Stock Review: Graphite India Limited (GIL)

 

Graphite India Limited (GIL) operates in four major areas: graphite and carbon, power, steel and other segments. The company is a leading producer of graphite electrodes and accounts for approximately 6.5 per cent of global electrode capacity.

 

Strengths

Good Q2 numbers:The graphite and carbon segment reported a growth of 19.2 per cent y-o-y in top line, mainly due to higher graphite electrode volumes. The power segment's revenue grew 64.1 per cent y-o-y. In Q2FY11, operating profit declined 16 per cent y-o-y but grew 58 per cent q-o-q.This sequential growth was due to improved volumes and higher capacity utilisation.

Strong entry barriers: The global graphite electrode industry is characterised by a high level of consolidation: the top six players account for over 70 per cent of total global installed capacity. The balance capacity is owned by a few small players. According to a recent report from Angel Broking, "The highly consolidated nature of the industry is owing to the barriers for new entrants."

 

Opportunities

Optimising costs: To optimise costs at the Bangalore plant, the company is implementing a voluntary retirement scheme. The scheme cost the company Rs 12.7 crore in Q2FY11, but is expected to save approximately Rs 6 crore annually.

The new 50 mega watt (MW) power plant is progressing on schedule. It is currently awaiting environmental clearance from the government. The project is expected to be commissioned by Q4FY12.

According to the Angel Broking report, the graphite electrodes industry is expected to grow faster, compared to electric arc furnace (EAF) steel production over the next few years, as the de-stocking of graphite electrode inventory by steel manufacturers is expected to reverse. "We expect graphite electrode volumes to register a 17.2 per cent compounded annual growth rate (CAGR) in CY10 and CY11. GIL plans to expand its capacity from 78,000 MT per year to 98,000 MT per year. This will be completed by FY12. Hence, it is well poised to reap the benefits of growth in demand," says the report.

 

Concerns

The company's main raw materials are either petroleum based or coal based. As the price of crude and coal rise, the price of derivative materials like needle coke, pitch, furnace oil and met coke all tend to rise. Thus, rising prices of these two commodities threaten to raise the company's input costs drastically. In addition, the company exports, imports and has also incurred foreign currency debt. So volatility in the foreign currency market directly impacts its bottom line.

 

Valuations

GIL has been able to bring down its debt-to-equity ratio from 1.16 (in FY06) to 0.2 (in FY10). Moreover, the company's net cash per share has risen to Rs 13.1 per share in FY10 as compared to Rs (-) 7.8 per share a year before. The stock is currently trading at a 12-month trailing price-to-earnings (PE) ratio of 8.8 (as on December 7, 2010). This is slightly above its five-year median PE of 7.6. It has registered a five-year CAGR of nearly 29 per cent in earnings per share; hence its price-earnings to growth (PEG) ratio is 0.8. Given a reasonable valuation and sound growth prospects, you may accumulate the stock on dips.