Graphite India (GI) and HEG - Earnings Calculations

Data extracted from Q4'18 Quarterly Results and FY18 Annual results:
Parameter GI HEG Remarks/ Justification
Q4'18 Standalone Capacity Utilization (%) 100% 84% Quarterly results include only standalone numbers. For GI, this means, numbers from its German subsidiary (18,000 MT capacity) are not included
Q4'18 Standalone Capacity Utilization (MT) 20,000 16,800 For GI, 100% utilization for its standalone capacity (80,000 tons) in Q4, hence the number 20,000
Q4'18 Standalone Net Sales (INR Crores) 1152 1292.45
Q4'18 Standalone Raw material expenses (INR Cr) 257.55 200.21
Q4'18 Standalone Other expenses (Employee, Power etc.) (INR Cr) 244.19 195.52
FY 18 Consolidated Revenue from GE products (INR Cr) 2,876 2,739 GI German subisidary (18,000 MT GE capacity) numbers are published as part of Annual Consolidated results, but not as part of Quarterly results
FY 18 Consolidated Revenue from non GE products(INR Cr) 415 214 GI is diversed into more additional non-GE products than HEG, hence the higher revenue.
General Assumptions
Parameter Value Remarks/ Justification
USD to INR 68
1) Though this expense was only Rs. 195.52 Crores for HEG and Rs. 244 Crores for GI in Q4'FY18, assumed a conservative figure of Rs. 300 Crores per quarter for FY19 for the estimation purpose. For subsequent years, it increases
Other Expenses (Employee, Power, Manufacturing etc.) per MT of utilization (INR) 178,571
by x% 2) Interest expenses, assumed to be zero, as both the companies are debt free now
Corporate tax rate rate (%) on business income 30%
Yearly Dividend Payout (%) 25% % of Dividend payed of the net yearly profit, including the Dividend Distribution tax
Dividend Distribution tax rate (%) 18% 15% Dividend Distribution tax plus surcharge etc.
Post-tax return (%) on the cash & other liquid assets in hand 5% 15% Dividend Distribution tax plus surcharge etc.
Profit Margin assumed on the non GE related revenue 10%
Year on Year increase in GE & Raw material prices, Other expenses (%) 5%

Stock Specific Assumptions/ Values

Parameter GI HEG Remarks/ Justification
Overall Capacity in MT (including subsidiary) 98,000 80,000
Q4'18 capacity utilization (standalone) 100% 84% GI subsidiary utilization is not known. MD in his recent interview was very positive about the subsidiary turning around, hence let us assume some 70% utilization
Capacity utilization (consolidated) assumed for FY19 95% 87% For GI, assumed 100% standalone utlilization and 78% for the subsidiary. For HEG, assuming 87%, as MD has mentioned that, the utilization will reach high eighties by the end of calendar year 2018
Capacity utilization (consolidated) assumed for FY20 96% 89%
Capacity utilization (consolidated) assumed for FY21 97% 91%
Total # of equity shares 195375594 39959142
FY18 net profit (Consolidted) in INR Crores 1,032.00 1,099.43
FY18 EPS (Consolidted) in INR 52.81 275.13

Earnings Calculations for FY19-FY21

FY19 (Apr-18 to Mar-19) FY20 (Apr-19 to Mar-20) FY21 (Apr-20 to Mar-21)

Opening Annual Raw Openin Annual Raw Openin Annual

Raw
Net cash Stock Stock Dividen GE Cost Materia g Net Consoli Stock Stock Stock Stock Dividen GE Cost Materia g Net Consoli Stock Stock Stock Stock Dividen
GE Cost Material Net Consolidat Stock Price, Revenu Expens Net Revenu Expens Net
& Revenue Expenses Stock Price, Price, Price, as d paid in USD l Cost in cash & dated Price, Price, Price, Price, d paid in USD l Cost in cash & dated Price, Price, Price, Price, d paid
in USD Cost in Profit ed EPS as per PE of e (INR es (INR Profit e (INR es (INR Profit
equivalen (INR Cr) (INR Cr) as per PE of 7 as per per PE of (INR) (Per USD equival EPS as per as per as per as per (INR) (Per USD equival EPS as per as per as per as per (INR)
(Per MT) USD (Per (INR Cr) (INR) 10 Cr) Cr) (INR Cr) Cr) Cr) (INR Cr)
ts (INR PE of 15 20 per MT) (Per ents (INR) PE of 7 PE of 10 PE of 15 PE of 20 per MT) (Per ents (INR) PE of 7 PE of 10 PE of 15 PE of 20 per
MT)
Cr) share MT) (INR Cr) share MT) (INR Cr) share
Graphite India
Scenario 1: Raw Materials Cost Assumed to be as @15% of the GE cost, which was the case for HEG in Q4'FY18
12,000 1,800 2,014 8,012 2,802 3,789 194 1358 1939 2909 3879 40 12,600 1,890 4,856 8,476 2,973 4,136 212 1482 2117 3176 4234 43 13,230 1,985 7,958 8,879 3,122 4,469 229 1601 2288 3431 4575 47
14,000 2,100 2,014 9,278 2,992 4,543 233 1628 2325 3488 4650 48 14,700 2,205 5,421 9,819 3,175 4,964 254 1778 2541 3811 5081 52 15,435 2,315 9,144 10,289 3,333 5,368 275 1923 2747 4121 5495 56
15,000 2,250 2,014 9,911 3,087 4,919 252 1762 2518 3777 5036 52 15,750 2,363 5,703 10,491 3,275 5,378 275 1927 2752 4129 5505 56 16,538 2,481 9,737 10,995 3,439 5,817 298 2084 2977 4466 5955 61
16,000 2,400 2,014 10,544 3,182 5,296 271 1897 2711 4066 5421 56 16,800 2,520 5,986 11,163 3,376 5,791 296 2075 2964 4446 5928 61 17,640 2,646 10,329 11,700 3,545 6,267 321 2245 3207 4811 6415 66
17,000 2,550 2,014 11,177 3,277 5,673 290 2032 2903 4355 5807 60 17,850 2,678 6,268 11,834 3,477 6,205 318 2223 3176 4764 6352 65 18,743 2,811 10,922 12,405 3,651 6,716 344 2406 3437 5156 6875 70
20,000 3,000 2,014 13,077 3,562 6,803 348 2437 3482 5223 6964 71 21,000 3,150 7,116 13,850 3,779 7,447 381 2668 3811 5717 7623 78 22,050 3,308 12,701 14,521 3,968 8,064 413 2889 4127 6191 8255 85
25,000 3,750 2,014 16,242 4,037 8,686 445 3112 4446 6669 8892 91 26,250 3,938 8,529 17,208 4,283 9,516 487 3409 4870 7306 9741 100 27,563 4,134 15,665 18,048 4,497 10,310 528 3694 5277 7916 10554 108
30,000 4,500 2,014 19,407 4,511 10,569 541 3787 5410 8115 10820 111 31,500 4,725 9,941 20,567 4,787 11,585 593 4151 5929 8894 11859 122 33,075 4,961 18,630 21,575 5,026 12,557 643 4499 6427 9641 12854 132
Scenario 2: Raw Materials Cost Assumed to be as @32% of the GE cost. This provides the most conservative estimates
12,000 3,840 2,014 8,012 4,094 2,885 148 1034 1477 2215 2953 30 12,600 4,032 4,178 8,476 4,343 3,143 161 1126 1609 2413 3217 33 13,230 4,234 6,535 8,879 4,561 3,391 174 1215 1736 2603 3471 36
14,000 4,480 2,014 9,278 4,499 3,488 179 1250 1785 2678 3570 37 14,700 4,704 4,630 9,819 4,773 3,805 195 1363 1948 2921 3895 40 15,435 4,939 7,484 10,289 5,012 4,110 210 1473 2104 3155 4207 43
15,000 4,800 2,014 9,911 4,701 3,789 194 1358 1939 2909 3879 40 15,750 5,040 4,856 10,491 4,988 4,136 212 1482 2117 3176 4234 43 16,538 5,292 7,958 10,995 5,238 4,469 229 1601 2288 3431 4575 47
16,000 5,120 2,014 10,544 4,904 4,090 209 1466 2094 3140 4187 43 16,800 5,376 5,082 11,163 5,203 4,467 229 1601 2286 3430 4573 47 17,640 5,645 8,432 11,700 5,463 4,829 247 1730 2472 3707 4943 51
17,000 5,440 2,014 11,177 5,106 4,392 225 1574 2248 3372 4496 46 17,850 5,712 5,308 11,834 5,418 4,798 246 1719 2456 3684 4912 50 18,743 5,998 8,907 12,405 5,689 5,188 266 1859 2656 3983 5311 54
20,000 6,400 2,014 13,077 5,714 5,296 271 1897 2711 4066 5421 56 21,000 6,720 5,986 13,850 6,063 5,791 296 2075 2964 4446 5928 61 22,050 7,056 10,329 14,521 6,366 6,267 321 2245 3207 4811 6415 66
25,000 8,000 2,014 16,242 6,727 6,803 348 2437 3482 5223 6964 71 26,250 8,400 7,116 17,208 7,138 7,447 381 2668 3811 5717 7623 78 27,563 8,820 12,701 18,048 7,495 8,064 413 2889 4127 6191 8255 85
30,000 9,600 2,014 19,407 7,740 8,309 425 2977 4253 6380 8506 87 31,500 10,080 8,246 20,567 8,213 9,102 466 3261 4659 6988 9317 96 33,075 10,584 15,072 21,575 8,623 9,861 505 3533 5047 7571 10094 103
HEG
Scenario 1: Raw Materials Cost Assumed to be as @15% of the GE cost, which was the case for HEG in Q4'FY18
12,000 1,800 964 5,893 2,095 2,749 688 4815 6879 10318 13758 141 12,600 1,890 3,026 6,314 2,250 3,038 760 5322 7602 11403 15205 156 13,230 1,985 5,304 6,619 2,363 3,287 822 5757 8225 12337 16449 169
14,000 2,100 964 6,840 2,237 3,312 829 5802 8288 12432 16577 170 14,700 2,205 3,448 7,331 2,403 3,664 917 6418 9169 13754 18338 188 15,435 2,315 6,196 7,687 2,523 3,966 993 6948 9926 14889 19852 203
15,000 2,250 964 7,313 2,308 3,594 899 6295 8993 13489 17986 184 15,750 2,363 3,659 7,840 2,479 3,977 995 6967 9953 14929 19905 204 16,538 2,481 6,642 8,221 2,603 4,306 1078 7544 10777 16165 21553 221
16,000 2,400 964 7,786 2,379 3,875 970 6788 9698 14547 19395 199 16,800 2,520 3,870 8,348 2,555 4,290 1074 7515 10736 16104 21472 220 17,640 2,646 7,088 8,755 2,683 4,646 1163 8139 11627 17441 23254 238
17,000 2,550 2,014 8,260 2,450 4,209 1053 7374 10534 15801 21068 216 17,850 2,678 5,171 8,856 2,631 4,657 1166 8159 11656 17483 23311 239 18,743 2,811 8,664 9,288 2,763 5,043 1262 8833 12619 18929 25238 259
20,000 3,000 2,014 9,680 2,663 5,054 1265 8854 12648 18972 25296 259 21,000 3,150 5,805 10,381 2,860 5,597 1401 9804 14006 21009 28012 287 22,050 3,308 10,002 10,890 3,003 6,062 1517 10620 15171 22757 30342 311
25,000 3,750 2,014 12,046 3,018 6,462 1617 11320 16172 24257 32343 332 26,250 3,938 6,861 12,923 3,241 7,162 1792 12546 17923 26884 35846 367 27,563 4,134 12,232 13,559 3,403 7,762 1942 13597 19424 29136 38848 398
30,000 4,500 2,014 14,412 3,373 7,870 1970 13787 19695 29543 39390 404 31,500 4,725 7,917 15,465 3,623 8,727 2184 15288 21840 32760 43680 448 33,075 4,961 14,462 16,228 3,804 9,461 2368 16574 23677 35516 47355 485
Scenario 2: Raw Materials Cost Assumed to be as @32% of the GE cost. This provides the most conservative estimates
12,000 3,840 964 5,893 3,060 2,073 519 3631 5187 7781 10375 106 12,600 4,032 2,519 6,314 3,287 2,287 572 4006 5722 8583 11444 117 13,230 4,234 4,234 6,619 3,451 2,471 618 4328 6183 9275 12366 127
 14,000 4,480 964 6,840 3,363 2,523 632 4421 6315 9473 12630 129 14,700 4,704 2,857 7,331 3,612 2,787 698 4883 6976 10463 13951 143 15,435 4,939 4,947 7,687 3,793 3,015 754 5281 7544 11316 15088 155
15,000 4,800 964 7,313 3,515 2,749 688 4815 6879 10318 13758 141 15,750 5,040 3,026 7,840 3,775 3,038 760 5322 7602 11403 15205 156 16,538 5,292 5,304 8,221 3,964 3,287 822 5757 8225 12337 16449 169
16,000 5,120 964 7,786 3,666 2,974 744 5210 7443 11164 14885 153 16,800 5,376 3,195 8,348 3,938 3,288 823 5760 8229 12344 16458 169 17,640 5,645 5,661 8,755 4,135 3,558 891 6234 8905 13358 17810 183
17,000 5,440 964 8,260 3,818 3,199 801 5604 8006 12010 16013 164 17,850 5,712 3,363 8,856 4,101 3,539 886 6199 8856 13284 17712 182 18,743 5,998 6,017 9,288 4,306 3,830 959 6710 9586 14378 19171 197
20,000 6,400 964 9,680 4,272 3,875 970 6788 9698 14547 19395 199 21,000 6,720 3,870 10,381 4,589 4,290 1074 7515 10736 16104 21472 220 22,050 7,056 7,088 10,890 4,818 4,646 1163 8139 11627 17441 23254 238
25,000 8,000 964 12,046 5,029 5,002 1252 8762 12517 18775 25033 257 26,250 8,400 4,715 12,923 5,402 5,542 1387 9709 13870 20804 27739 284 27,563 8,820 8,872 13,559 5,672 6,006 1503 10521 15030 22544 30059 308
30,000 9,600 964 14,412 5,786 6,128 1534 10735 15336 23003 30671 314 31,500 10,080 5,560 15,465 6,215 6,794 1700 11902 17003 25505 34006 349 33,075 10,584 10,656 16,228 6,526 7,365 1843 12903 18432 27648 36864 378
Important Notes:
As per the interview with Vardhman Special Steels MD during the first week of Mar-18, the contract prices of GE at that time was around USD 14,500/MT. Also, the spot prices vary from USD 17,000 to 23,000/MT, as per the earnings call wich Graftech had after their Quarterly results couple of months back. It is very likely that, both GI and HEG would have
already come out of almost all of their legacy contracts by Mar-18. Also, these companies would most likely be be selling at least 30% on spot rates, averaging USD 20,000/MT. Also, as per the Outlook provided in the Graphite India subsidiaries results (Foreign Subsidiary Accounts - IV.pdf) available at their website
(http://www.graphiteindia.com/View/investor_relation.aspx), they are expecting 200 Million Euro sales in FY19, for sales of 15,775 MT, which translates to approximately USD 15,000/MT.

Considering the above and digesting the information from the articles and interviews shared below in this estimation sheet, an average price realization upwards of USD 14,000/MT is very likely for Graphite Electrodes (GE) for GI and HEG in Q1'19. The above price is only expected to increase during the remaining 3 quarters of FY19. If we assume 70% of
the product sold based on contract prices of USD 14,500/ MT and 30% on spot price of USD 20,000/ MT, that translates to an average price realization of USD 16,150/ MT. However, there is a chance that, GI and HEG might be having a miniscule portion of their contracts still running in Q1'19.

Graphite India obviously has one clear advantage over HEG during FY19 (making them the dark horse of FY19 and the following years), as they are expected to utilize approximately 34% more overall capacity than HEG! Then, why did GI come up with lesser revenues in Q4'18? Reason was that, more than 70% of their revenues during Q4'18 were based on
legacy contracts, whereas for HEG, these legacy orders were only 22%.

Expenses side of the GE companies include two categories of expenseses. First category includes raw materials prices and needle coke constitutes a major portion of the above expense. This cost is a major variable in our estimates. Like GE prices has increased, needle coke prices also have rised significantly ove the past one year. Corresponding to a GE
spot price of USD 2,500/MT in early 2017, needle coke price was around USD 450/MT (18% of GE price). By May-18, GE spot price touched $25,000/MT and needle coke was 3,200/MT (13% of GE price). Hence, the trend for the past year has been that, GE price increases at a faster rate than needle coke price.

For HEG, in Q4'18, raw material cost was 15% of the GE price. Even though, we would like to understand the impact in earnings, if needle coke prices increase significantly in the future in a disproportional way. Hence, the estimates provided above cover two separate scanarios: One assuming a raw material cost of 15% of the GE price and the second
scenario assumes it as 32%.

Second category of expenses include the expenses other than for raw materials (Employee, Power, Manufacturing etc.). These expenses are more or less fixed in nature and do not vary much from quarter to quarter. In our estimates, we decided to be very conservative on the above costs also. Though this expense was only Rs. 195.52 Crores for HEG and
Rs. 244 Crores for GI in Q4'FY18, we assumed a conservative figure of Rs. 300 Crores per quarter for FY19 for the estimation purpose. For subsequent years, the above costs increase by x% every year.

Most Important articles/ interviews that you would want to refer to:
Steel360 Article https://www.steel-360.com/stories/graphite-electrode/graphite-electrode-crisis-to-deepen-in-2018-2
SteelMint Article http://events.steelmintgroup.com/will-indian-graphite-electrode-price-graph-flat-curvy-2018/
Interview with K K Bangur of Graphite India (GI) https://twitter.com/cnbctv18news/status/995899852897710081?lang=en
Interview with Ravi Jhunjhunwala of HEG https://www.youtube.com/watch?v=-ytTABLtc6I

Disclaimer
These are calculations which I have come up with, based on best possible available information in the public media and analysing details to the best of my capabilities and knowledge. I can go wrong in many occasions. Please see these as just calculations, based on certain assumptions and not as stock recommendations (I am not even qualified to do any
recommendations). These assumptions could change at any time in a drastic way and those may have severe impact on these estimates, and none of us may have any control over the same. You are advised to do your own thorough due diligence prior to making any investment decisions.