Buy Graphite India; target of Rs 550: ICICI Direct

ICICI Direct's research report on Graphite India

Graphite India reported a strong set of Q2FY18 numbers. On account of higher-than-expected realisations, the performance came in notably better than our estimates The company’s domestic operations reported capacity utilisation of ~89% (vs. our estimate of ~95%, Q2FY17: 75%, Q1FY18: 95%). GIL reported income from operations of Rs 461.9 crore (up 44.5% YoY, 31.6% QoQ), higher than our estimate of Rs 421.8 crore EBITDA during the quarter came in at Rs 129.9 crore (up 266% QoQ) significantly higher than our estimate of Rs 77.9 crore. The subsequent EBITDA margin was at 28.1% (our estimate of 18.5%) The company reported other income of Rs 19.2 crore (our estimate: Rs 21.6 crore), depreciation of Rs 12 crore (our estimate: Rs 15.5 crore), while interest expenses came in at Rs 1.5 crore (our estimate: Rs 2.8 crore). Ensuing PAT was at Rs 89.9 crore, up 204% QoQ (our estimate of Rs 54.4 crore).

Outlook

Graphite India’s Q2FY18 performance was marked by healthy topline growth and a strong EBITDA, reflective of increased realisations of graphite electrodes. Subsequently, we expect EBITDA margins to increase from 2.7% in FY17 to 18.5% in FY18E and further to 27.2% in FY19E. Going forward, on a standalone basis, we model capacity utilisation of 91% for FY18E and 80% for FY19E. On a consolidated basis, we model capacity utilisation of 84% for FY18E and 75% for FY19E. We tone down the capacity utilisation levels for FY19E factoring in the current scarce availability of needle coke (a key raw material). Any increase in availability of needle coke presents an upside risk in terms of capacity utilisation. We value the company at 10x FY19E EV/EBITDA thereby arriving at a target price of Rs 550. We maintain BUY recommendation.

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