Graphite In­dia Ltd

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(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.

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