Stock Review: GRAPHITE India Limited (GIL)

 

A higher crude steel output in India paints a rosy picture for Graphite India Limited. Given its growth momentum and the leadership position, investors can consider the stock with a horizon of over two years

 

GRAPHITE India Limited (GIL) will benefit from the increasing crude steel production in India. The company is India's leading producer of graphite electrodes, which is a key ingredient to produce steel by the electric arc furnace process. India is likely to be the second-largest producer of crude steel in the next four years from its current fourth place, according to industry estimates. Also, the recent weakness in the equity market has impacted the company's stock price, making it attractive at current levels.

BUSINESS:    

GIL, with an annual capacity of 78,000 MT, occupies nearly 7% of the global market share and services clients such as Sterling Steel, ArcelorMittal, ThyssenKrupp and Qatar Steel. Sales from its graphite division, which contributes about 80% to the topline, have been growing at 15% over the past five years.

   GIL also has operations in power and steel. It has a 33 megawatt installed capacity power plant where it generates power via hydel and multi fuel routes. In the steel space, it manufactures high-speed steel (HSS), where it corners 60% of the domestic market share. HSS is used in automotive, machine tools and aviation industries.

GROWTH DRIVERS:

Provisional data from the World Steel Association showed that India ranked fourth among the largest crude steel producers during January-September 2010, with an output of 50.1 million tonne. Estimates indicate that India will be the second-largest producer in the next four years, which implies that demand for electrodes will also increase significantly as it constitutes about 2% of the steel-making costs. Globally, steel production via the EAF route has increased over the past two decades from 26% to 32%.

   In order to meet demand, the company is expanding capacity at its Durgapur facility by 20,000 MT by the end of this year from the present 34,000 MT. To address its power requirement, the company is in the process of setting up a 50-megawatt thermal power plant at the same location, which will be commissioned a year from now.

FINANCIALS:

Over the past five years, the company's net sales have been growing at over 10% while its net profit has increased almost 40%, compounded annually. During the same period, GIL has consistently been increasing its cash flows from operations and using it to ease its debt burden. Its debt-to-equity ratio currently stands at 0.27 times from 0.9 times in 2006. As of December 2010, the company's net cash stood at 60 crore. This puts the company in a comfortable position to expand capacities further.

   During the past four quarters, the company's net sales rose 26%. Operating profit margin, however, has been under pressure, declining 700 basis points. This was primarily due to the rise in price of needle coke, which the company procures from third parties.

   Demand for electrodes declined on the back of slow recovery in industrial production in the West while electrode producers increased their capacity utilisation. This has pushed electrode prices down by nearly 13-14% from a year ago.

   The company sees prices improving in coming quarters taking cues from price hikes undertaken by SGL Carbon and Graftech International, which are global market leaders in electrode production.

VALUATIONS:

The stock has fallen 12% in the past three months. At 94.8, it trades at 9.1 times its 12-month trailing price-earnings ratio. Given its leadership position and growth prospects, investors can consider the stock with a horizon of over two years.