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Graphite India (CAREVE) : Higher Costs To Impact Margin Profile..
Graphite India (CAREVE) : Higher Costs To Impact Margin Profile..
February 7, 2019
Rating matrix
Rating : Buy
Graphite India (CAREVE) | 520
Target : | 650
Target Period : 12 months Higher costs to impact margin profile ...
Potential Upside : 25%
For Q3FY19, Graphite India reported subdued results wherein topline,
EBITDA and PAT came in below our estimate. The performance during
What’s Changed?
the quarter was impacted by higher-than-expected operating costs
Target Changed from |1400 to |650
(especially needle coke) and lower than expected volumes
EPS FY19E Changed from |180.0 to |173.1
The company reported a consolidated topline of | 1855 crore (up 81%
EPS FY20E Changed from |140.0 to |108.3
YoY, down 21% QoQ) lower than our estimate of | 1926.1 crore.
Rating Unchanged
Consolidated EBITDA for the quarter was at | 1083 crore (Q3FY18:
Quarterly Performance (Consolidated)
| 543 crore, Q2FY19: | 1640 crore, our estimate: | 1193 crore). The
corresponding EBITDA margin was at 58.4% (Q3FY18: 53.0%,
Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%)
Q2FY19: 69.9%, our estimate: 61.9%). Sequentially, raw material cost
Revenue 1,855.0 1,025.0 81.0 2,345.0 -20.9
EBITDA 1083.0 543.0 99.4 1640 -34.0
(as percentage of sales) increased to 32.2% from 22.2% in Q2FY19
EBITDA (%) 58.4 53.0 541 bps 69.9 -1155 bps leading to moderation in EBITDA margin from Q2FY19 level. Ensuing
PAT 764.0 359.0 112.8 1113.0 -31.4 consolidated PAT was at | 764 crore (vs. Q3FY18: | 359 crore and
Q2FY19: | 1113 crore, our estimate of | 821.6 crore)
Key Financials Standalone topline came in at | 1562 crore (up 67% YoY, down 22%
(| Crore) FY17 FY18 FY19E FY20E QoQ) lower than our estimate of | 1605.2 crore. Standalone EBITDA
Total Operating Income 1467.8 3266.0 8120.3 7309.7 for the quarter was at | 868 crore (Q3FY18: | 518 crore, Q2FY19:
EBITDA 39.6 1444.2 4929.0 3003.2 | 1367 crore, our estimate: | 982.6 crore). Corresponding EBITDA
Net Profit 70.5 1032.0 3381.5 2116.8 margin was at 55.6% (Q2FY19: 68.1%, our estimate: 61.2%). Ensuing
EPS 3.6 52.8 173.1 108.3 standalone PAT was at | 609 crore (our estimate: | 678.8 crore)
Graphite electrode prices witnessing softening trend…
Valuation summary Graphite electrodes are used in the EAF route of steel-making. Recently,
FY17 FY18 FY19E FY20E the slowing down of the Chinese economy together with oversupply of
PE (x) 144.2 9.8 3.0 4.8 Chinese steel has resulted in an ongoing correction of steel prices. This
Target PE (x) 180.3 12.3 3.8 6.0 has had an adverse effect on graphite electrodes realisation. Graphite
EV/EBITDA (x) 246.2 6.3 1.7 2.3 electrode prices have softened due to a combination of factors like weak
P/BV (x) 5.5 3.7 2.2 1.7 global steel prices, increased Chinese imports into India and select trade
RoNW (%) 3.8 37.8 73.7 35.5 restriction placed by the US.
RoCE (%) -0.3 47.1 103.5 49.4 Needle coke prices on uptrend; to impact margin profile...
Stock data
Needle coke is a key raw material used in manufacture of UHP grade
graphite electrodes. As needle coke is scarce in supply, its prices are on a
Particular Amount sustained uptrend. In a scenario of softening graphite electrode prices, an
Market Capitalisation (| crore) | 10356
uptick in needle coke costs is likely to impact the margin profile of
Debt (FY18) (| crore) | 272
Graphite India.
Cash & Cash Equivalent (FY18) (| crore) | 1263
Elevated needle coke prices to impact operating margins…
EV (| crore) | 9365
52 week H/L 1126 / 459 While Graphite India reported a healthy 9MFY19 on the back of favourable
Equity capital (| crore) | 39.1
realisations and relatively subdued operating costs, we expect operating
profit margins to decline from supernormal levels of 67.5% in 9MFY19 to
Face value |2
~41% in FY20E. This is on account of a steep rise in price of key raw
Price performance (%) material (needle coke) and the fall witnessed in price of graphite
Return % 1M 3M 6M 12M
electrodes in both UHP grade (on account of recent weakness in steel
prices) and HP grade (on account of removal of anti-dumping duty from
HEG (30.9) (40.9) (41.3) (1.2)
China) electrodes. Taking into account the same, we downward revise our
Graphite India (26.2) (44.0) (45.5) (22.7)
graphite electrodes realisation assumption for FY19 & FY20E while we
upward revise the needle coke costs estimate. Aligning with the
Research Analyst contraction witnessed in P/E of global graphite electrodes majors, we
now value the stock at 6x FY20E P/E. Hence, we arrive at a target price of
Dewang Sanghavi
dewang.sanghavi@icicisecurities.com
| 650 and assign a BUY rating on the stock. In the current volatile
scenario, a healthy payout ratio coupled with a robust balance-sheet and
strong track record of Graphite India comforts our positive stance.
Change in estimates
FY19E FY20E
(| Crore) Old New % Change Old New % Change Comments
Revenue 8412.1 8,120 -3.5 8046.2 7309.7 -9.2 Downward revised estimate for FY19E & FY20E
EBITDA 5,175.3 4,929 -4.8 4,018.2 3,003.2 -25.3
EBITDA Margin (%) 61.5 60.7 -82 bps 49.9 41.1 -885 bps
PAT 3,517.1 3,381 -3.9 2,735.8 2,116.8 -22.6
EPS (|) 180.0 173.1 -3.9 140.0 108.3 -22.6
Source: Company, ICICI Direct Research
Assumptions
Current Earlier Comments
FY19E FY20E FY19E FY20E
Domestic capacity utilisation (%) 95 95 95 85 Maintained estimates
Consolidated capacity utilisation (%) 88 90 88 88 Maintained estimates
Source: Company, ICICI Direct Research
100000 95 95 100
94
80000 79 80
70
60000 60
tonne
80000
80000
80000
80000
80000
74800
76000
76000
%
40000 40
63400
55600
20000 20
0 0
FY2016 FY2017 FY2018 FY2019E FY2020E
100000 100
87 88 90
80000 80
74
tonne
60000 62 60
98000
98000
98000
98000
98000
88600
85600
85900
%
72520
40000 40
60760
20000 20
0 0
FY2016 FY2017 FY2018 FY2019E FY2020E
75.6 71.3
80.0 60.2 59.8
70.0 57.9
60.0
%
50.0 29.7
40.0
30.0
20.0 9.5 10.8
10.0 2.5 2.2
0.0
Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19
820 50.0
(%)
620 40.0
30.0
420
20.0
220 10.0
20 0.0
Sep-17
Sep-18
Dec-17
Dec-18
Oct-16
Oct-17
Jul-16
May-16
Jul-17
Jul-18
Nov-16
Nov-18
Aug-16
Mar-18
Apr-17
Apr-18
Apr-16
Feb-16
Feb-19
Feb-17
Jan-18
Jan-17
Jun-18
Jun-17
Price Idirect target Consensus Target Mean % Consensus with Buy
Source: Bloomberg, Company, ICICI Direct Research
Key events
Date Event
Mar-10 Converts bonds into shares. Sets bond conversion price at | 55.3
Dec-10 European Union renews tariffs on graphite electrodes from India (tariff at 9.4%)
Mar-11 GIL declares lockout at Titlagarh unit post labour unrest at its plant site
Jun-11 Titlagarh unit resumes production post settlement with labour unions including increase in wages & other benefits
Mar-12 GIL sells its entire stake in its subsidiary Carbon International (engaged in trading activities only) for €4.6 million (| 30 crore)
Jul-12 Karnataka State Pollution Control Board orders the company to shut operations in its Bangalore plant till further orders, citing environmental pollution
Aug-12 GIL resumes operations at its Bangalore plant after obtaining stay on the pollution control board order for closure of its plant at Bangalore
Sep-12 The company's international peer Graftech expected to hike electrode prices for 2013 contracts
Nov-13 Global players announce production cuts to support graphite electrode prices
GoI imposes antidumping duty on graphite electrodes (all diameters) originating in or exported from China. The amount of anti-dumping duty ranges from US$278.19
Feb-15
per MT to US$922.03 per MT, depending on the Chinese producer/exporter
Mar-16 Board declares interim dividend of | 2.0/share
Jun-17 Board declares dividend of | 2.0/share for FY17
Source: Company, ICICI Direct Research
Recent Activity
Buys Sells
Investor name Value Shares Investor name Value Shares
Causeway Capital Management LLC 3.5M 0.3M L&T Investment Management Limited -3.3M -0.3M
IDFC Asset Management Company Private Limited 1.4M 0.1M J.P. Morgan Asset Management (Hong Kong) Ltd. -2.8M -0.3M
HSBC Global Asset Management (India) Private Limited 0.4M 0.0M Fisher Investments -1.5M -0.1M
Schroder Investment Management Ltd. (SIM) 0.5M 0.0M JPMorgan Asset Management U.K. Limited -1.5M -0.1M
BlackRock Institutional Trust Company, N.A. 0.4M 0.0M Sundaram Asset Management Company Limited -1.4M -0.1M
Source: Reuters, ICICI Direct Research
HEG 2420 5750 Buy 9,680 270.6 750.1 575.0 8.9 3.2 4.2 10.3 3.7 4.8 78.9 121.4 65.7 59.8 79.8 43.8
Source: Company, ICICI Direct Research
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
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