Goa Carbon - A value buy
Jayashree / 08 May 2011
After discussions with the management, we feel there are a number of reasons for recommending GCL, which manufactures calcined petroleum coke (CPC) that is used in the manufacture of aluminium.
The first and foremost among these is the high dividend yield of 4.50% and that too cum dividend.
Secondly, the demand for CPC is expected to increase on account of an increased demand for aluminium all over the world. As a result, realisations are on an upward move and the volume is also likely to improve. Furthermore, the management has also mentioned improvement on the margins front.
Thirdly, the company has entered into a 49:51 JV with a Chinese company to set up a 250000 metric tonnes per annum (mtpa) CPC facility. On the valuation front, the CMP of `91 discounts its FY11 earnings by 9x and the EV/EBITDA stands at 8x. Looking at all these factors, we recommend a buy on the counter.
GCL is the second largest CPC manufacturer in India and through its three plants (Bilaspur, Paradeep and Goa) has a capacity of 225000 mtpa. As regards the growth in demand, that for aluminium is expected to rise by about 10% in the world. In India, according to Aluminium Casters Association of India, the demand is expected to grow at more than 18%. With CPC forming 40% of the raw material of aluminium, the demand for CPC is also expected to go up. In FY12 the volume growth is expected to be higher as in FY11 it witnessed a shut-down at some plants.
However, with demand on the rise, capacity utilisation will also be better. Further, about 40% of world demand comes from China and, therefore, looking at the opportunity, GCL is setting up a plant with a capacity to manufacture 250000 mtpa at a capital expenditure of Rs 200 cr. The facility is likely to go on stream in the first quarter of 2012.
The capex will be funded through a 2:1 debt equity ratio. For the equity requirement GCL is planning a rights issue and is likely to raise about Rs 33 cr. The rights issue, which is expected in the Q2FY12, is likely to results in a 30% equity dilution on pre-issue capital.
In the past GCL has consistently rewarded its shareholder by way of dividend. In FY11 also it has announced a dividend of Rs 4 per share resulting into a dividend yield of 4.50%. This also provides solace in the current uncertain market.
On the financial front, the company has announced its FY11 results wherein it posted a topline of Rs 269 cr and a bottomline of Rs 9.19 cr as compared to Rs 252 cr and `0.40 cr respectively. This results in an EPS of `10 and a P/E of 9x. Going forward, the company expects improvement in its margins. Therefore, taking all these factors into consideration, we recommend a buy with a target price of Rs 105.
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