Graphite India - Lower demand hits margins - Centrum

Graphite India results were below our expectations with net sales at Rs4.2bn, drop of ~4% YoY as lower demand led to pressure on sales volumes and muted realizations. Higher costs resulted in fall in margin to 13.5%, drop of 300bps QoQ. Other expenses included forex loss of ~Rs100mn on foreign currency packing credit loans and resulted in suppressed PAT of Rs345mn, ~30% below our estimate of Rs493mn and down by ~26% QoQ. We see demand pressure continuing in the near future for graphite electrodes due to low steel production growth but remain positive on the stock on account of better cost proposition from Durgapur plant (expansion is complete), strong balance sheet and cheap valuations with good dividend yield. Maintain Buy.

Lower demand leads to inventory build up: Capacity utilization was strong at 96% but lower global demand due to a drop in steel production (world steel capacity utilization fell to ~73% in Dec-12) led to build up in inventory which affected the topline and realizations negatively.

EBITDA margin fall more than expected: EBITDA margin fell to 13.5% during the quarter on account of muted realizations and increase in RM and power & fuel costs on account of higher production. Staff cost also went up by ~18% QoQ and ~28% YoY on account of the wage revision.

Outlook – Prices under pressure, lower costs to support earnings: Lacklustre demand from steelmakers globally has put pressure on graphite electrode demand and prices for electrodes have seen downward bias. Our interaction with the management post results reveal that needle coke negotiations (currently underway) could result in 8-10% lower contract prices. Expansion of 20 ktpa at Durgapur plant has been completed and the company will target more volumes from here to achieve economies of scale at one location. Wage costs have been revised upwards and are expected to be at a quarterly run rate of Rs340-350mn. EBIT performance of graphite division was stable sequentially but other unallocable expenses of ~Rs139mn (inlc. Rs100mn of exchange loss on packing credit loans) led to lower profits. We see pressure on volumes and realizations due to low demand and expect lower needle coke prices to mitigate the impact of the same. We reduce our EBITDA estimates by 4.9%/3.7% for FY13E/14E. We expect electrode volumes of 57000/60800 tonne from domestic operations in FY13E/14E.

Valuations: Attractive, maintain Buy: We maintain our positive stance on the back of cheap valuations, strong balance sheet and good dividend yield. We value the company at 5.5x FY14E EV/EBITDA and arrive at a target price of Rs109. Maintain Buy.

Source : Equity Bulls

Keywords