Graphite India Ltd
(BSE Code: 509488) (CMP: Rs.164.30) (FV: Rs.2) (TGT: Rs.210+)
Graphite India Ltd (GIL) manufactures graphite electrodes, graphite equipments, steel, glass reinforced plastic (GRP) pipes and tanks and generates hydel power. It operates through three segments: Graphite and Carbon, Steel and Others. The ‘Graphite and Carbon’ segment is engaged in the production of graphite electrodes, other miscellaneous carbon and graphite products including captive power generating units and impervious graphite equipment (IGE) division. The ‘Steel’ segment is engaged in the production of high speed steel and alloy steel. The ‘Others’ segment is engaged in the manufacture of glass reinforced pipes and power generating unit for outside sale. Its ‘Coke’ division is engaged in the manufacture of carbon paste and electrically calcined anthracite paste. The ‘IGE’ division is engaged in the design, manufacture and supply of impervious graphite heat and mass transfer equipment and turnkey systems. Graphite electrode prices have more than doubled from their two decade lows in the past 6 months. The electrode price rally was triggered by a combination of large capacity closures (~20% ex-China capacity shut), industry consolidation, return of demand-supply balance, reduced Chinese electrode exports and better pricing discipline by the incumbents in a loose oligopolistic set-up. We expect electrode prices to sustain at the long-term average levels (above $3800/t) in the medium-term led by improved industry structure and demand-supply balance. After years of stagnation, we expect electric arc furnace (EAF) steel production to grow at 4.6% CAGR during CY16-18E, which in turn could create an additional annualized electrode demand of 60 KT by CY18E. This is led by multiple factors such as i) stiff regulatory measures against Chinese steel imports into key geographies which have high EAF share; ii) uptick in local steel production in key markets; and iii) increased competitiveness of EAF route vis-à-vis the more popular BF route due to CoP convergence.
We expect strong expansion in gross profit/tonne for the overall industry as well as GIL led by better spreads, which in turn would be aided by a tight demand-supply balance, reduced Chinese competition and consolidated industry positioning. GIL would further benefit from the turnaround of its German subsidiary in FY18E and we expect consolidated EBITDA/tonne to expand materially to $392/818 in FY18E/19E.
GIL is at a positive stance as we see earnings at an inflection point with improved industry demand-supply outlook led by closures, consolidation and reduced Chinese exports of both steel and electrodes. With the recent commissioning of key technology upgradation projects providing an improved and flexible production base coupled with sharp improvement in gross profit/tonne, GIL is set to take a big leap in EBITDA/tonne over FY17-19E. A healthy balance sheet with ~Rs.400 crore net cash, strong adjusted FCF (free cash flow) generation, high dividend payout and strong management pedigree are added positives.
Technical Outlook: The Graphite India Ltd stock looks very good on the daily chart for medium-term investment. It has broken out of the ascending triangle pattern and trades above all important DMA levels on the daily chart.
Start accumulating at this level of Rs.164.30 and on dips to Rs.137 for medium-to-long-term investment and a possible price target of Rs.210+ in the next 6 months.