Good Dividend Yield - Goa Carbon

It has often been mentioned in various columns of the Dalal Street Investment Journal that during difficult times it is best to opt for dividend-paying scrips. Sticking to our theory, we are therefore recommending Goa Carbons (GCL) to our investors. GCL has recently announced a dividend of Rs 3 per share resulting in a dividend yield of 6 per cent (CMP Rs 50.45). The important factor is that it has had a consistent dividend payment history for the past 19 years. There are other compelling reasons including the fact that a reduction in the raw material prices is expected to result in better margins for the next year while the restructuring of its higher cost debt with lower cost will prove to be of advantage. And, last but not the least, the recent revival in demand for aluminium (largest user of calcined petroleum coke - CPC, GCL's finished product) is expected to be good for the company too. Further, on the valuation front, the scrip is well placed. The CMP of Rs 50 discounts its FY09 earnings by 3.71x. Also, the EV / EBITDA of 4.68x seems to be fairly placed.

GCL is the second largest manufacturer of CPC in India with a total capacity of 2.40 lakh metric tonne per annum, next only to Rain Calcining with 6 lakh tonne per annum. Currently it has three plants, one each at Goa (75,000 TPA), Paradeep (1,25,000 TPA) and Bilaspur (40,000 TPA). Here the company has a distinct advantage since it has got port-based plants on both the coastlines of the country.

Regarding the demand for CPC, it is directly linked to aluminum consumption. The CPC demand is 0.40 times that of aluminium. It means that for every 100 kg of aluminium production, 40 kg of CPC is required. As regards the volume growth in FY09, it remained stagnant and realisation has declined to Rs 16,000-17,000 per tonne from its earlier levels of Rs 33,000- 35,000 per tonne in a span of one year. That is the main reason why the Q4FY09 results of the company have got impacted. Regarding the realisation, the management expects the prices of CPC to stabilise at the current levels and expects the same to improve after two quarters. Further, the company is now exporting 50 per cent (It did 25 per cent in FY08) of its products and realisation is higher in exports. As regards the raw material prices, being a derivative of crude it has also declined and going ahead the margins are expected to improve.[PAGE BREAK]

In August 2008 the company had plans to expand its capacity. While 1.50 lakh tonne capacity was planned at its Paradeep plant as brownfield expansion, a greenfield plant of 3.5–5.0 lakh tonnes was planned in Gujarat. A 18 MW waste heat recovery power plant was also on the cards. But looking at the current difficult scenario wherein the prices have declined, the company has put its expansion plans on hold. We feel the company has taken the right step.

On the financial front, despite an increase in the topline, its bottomline has got impacted in FY09. While the topline stood at Rs 390 crore its bottomline was at Rs 12.33 crore as against Rs 208.27 crore and Rs 15.49 crore respectively in FY08. On the valuation front, the scrip is trading at 3.71x of its FY09 earnings. Considering these factors our recommendation is that you should buy the scrip at its current level with a target price of Rs 65 in the next one year.