GRAPHITE India

 

 

GRAPHITE India is the largest producer of graphite electrodes in the country and one of the largest in the world. The company's stock has consistently outperformed the benchmark Sensex. The scrip more than doubled in the past one year compared with the 26% jump in the Sensex. The company is expected to grow in future from the increasing number of expansion projects in the steel sector, the main user of graphite electrodes.

BUSINESS AND OUTLOOK:

The company manufactures ultra high graphite electrodes used in steel plants that use the electric arc furnace method. This is a more efficient method compared to the traditional blast furnace method. The latter consumes more electricity and is more capital intensive.

   The graphite electrodes division contributes 78% to the company's revenue. The rest comes from the sales of graphite equipment, calcined petroleum coke, high speed steel, allow steel and GRP tanks and pipes. The company is currently expanding capacity of its Durgapur plant by 20,000 tonnes with a capex of Rs 255 crore. The company is also setting up a new 50-megawatt power plant at Durgapur, with an investment of over Rs 214 crore.

   The company will fund the capex required for both the projects through a mix of internal accruals and borrowings. The captive power plant at Durgapur is likely to reduce the cost of production significantly. This cost savings could be reflected in FY11 earnings. Going forward, more steel companies are coming with electric arc furnace type of steel plants to improve efficiency and reduce cost. This can directly benefit Graphite India, as it is a leading supplier in this segment.

FINANCIALS:

In FY10, the company reported consolidated net sales of Rs.1,347, 10% lower than the previous year's sales. Net profit remained more or less the same at Rs 234 crore due to lower raw material costs relative to sales.

   The company has repaid a significant amount of debt in the past four years. This has resulted in a drop in debt relative to operating profit before depreciation from 4.7 in 2006 to just over 0.8 in FY10. This gives a significant financial flexibility necessary for the future capacity expansion or inorganic acquisitions.

VALUATIONS:

The stock trades at about eight and a half times its trailing twelvemonth earnings. This seems to be lower compared to that of most of its peers. The company's recent decision to add capacity and backward integration should add to the volume growth. Growing demand for graphite electrodes from the steel industry and all around improvement in the efficiency by the company can lift Graphite India's topline as well as bottomline in the coming quarters. Investors can look at this stock with a long-term perspective.