 741 741 Deferred Tax Liability (Net) 70 62 74 62 63 63 Total Liabilities 1,444 1,709 1,681 1,924 2,466 2,653 APPLICATION OF FUNDS Gross Block 834 995 1,010 1,047 1,267 1,507 Less: Acc. Depreciation 303 435 485 534 589 654 Net Block 531 559 524 513 678 852 Capital Work-in-Progress 9 14 20 103 233 15 Investments 106 101 187 225 225 225 Current Assets 1,133 1,336 1,230 1,448 1,761 2,073 Cash 66 177 80 48 94 86 Loans & Advances 108 132 119 146 175 208 Inventories 534 695 729 906 1,079 1,288 Debtors 412 318 291 339 404 482 Other 13 14 11 9 9 9 Current liabilities 335 301 281 364 431 512 Net Current Assets 798 1,035 949 1,084 1,330 1,561 Total Assets 1,444 1,709 1,681 1,924 2,466 2,653 July 25, 2011 8
Cash flow statement (consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E Profit before tax 223 251 364 274 346 450 Depreciation 41 44 50 49 55 66 (Inc.)/ Dec. in Working Capital (92) (103) (23) (140) (172) 205 Less: Other income 29 25 32 34 34 34 Direct taxes paid 81 18 129 85 114 148 Cash Flow from Operations 62 148 229 64 80 127 (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 29 25 32 34 34 34 Cash Flow from Investing 23 (158) (62) (150) (344) (22) Issue of Equity 23 4 3 129 - - Inc./(Dec.) in loans (86) (91) (204) 17 400 - Dividend Paid (Incl. Tax) 53 60 70 80 91 114 Others 6 267 8 (11) 1 - Cash Flow from Financing (111) 120 (264) 55 310 (114) Inc./(Dec.) in Cash (25) 111 (97) (32) 46 (9) Opening Cash balances 92 66 177 80 48 94 Closing Cash balances 66 177 80 48 94 86 July 25, 2011 9
Key ratios (consolidated) Y/E March FY08 FY09 FY10 FY11 FY12E FY13E Valuation Ratio (x) P/E (on FDEPS) 11.0 7.6 8.2 9.1 7.4 5.7 P/E (on basic, reported EPS) 9.1 5.8 6.4 9.1 7.4 5.7 P/CEPS 7.2 5.4 5.3 7.2 6.0 4.7 P/BV 1.8 1.3 1.2 1.1 1.0 0.9 Dividend yield (%) 3.4 3.4 4.0 4.0 4.6 5.7 Market cap. / Sales 1.0 1.0 1.1 1.2 1.0 0.8 EV/Sales 1.2 1.0 1.2 1.5 1.2 0.8 EV/EBITDA 5.7 4.3 4.0 6.9 5.4 3.3 EV / Total Assets 1.1 0.9 0.9 1.1 0.9 0.6 Per Share Data (`) EPS (Basic) 9.6 15.1 13.7 9.7 11.9 15.4 EPS (fully diluted) 8.0 11.5 10.7 9.7 11.9 15.4 Cash EPS 12.1 16.2 16.6 12.2 14.7 18.8 DPS 3.0 3.0 3.5 3.5 4.0 5.0 Book Value 42.2 55.1 58.5 77.9 85.1 94.6 ROE Decomposition (%) EBIT margin 17.8 21.3 25.7 18.0 19.7 22.4 Tax retention ratio 63.8 92.7 64.5 69.1 67.0 67.0 ROCE (Post Tax) 11.9 20.7 15.8 10.9 10.6 13.1 Cost of Debt (Post Tax) 4.1 5.7 2.2 1.6 3.4 4.0 Leverage (x) 0.6 0.3 0.1 0.0 0.1 0.2 Operating ROE 16.7 25.3 17.5 11.2 11.6 15.2 Returns (%) ROCE (Pre-tax) 16.6 20.2 20.5 14.4 15.4 18.0 Angel ROIC 18.7 22.5 24.9 16.8 17.7 19.7 ROE 20.4 25.0 19.6 13.5 14.6 17.2 Turnover ratios (x) Asset Turnover (Gross Block) 1.6 1.6 1.3 1.4 1.5 1.5 Asset Turnover (Net Block) 2.5 2.7 2.5 2.8 2.9 2.7 Operating Income / Invested Capital 1.1 1.1 1.0 0.9 0.9 0.9 Inventory / Sales (days) 133 150 193 207 211 210 Receivables (days) 104 89 83 80 79 79 Payables (days) 82 77 79 71 74 74 Working capital cycle (ex-cash) (days) 189 194 234 241 241 241 Solvency ratios (x) Gross debt to equity 0.8 0.5 0.3 0.2 0.4 0.4 Net debt to equity 0.6 0.2 0.0-0.3 0.2 Net debt to EBITDA 1.6 0.7 0.1-1.1 0.8 Interest Coverage (EBIT / Interest) 5.5 9.1 24.0 33.5 12.5 10.3 July 25, 2011 10
Research Team Tel: 022-39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com 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, 2011 11