Graphite India - Margins remain under pressure - Centrum

Graphite India's results were below our expectations at EBITDA level with EBITDA sliding down to Rs489mn (down ~32% YoY and below 23% our exp.) as lower demand led to pressure on realizations and costs remained high for needle coke and power and fuel. Higher costs resulted in fall in margin to 9.8%, a drop of 370bps QoQ and 640bps YoY. Other income was higher and along with lower tax resulted in PAT of Rs416mn, ~5% above our estimate of Rs395mn and up by ~20% QoQ. We see demand pressure continuing in the near future for graphite electrodes due to low steel production growth and the large inventory of higher cost needle coke bought earlier is expected to keep margins under pressure for GIL. We revise our EBITDA estimates downwards for FY14E/15E by 21.9%/9.8% to account for the same. We like the stock on account of strong balance sheet with good dividend yield. Downgrade to Accumulate.

No contribution from new capacity due to lower demand: Capacity utilization stood at 103% for the standalone capacity of 60ktpa (without considering expansion of 20ktpa). Lower global demand due to a drop in steel production led to expansion capacity not being utilized affecting realizations negatively.

EBITDA margin fall more than expected: EBITDA margin fell to 9.8% during the quarter on account of muted realizations and increase in RM and power & fuel costs. Stores & spares cost also went up by ~34% YoY.

Outlook – Pricing pressure and high cost needle coke inventory to keep earnings muted: Lacklustre demand from steelmakers globally has put pressure on graphite electrode demand and price for electrodes has seen a downward bias. Needle coke has been contracted 15-18% lower for different grades but GIL has a large inventory (more than 2 qtrs in our view) of higher cost coke bought earlier. Expansion of 20 ktpa at Durgapur plant has been completed and the company will target more volumes to achieve economies of scale at one location. We see pressure on volumes and realizations due to low demand and do not expect lower needle coke prices to mitigate the impact of the same completely. We reduce our EBITDA estimates by 21.9%/9.8% for FY14E/15E. We expect electrode volumes of 60000/64000 tonne from domestic operations in FY14E/15E.

Valuations - Downgrade to Accumulate on lower earnings: We maintain positive stance on the back of strong balance sheet and good dividend yield. We value the company at an average of 5.5x FY14E EV/EBITDA and 9x FY14E P/E and arrive at a target price of Rs88. Downgrade to Accumulate.

Source : Equity Bulls

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