GRAPHITE INDIA

Graphite India Ltd - Background

Graphite India Ltd, formerly known as Carbon Corporation was incorporated in the year 1974 is headquartered in Kolkata. The company’s principal activities are to develop, manufacture and market graphite electrodes, pipes and tanks, impervious graphite equipment and related components. It also offers high speed steel and alloy steel that is used in manufacturing cutting tools, such as drills, taps, milling cutters, reamers, hobs, broaches, and special form tools for the automotive, machine tools, aviation, and DIY markets. Its manufacturing facilities are located at Nasik in Maharashtra, Durgapur in West Bengal, Bangalore, Mandya and Mysore in Karnataka and Barauni in Jharkhand. It has total 1981 permanent employees.

Graphite India Ltd - Price Chart

Investment Rationale

• Increase in steel Demand after going through bottom down

• Rise in Infrastructure spending in Emerging Economies

• Implementation of Anti-Dumping Duty

• Product diversification and Increase in production capacity

• Indian government allocation for urban India development

Risks and Concerns

• Decline in Chinese Steel demand

• Fluctuation in commodity prices

• Implementation of Demonetization

Graphite India Ltd - Financial Summary

The revenue has decreased from 1750.73 cr in 2015 to 1422.9cr in 2016 because of the decrease in steel price and china’s economic slowdown but with cost effective production and production diversification will increase the margins, we expect company to outperform the industry in the both medium term and long term

Business Profile

Graphite India Limited is engaged in the manufacturing graphite electrodes, graphite equipments, steel, glass reinforced plastic (GRP) pipes and tanks and generation of hydel power. GIL’s manufacturing facilities are spread across 6 plants in India with an aggregate electrode manufacturing capacity of 80000 tons per annum. It operates through three segments: Graphite and Carbon, Steel and Others.

Its main products are:

1. Graphite Electrodes

2. Specialty carbon and graphite

3. Impervious Graphite equipment

4. Calcined petroleum coke and carbon electrode paste

5. Glass reinforced plastic pipes

6. High speed steel and Alloy tool steels

GIL has been continually improving its product quality and services thereby scaling newer heights of excellence and customer recognition. Its plant and machinery which uses the state-of-the-art technology makes them achieve economies of scale. It had spent 12.58 Lakhs in R&D during 2015-16.

SEGMENT PERFORMANCE:

The Company’s Graphite and Carbon Segment continues to be the main source of revenue and profit for the Company, accounting for about 81% of the total revenue as of March 2016. Glass Reinforced Plastic Pipes division performed better during the year in comparison to previous year. Steel division’s performance during the current year was similar compared to previous year.

MILESTONES

EQUITY FUNDS HOLDINGIN GRAPHITE INDIA LTD:(Cur: Rs in Cr.) As on OCT 2016

Investment Rationales

Increase in steel Demand after going through bottom down

Global demand in steel is expected to increase by 0.2% during 2016-17 following a contraction of -3% in 2015. In 2017-18 global demand is expected to reach 1510 Mt from 1501 Mt in 2016.

Steel sector has bottomed in then past 4 years and now with infrastructure devlopment projects in india and growth in emerging economies will drive the sector. The growth in automotive component sector will have a possitive impact in the global steel sector.. We expect this slight growth momentum to remain weak for the time being due to the continued rebalancing in China and weak recovery in the developed economies. Downside risks to this outlook come from the high corporate debt and real estate market situation in China, Brexit uncertainties and possible further escalation of instability in some regions. On a positive note, steel demand in the emerging and developing economies excluding China is expected to accelerate to show 4.0% growth in 2017 thanks to the resilient emerging Asian countries and stabilisation of commodity prices. While the US economy continues to show strength, steel demand in the US is struggling to grow due to the strong dollar, which hurts the manufacturing sector, and the collapse in shale related investments. Likewise, Japan’s steel demand growth is subdued due to structural issues and is negatively affected by the appreciation of the yen after the UK referendum. Steel demand in developed economies is projected to increase by 0.2% in 2016 and by 1.1% in 2017. In 2016 some low performing emerging economies are showing signs of stabilization. After two consecutive years of double-digit contraction, steel demand in Brazil will start a moderate recovery in 2017. The minor rebound in oil prices helped to stabilize the decline in Russia and prevent further deterioration of the Mexican, South American and GCC economies. However, lower and unstable oil prices and geopolitical instability are continuing to undermine the outlook for the MENA region. Indian steel demand is expected to report solid growth in 2016-2017 backed by consumption-boosting reforms and infrastructure investment. In the ASEAN countries, benefiting from stable macroeconomic policies, construction will continue to drive strong steel demand growth. Steel demand in emerging and developing (excluding China) economies is expected to expand by 2.0% in 2016 and 4.0% in 2017

Rise in Infrastructure spending in Emerging Economies

Increase in tourism and rise in urban development projects in Asian economies have increased the growth of steel sector. Increasing prosperity in emerging markets is expected to drive infrastructure financing toward consumer sectors, including transportation and manufacturing sectors that provide and distribute raw materials for consumer goods. The Asian market is slated to represent nearly 60% of global infrastructure spending by 2025. Indonesia (power and transport), Vietnam (PPP projects throughout), the Philippines and Thailand (both transport) are areas of opportunity. Malaysia and Singapore will focus on quality rather than quantity. Infrastructure investment rose from $6 bn to $16 bn between 2005 and 2013 in Malaysia. Infrastructure spending is expected to grow by around 9% a year between 2013 and 2025 which is consistent with other countries in the region but substantially faster than the global infrastructure market. The Philippines’ economy has grown very strongly in recent years and infrastructure spending needs to respond to the growth in the economy to support further growth. Spending in infrastructure is expected to grow at around 10% a year in the next decade, reaching a total of $27 bn a year by 2025. Singapore has high quality infrastructure which means that its infrastructure needs will be lower than other countries in the region. Hence, its share of regional and global infrastructure spending is likely to fall. Singapore’s overall infrastructure spending is expected to approach $18 bn a year by 2025. Rail projects are a key driver of investment growth in Singapore with a doubling of the metro system by 2030, contributing to an estimated $16 bn to be spent over the coming decades. Manufacturing and social infrastructure are also expected to see growth in investment. There is positive outlook for increase in infrastructure investment in Thailand which is expected to reach $58.5 bn by 2025. Thailand’s share of total global spending will rise in the near term due to the expected high speed rail project but will be broadly stable over the longer term. Investment is expected to grow across all sectors in Thailand. An ambitious high-speed rail project under construction, which is expected to cost $32 bn over 7 years, shall project significant spending in the transportation sector.

GLOBAL INFRASTRUCTURE INVESTMENT INDEX 2016

Global infrastructure index is conducted out of 41 countries and rating has been given based on the growth prospects and current policies governing in their respective countries.

Implementation of Anti-Dumping Duty

India is expected to impose an anti-dumping duty of up to $ 557/ ton on imports of certain steel products from six countries, including China, Japan and Korea. Anti dumping is an effective step to increase the domestic demand by imposing duty on imports of steel wire rods from china which safeguards manufacturers from cheap in-bound shipments. The Directorate General of Anti-Dumping and Allied Duties (DGAD), under the Commerce Ministry, has found that hot-rolled flat products of alloy or non-alloy steel has been exported to India from China, Japan, Korea, Russia, Brazil and Indonesia at below-normal value, the authority recommends imposition of provisional anti-dumping duties on the imports of the subject goods, originating in or exported from the subject countries. Countries initiate anti-dumping probes to determine if the domestic industry has been hurt by a surge in below-cost imports. As a counter-measure, they impose duties under the multi-lateral WTO regime. Anti-dumping measures are taken to ensure fair trade and provide a level-playing field to the domestic industry. They are not a measure to restrict imports or cause an unjustified increase in cost of products.

Product diversification and Increase in production capacity

Graphite segment is a main contributor but orders from Glass reinforced pipes and tanks, high speed steel has provided an edge in the industry as the current scenario of steel is not good enough for highly competitive Because of its production it has been receiving orders from different sectors. The acquisition in UK subsidiaries will start of providing margins as the investors held their confidence on service based UK economy. Graphite India Ltd reported healthy capacity utilization for Q2FY17. Capacity utilization was at 75%, higher than our estimate of 65% (capacity utilization of 63% in Q2FY16 and 68% in Q1FY17). The installed capacity in India is 80,000 ton of which 54,000 ton is in Durgapur, 13000 ton in Nashik and 13000 ton in Bangalore. GIL also owns a plant in Nurnberg (Germany) with an installed capacity of 18,000 tonne. The company commissioned its last capacity expansion in Q1FY14 wherein it installed a capacity of 20,000 ton at its Durgapur plant while incurring a capex of 255 crore.

Indian government allocation for urban India development

India needs Rs 31 trillion (US$ 454.83 billion) to be spent on infrastructure development over the next five years, with 70 per cent of funds needed for power, roads and urban infrastructure segments. The Indian power sector itself has an investment potential of US$ 250 billion in the next 4-5 years, providing immense opportunities in power generation, distribution, transmission and equipment. The Indian construction equipment industry is reviving after a gap of four years and is expected to grow to US$ 5 billion by FY2019-20 from current size of US$ 2.8 billion. Foreign Direct Investment (FDI) received in construction development sector from April 2000 to December 2015 stood at US$ 24.18 billion. Silver Spring Capital Management, a Hong Kong-based equity hedge fund, plans to invest over Rs 2,000 crore (US$ 306 million) in Hyderabad-based infrastructure developer Trans stroy India Ltd, for construction of highways in the country. Altico Capital, the non-banking finance company (NBFC) of Clearwater Capital Partners LLC, plans to invest around US$150 million in the commercial office properties and infrastructure sector over the next 12-18 months. Sovereign wealth funds and global pension funds plan to invest up to US$ 50 billion in Indian infrastructure sector over the next five years. The Asian Development Bank (ADB) and Government of India signed a loan agreement of US$ 80 million, which is the third tranche of a US$ 200 million financing facility under the North Eastern Region Capital Cities Development Investment Programme, and will be invested for improving water supply, solid waste management and sanitation in the cities of Agartala and Aizwal, the capital cities of Tripura and Mizoram respectively. Maharashtra State Government plans to launch infrastructure projects worth Rs 73,367 crore (US$ 10.78 billion) in Mumbai and neighboring areas in 2016, which include coastal road, Trans harbour link, metro rail, airport and road projects. The Government of India has announced highway projects worth US$ 93 billion, which include government flagship National Highways Building Project (NHDP) with total investment of US$ 45 billion over next three years

Demand cycle change in steel & Cost effective production:

As graphite electrode is a key input for the EAF route of steelmaking, subdued demand from the user industry resulted in a decline in graphite electrodes prices. Even in Q2FY17, operating margins of graphite electrodes (standalone operations) declined from 14.0% in Q2FY16 to 4.4% in Q2FY17. Better working capital management led to a reduction in debt levels for the company. On a consolidated basis, GIL’s net cash & cash equivalents has increased from 34 crore at the end of FY15 to 135 crore at the end of FY16.

Industry Overview

Graphite electrode will play a crucial role in infrastructure and construction, oil and gas industry, and automotive industries varies in countries that have shown robust growth rates for steel consumption. The infrastructure and construction sector, which accounts for more than 51.53% of the world steel consumption, is expected to post a CAGR of 7.6 % until 2020. Similarly, the machinery and automotive industries, which account for roughly 14.84% and 12% of the global steel consumption in 2015 respectively, are poised to grow at a higher rate during the forecast period. This will lead to a constant increase in steel demand over the next few years, thereby fueling the growth of graphite electrodes.

Globally, the demand for UHP graphite electrodes is anticipated to account for around 67% of the total graphite electrodes market by 2020. UHP electrodes are used mainly in steel smelting process of large capacity EAF and in ladle refining furnace. These electrodes are impregnated with special pitch in the furnace to increase strength and density. These electrodes possess several characteristics such as low electrical resistivity, high-temperature resistance, coefficient of thermal expansion (CTE), and ultra-high bending resistance, which will significantly propel their usage in the coming years.

India Graphite Electrode is used in electric arc furnace based steel mills for conducting current that melts scrap iron and steel and is a consumable item for the steel industry. The principal manufacturers are based in USA, South America, Europe, India, China, Malaysia and Japan. Graphite Electrode demand is primarily linked with the global production of steel in electric arc furnaces. Between the two basic methods for steel production - (1) Blast Furnace (BF); and (2) Electric Arc Furnace (EAF) – the share of EAF route to steel production is estimated at about 26% at the global level. This is expected to grow further in years to come due to its inherent favorable characteristics of (a) an environment friendly and less polluting production process; (b) low capital cost; and (c) faster project (commissioning) time. Fresh investments in EAF steel mills are characterized by large furnace capacities requiring large diameter UHP Electrodes. It is expected that the demand for UHP Electrodes too will grow synchronously. These industry features coupled with an increasing proportion of EAF steel share in total crude steel production in future should proportionately augment the demand for Graphite Electrodes in long term.

Graphite India Ltd - Risks and Concerns

Decline in Chinese Steel demand

China’s steel mills, which supply half of global output, churned out less steel in the first two months of the year, extending a decline amid government efforts to reduce reliance on manufacturing for growth. Crude-steel production for the January-to-February period dropped 5.7 percent from a year earlier to 121.07 million metric tons, data published by the country’s statistics bureau Saturday showed. Steel products output fell 2.1 percent to 162.28 million tons. teel mills in China are battling losses and overcapacity as the nation transitions its economy to one fueled by consumption and services, from growth driven by manufacturing, and have seen their output fall off record highs in 2014. Annual steel output shrank 2.3 percent to 804 million tons in 2015, the first contraction since 1981. Steel consumption in China, which fell 5.4 percent last year, has seen drop of further 3 percent in 2016.

Implementation of demonetization

Demonetization has impacted the ongoing infrastructure growth as there will be delay in payments and also decreases in spending by the consumers. But Government has given relief by announcing housing schemes for rural people which provide for the growth of infrastructure as Smart cities development are in full sway. The government allocated about 7,296 crore for smart cities development and added 100 cities under this development. Under the project AMRUT each selected city will be given Rs 500 crore over a period of 5 years by the centre with the respective states. For the rural regions Government will build 33% more homes under the Pradhan Mantri Awas Yojana (PMAY). Home loans in villages up to Rs 2 lakh to get 3% interest exemption, available for building a new house or expanding an old one. In urban region Home loans up to Rs. 9 lakh will get 4% interest subvention, and loans up to Rs. 12 lakh will get 3%. Banks are expected to cut their interested rate in the coming months. In the long demonetization will assist for the growth of infrastructure sector in India.

Financials

Q2 FY16 Overview

• The revenues increase by 3.01% as domestic increases and growth in infrastructure spending has resulted for increased margins where as gross profits increased by 12.45 %

  	Q2 2016	Q2 2015	VAR [%]	Q1 2016	Q1 2015	VAR [%]
  Gross Sales	363.57	352.69	3.1	349.57	322.35	8.4
  Excise Duty	0	0	0	0	0	0
  Net Sales	363.57	352.69	3.1	349.57	322.35	8.4
  Other Operating Income	0.24	0.21	14.3	0.23	0.21	9.5
  Other Income	3.88	0.97	300	3.03	1.39	118
  Total Income	367.69	353.87	3.9	352.84	323.95	8.9
  Total Expenditure	289.6	284.43	1.8	281.3	259.9	8.2
  PBIDT	78.09	69.45	12.4	71.54	64.04	11.7
  Interest	8.29	8.8	-5.8	7.94	8.08	-1.7
  PBDT	69.8	60.64	15.1	63.59	55.97	13.6
  Depreciation	18.47	14.4	28.3	16.34	13.95	17.1
  Minority Interest Before NP	0	0	0	0	0	0
  PBT	51.33	46.24	11	47.25	42.02	12.4
  Tax	15.61	14.36	8.7	15.37	13.29	15.7
  Fringe Benefit Tax	0	0	0	0	0	0
  Deferred Tax	0	0	0	0	0	0
  Reported Profit After Tax	35.72	31.87	12.1	31.87	28.73	10.9
  Minority Interest After NP	0	0	0	0	0	0
  Profit/Loss of Associate Company	5.1	0.4	1175	7.09	-0.19	3831.6
  Net Profit after Minority Interest & P/L Asso.Co.	40.82	32.27	26.5	38.96	28.54	36.5
  E
  ExtraB-ordinary Items	0	0	0	0	0	0
  AdjuIsted Profit After Extra-ordinary item	40.82	32.27	26.5	38.96	28.54	36.5
  T
  D
  PBIDATM(%)	21.48	19.69	9.1	20.47	19.87	3
  PBDTM(%)	19.2	17.19	11.7	18.19	17.36	4.8
  PATeM(%)	11.23	9.15	22.7	11.15	8.85	26

• The EPS decreased from 1.74 Rs in Q2 2015 to 0.82Rs in Q2 2016 shrunk by (47.01%) the last 3 quarters company has been under pressure with global economy improving it is expected to perform well.

Valuation

PERFORMANCE

Balance Sheet (in cr)

KEY RATIOS

INCOME STATEMENT (in cr)

Graphite India Ltd - Cash Flow Statement( incr)

Conclusion and Recommendation

We are positive on Graphite India Ltd which is a major player in graphite electrode production, over the long term better product diversification and growth in infrastructure projects will increase the margins. Hence recommend a BUY at CMP of RS.72 and further add on declines between Rs.67.75 to Rs.70 for a target of Rs.81 to Rs.83 with stop loss maintained at Rs.67.25.

Technical Chart