Graphite India: Better Than Expected Show

Graphite India (GIL) is India’s largest and the world's fifth largest manufacturer of graphite electrodes, which is a key input in steel production through the electric arc furnace (EAF) route. The company accounts for around 6.5% of global electrode capacity and has over 40 years of technical expertise in the industry.

GIL’s manufacturing units have currently reached almost full capacity utilization levels. Its new expansion plan at Durgapur is progressing as per schedule and is expected to be completed by 2012 end. The company is well poised in the global graphite electrode industry through its quality, scale of operations and low-cost production base.

Graphite India announced its June 2012 quarter results and the performance was better than the street expectations. For the June 2012 quarter the company has posted a Topline of Rs 418 crore and bottomline of Rs 41 crore as against Rs 319 crore and Rs 37 crore in June 2011.

If we analyse the results, it is clearly seen that the EBITDA margins have got impacted severely. For the June 2012 quarter EBITDA margins stood at 17.50 per cent as against 19.30 per cent in June 2012. It signifies severe decline of 80 basis points as compared to similar quarter last year.

If we analyse ion the segmental front, the graphite segment, which contributes around 87.60 per cent of revenues, registered a good growth of 34.10 per cent to touch Rs 366 crore mark.  The Steel segment witnessed a good up-move of around 163 per cent and stood at Rs 24 crore.  The Electrode sales volume increased significantly 15 per cent as the total Capacity utilization also increased to 89 per cent from just 79 per cent.

On the EBITDA front, the EBITDA margins in graphite segment witnessed an EBITDA margin of 20.40 per cent down 143 basis points Y-o-Y and 672 basis points Q-o-Q.  In the steel segment it posted a profit of Rs 0.40 crore as against a loss of Rs 1.80 crore in June 2012.

Overall, Company’s EBITDA increased by 18.9 per cent yoy to Rs 73 crore on the back of higher revenue during the quarter. The OPM declined by 179bp yoy during the quarter to 17.5 per cent. The decline was due to a substantial increase in other expenditure during the quarter. We expect the company’s OPM to increase in the coming quarters, with the steel division contributing to the top-line again and the domestic currency stabilizing at the current levels.

The profit after tax increased by just 10.0 per cent on yoy  basis to Rs 41 crore, ie lower than the growth in EBITDA, largely due to lower other income which declined by 34.4% yoy to  Rs 5 crore and higher interest cost which increased by 102% yoy to  Rs 5 crore. If adjusted for other income, the PAT increased by 20.2% on yoy basis.

The graphite electrodes industry is expected to grow faster, compared to electric arc furnace (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 capacity expansion from 78,000mt/year to 98,000mt/year, to be fully commissioned by 3QFY2013E, is well poised to reap the benefits of this growth.

On the valuation front the scrip is currently trading at 6.76x of its trailing four quarter earnings. We recommend accumulate rating to the stock.