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GRAPHITE ELECTRODES

On an upswing
GRAPHITE ELECTRODES
On an upswing
Dec 2013
Rajesh Zawar
+91 22 6626 6726
rajeshzawar@rathi.com
India Equities
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Anand Rathi Research
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Graphite India & HEG to leverage growth
 Western graphite electrode (GE) capacity
curtailments driving supply rationalization
 Raw-material access and scale leading to
polarisation towards 10-12 global players
 Supply continuity for global steel
manufacturers favours stable and long-term
GE players
 Steel capacity utilisation upswing will create
pricing power in GE industry
 Graphite India and HEG have attained global
scale and competitiveness to leverage the
upswing – initiate coverage with BUY
 Protectionism through anti-dumping duty, the
biggest risk
GE industry peers
Source: Industry, company annual reportsa
Graphite electrode (GE) demand supply scenario
Source: Graftech International annual reports
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Index
Demand improvement gaining visibility 4
Long-term growth drivers intact 5
GE manufacturing process 6
Entry barriers create an edge 7
Needle coke manufacturing process 8
Indian players moving into the global league 9
Graphite India – Stability at the best 10
HEG – Poised for growth 14
Steel utilization levels looking up
Steel capacity utilization improving in developed
markets – better dynamics for EAF
Feedstock (scrap, DRI or HBI) offer greater
operational flexibility to EAF steel producers
Environmental advantages: fewer carbon emissions
and recycling gaining wider acceptance
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Demand improvement gaining visibility
No known alternative to GE
Graphite electrodes (GE) utilised in steel production
through the electric arc furnace (EAF) route
Efficient/flexible – swing capacity to manage demand
volatility – US market, best example
~1.7kg to ~4kg of GE consumed per tonne of steel
produced; inversely proportional to the EAF current
Growing importance of the EAF route in global steel production
Source: IISI, AnandRathi Research
Graphite electrode use in EAF
Source: Industry reports
EAF capacity to increase ~25% over five
years
Steel production growth in the last decade driven by
BOF technology for scale and efficiency in China;
environmental empathy creating strong driver for
manufacturing-process reorientation
Life-cycle approach to the business plans of large steel
players (>10m tonnes pa) necessitating EAF facilities to
balance demand volatility and cost effectiveness
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Long-term growth drivers intact
DRI - new frontier for feedstock
Coking coal replacement necessitating DRI (Direct
Reduced Iron) usage instead of scrap
Iron-reduction technologies have successfully
demonstrated large-scale efficient production
New energy sources (shale gas, natural gas) favouring
DRI production
GE Regional Demand in 2012 - Market size of ~1.9m tpa (US$5.5 billion)
Source: Graftech
EAF Steel-making process
Source: Industry
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GE manufacturing process
Source: Industry
GE manufacturing process
 Needle coke is crushed and mixed with binder (pitch coke)
 Baked and machined for finishing into GE
Raw-material access is restricted
Only 11 global manufacturers of needle coke (premium
grade pet coke) as a by-product of the delayed coking of
crude oil by refineries
Needle coke, the highest cost component in GE, with
sourcing on annual contracts
~105m tpa pet coke produced; ~250m tpa can be
produced as demand improves
Anand Rathi Research
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Entry barriers create an edge
Every client is unique
GE manufacturers require strong understanding of client
EAF operations
Extensive GE product & process knowledge are
required as EAF technology is changing
~60% demand served by 8-10 global-scale GE players
as capital investment creates customised products for
clients
GE production cost structure
Source: Graftech
GE product technology and application
Source: Energoprom presentation Aug 2013
Electro Grade
EAF Transformer
capacity (MVA)
Electrode current
load (kA)
Regular Power (RP) 4 to 15 up to 45
High Power (HP) up to 45 up to 60
Super High Power
(SHP)
up to 100 up to 75
Ultra High Power
(UHP)
up to 140 up to 85
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Needle coke manufacturing process
Needle coke production process
Source: Industry reports
World crude oil production
Source: US EIA
Different types of coke
Petroleum coke
Pitch coke
Metallurgical coke
Carbon Black
Needle coke
Needle coke manufacturers
Phillips 66
Petrocokes Japan (Japan)
Mitsubishi Chemical Company
Baosteel Group (China)
Cchem Co. (Japan),
Indian Oil Company
Hongte Chemical Industry (Group) Co. (China)
JX Holdings Inc. (Japan)
Petrochina International Jinzhou Co. (China)
Sinosteel Anshan (China)
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Indian players moving into the global league
Scale in top league creates an edge
Steel demand in Asia (>50% of global demand) has
created a huge GE market and scale for Indian players
Investment capability in technology is driving efficient
product mix through value addition
Focus on quality improvement has created strong client
relationships over 30 countries
EBIT margins
Source: Companies
Global GE players capacity
Source: Company presentations, Industry
Cost competitiveness, the chief factor
Employee and captive power costs provide competitive
edge
Cost competitiveness saw capacity utilisation above
global counterparts in the downturn
Scale driving operating leverage; so margins will reverse
on the upswing
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Peer comparison
Valuations
Source: Bloomerg, Anand Rathi Research
Ticker Name Mkt Cap (US$m) EV/EBITDA FY14/CY13 EV/EBITDA FY15/CY14 PE FY14 PE FY15
GRIL IN Equity GRAPHITE INDIA 252 6.1 4.8 8.0 6.6
HEG IN Equity HEG 122 7.9 6.4 9.0 6.7
SGL GR Equity SGL CARBON 2,814 22.7 13.5 NA 66.3
GTI US Equity GRAFTECH INTERNATIONAL 1,549 14.7 11.8 98.8 34.7
Stock performance
Source: Bloomberg
Ticker Name 3M price chg 6M price chg 1Y price chg 3Y price chg 5Y price chg
GRIL IN Equity GRAPHITE INDIA 6.4 9.6 (1.3) (5.0) 23.3
HEG IN Equity HEG 32.6 53.0 25.2 (16.6) 8.8
SGL GR Equity SGL CARBON 7.5 8.7 (3.7) 3.0 5.2
GTI US Equity GRAFTECH INTERNATIONAL 22.5 20.5 (17.6) (7.7) 16.2
Operating metrics
Source: Bloomberg
Ticker Name Revenue (US$m) EBITDA (US$m) EBITDA Margin ROA (%) ROE (%)
GRIL IN Equity GRAPHITE INDIA 358.4 50.5 14.1 4.7 8.0
HEG IN Equity HEG 298.4 54.1 18.1 3.9 11.2
SGL GR Equity SGL CARBON 1,248.3 238.1 19.1 5.3 8.7
GTI US Equity GRAFTECH INTERNATIONAL 2,197.7 257.8 11.7 0.3 0.7
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■ Scale in global league with 98,000 tonnes per annum production capacity - ~65%
production exported to 30 countries – strong product knowledge built since 1960.
■ Strong operating margins driven by operational efficiency, productivity, technology, and
access to low-cost sources of power.
■ Integrated backwards and produces Calcined Petroleum Coke - key raw material in
electrode manufacturing, Strong cash-flow generation, healthy balance sheet, high
dividend yield – added attractiveness
■ Initiate Buy with target price of `108 based on 6x EV/EBITDA on FY15e basis
Key data GRIL IN / GRPH.BO
52-week high / low `91 / `57
Sensex / Nifty 21101 / 6284
3-m average volume US$0.1m
Market cap `15bn / US$0.2bn
Shares outstanding 195m
Graphite India: Stability at the best
Financials (YE Mar)
FY12 FY13 FY14e FY15e FY16e
Revenues (`m)
16,708 17,649 16,993 19,051 21,919
EBITDA (`m)
3,112 2,789 2,887 3,434 4,491
EBITDA margin (%)
18.6 15.8 17.0 18.0 20.5
PAT (`m)
2,379 1,631 1,933 2,265 2,922
EPS (`)
12.2 8.3 9.9 11.6 15.0
EPS growth (%)
38.1 (31.4) 18.5 17.2 29.0
PE (x)
6.3 9.2 7.8 6.6 5.1
P/BV (x)
1.0 0.9 0.8 0.8 0.7
EV/EBITDA (x)
5.9 6.6 5.2 4.2 3.1
ROACE (%)
16.0 10.2 11.3 12.3 14.5
Source: Company, Anand Rathi Research
Rating: Buy
Target Price: `108
Share Price: `77
Shareholding (%) Sep'13 Jun'13 Mar'13
Promoters 63.9 63.2 62.8
Foreign Institutions 15.2 15.4 15.9
Domestic Institutions 4.8 5.0 4.9
Public 16.2 16.4 16.4
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■ Starting with electrodes in the 1960s, Graphite India further extended into specialty
carbon, graphite applications, heat exchanger equipment, glass-reinforced pipes (GRP)
■ It has shown strong financial performance with a double-digit revenue CAGR over the
past six years despite the global slowdown
■ Group capacity of 98,000 tonnes per annum with four plants -UHP accounts for 90%
and regular power (RP) accounts for the balance
■ Diversified customer portfolio including global steel majors, diversified across
geographies
Management Team
■ Mr. K. K. Bangur, Chairman
■ Mr. M. B. Gadgil, Executive Director
■ Mr. K. C. Parakh, Senior Vice-President (Finance)
■ Mr. S. Chaudhary, Senior Vice-President (Corporate)
■ Mr. B. Shiva, Senior Vice President (Legal) & Company Secretary
■ Mr. A. K. Dutta, Senior Vice-President (Marketing)
Plant Location Capacity (tonnes)
Durgapur (India) 54,000
Bangalore (India) 13,000
Nasik (India) 13,000
Nurnberg (Germany) 18,000
Total 98,000
Graphite India: Background
Relative price performance
Source: Bloomberg
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Graphite India: Operational model
Source: Company, Anand Rathi Research
Operational model
Year end: Mar FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e
Capacity (tons) 55,000 55,000 55,000 55,000 80,000 80,000 80,000 80,000 80,000
Chg YoY (%) 0.0 0.0 0.0 0.0 45.5 0.0 0.0 0.0 0.0
Capacity utilisation levels (%) 132.5 120.4 73.7 102.9 71.6 71.1 68.0 75.0 85.0
Chg YoY (%) 10.0 (9.1) (38.8) 39.6 (30.5) (0.7) (4.3) 10.3 13.3
Realization (US$/ton) 3,240 3,233 4,680 3,698 4,861 4,804 4,083 4,246 4,416
Chg YoY (%) 30.7 (0.2) 44.7 (21.0) 31.4 (1.2) (15.0) 4.0 4.0
Expenses (US$/ton) 2,505 2,372 2,928 2,813 3,848 3,768 3,241 3,338 3,438
Chg YoY (%) 47.9 (5.3) 23.4 (3.9) 36.8 (2.1) (14.0) 3.0 3.0
EBITDA (US$/ton) 735 861 1,752 885 1,013 1,035 842 909 978
Chg YoY (%) (6.4) 17.2 103.5 (49.5) 14.4 2.2 (18.6) 7.8 7.7
Revenue and EBITDA margin
Source: Company, Anand Rathi Research
RoAE and RoACE
Source: Company, Anand Rathi Research
Anand Rathi Research
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Fig 1 – Income statement (`m)
Year-end: Mar
FY12 FY13 FY14e FY15e FY16e
Net revenues 16,708 17,649 16,993 19,051 21,919
Revenue growth (%) 36.3 5.6 (3.7) 12.1 15.1
- Op. expenses 13,596 14,860 14,106 15,617 17,428
EBIDTA 3,112 2,789 2,887 3,434 4,491
EBITDA margin (%) 18.6 15.8 17.0 18.0 20.5
- Interest expenses 144 221 284 259 209
- Depreciation 404 500 550 576 603
+ Other income 346 264 264 264 264
- Tax 828 700 952 1,116 1,439
Effective tax rate (%) 34.8 42.9 49.3 49.3 49.3
Reported PAT 2,379 1,631 1,933 2,265 2,922
+/- Extraordinary items 296 - - - -
+/- Minority interest - - - - -
Adjusted PAT 2,379 1,631 1,933 2,265 2,922
Adj. FDEPS (`/sh) 12.2 8.3 9.9 11.6 15.0
Adj. FDEPS growth (%) 38.1 (31.4) 18.5 17.2 29.0
Source: Company, Anand Rathi Research
Fig 2 – Balance sheet (`m)
Year-end: Mar
FY12 FY13 FY14e FY15e FY16e
Share capital 391 391 391 391 391
Reserves & surplus 15,228 16,059 17,314 18,784 20,680
Net worth 15,619 16,450 17,705 19,174 21,070
Minority interest - - - - -
Total debt 4,617 5,676 5,676 4,676 3,676
Def. tax liab. (net) 708 950 950 950 950
Capital employed 20,945 23,077 24,331 24,801 25,697
Net fixed assets 6,700 6,626 6,676 6,700 6,697
Investments 2,051 1,093 1,093 1,093 1,093
- of which, Liquid - -
Net working capital 12,850 14,026 10,752 11,754 13,070
Cash and bank balance 1,395 2,424 5,810 5,254 4,837
Capital deployed 20,945 23,077 24,331 24,801 25,697
Net debt 3,222 3,252 (134) (578) (1,162)
WC days 281 290 231 225 218
Book value (`/sh) 64.0 78.3 97.4 118.7 119.7
Source: Company, Anand Rathi Research
Fig 3 – Cash-flow statement (`m)
Year-end: Mar FY12 FY13 FY14e FY15e FY16e
PAT 2,379 1,631 1,933 2,265 2,922
+Non-cash items 404 500 550 576 603
Cash profit 2,783 2,131 2,483 2,841 3,524
- Incr./(Decr.) in WC 2,101 2,349 (2,181) 1,002 1,316
+ Net finance exp 168 253 548 523 473
- Misc 564 (69) 528 528 528
Operating cash-flow 286 104 4,684 1,835 2,153
-Capex 1,321 408 600 600 600
Free cash-flow (1,035) (305) 4,084 1,235 1,553
-Dividend and interest 947 1,024 962 1,054 1,234
+ Equity raised - - - - -
+ Debt raised 1,752 1,241 - (1,000) (1,000)
-Investments (4) 3 - - -
+ Other inc and misc (33) (41) (264) (264) (264)
Net cash-flow (193) (49) 3,386 (555) (417)
Source: Company, Anand Rathi Research
Fig 4 – Ratio analysis @ `77
Year-end: Mar FY12 FY13 FY14e FY15e FY16e
P/E (x) 6.3 9.2 7.8 6.6 5.1
P/B (x) 1.0 0.9 0.8 0.8 0.7
P/CF (x) 5.4 7.1 6.1 5.3 4.3
EV/Sales (x) 1.1 1.0 0.9 0.8 0.6
EV/EBITDA (x) 5.9 6.6 5.2 4.2 3.1
Dividend yield (%) 4.5 4.5 3.9 4.5 5.8
Dividend payout (%) 28.7 41.9 30.0 30.0 30.0
RoAE (%) 16.0 10.2 11.3 12.3 14.5
RoACE (%) 16.0 11.6 11.0 12.7 16.4
Debt/Equity (x) 0.3 0.3 0.3 0.2 0.2
EBIT/Interest (x) 18.8 10.3 8.2 11.0 18.6
EBITDA growth (%) 10.1 (10.4) 3.5 18.9 30.8
EBITDA margin (%) 18.6 15.8 17.0 18.0 20.5
EBIT margin (%) 16.2 13.0 13.8 15.0 17.7
PAT margin (%) 14.2 9.2 11.4 11.9 13.3
Source: Company, Anand Rathi Research
Graphite India: Financials
Anand Rathi Research
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■ Scale in global league with 80,000 tonnes per annum production capacity- largest
integrated facility in the world with captive power generation
■ ~75% of electrode production is exported to 25 countries – strong customer
relationships and product knowledge to drive higher utilisation levels from 75% to
85% in three years.
■ Operating margins to improve ~300bps from FY14 to FY16, still below past 10 years’
average of 21.9%, driven by utilisation and realisation
■ Strong cash-flow generation, healthy balance sheet, high dividend yield – added
attractiveness
■ Initiate Buy with target price of `235 based on 7x EV/EBITDA on FY15e basis
Key data
HEG IN / HEG.BO
52-week high / low
`263 / `140
Sensex / Nifty
21101 / 6284
3-m average volume
US$0.1m
Market cap
`7bn / US$0.1bn
Shares outstanding
40m
HEG: Poised for growth
Financials (YE Mar)
FY12 FY13 FY14e FY15e FY16e
Revenues (`m)
14,246 16,226 15,403 16,981 18,719
EBITDA (`m)
2,418 2,931 2,351 2,846 3,411
EBITDA margin (%)
17.0 18.1 15.3 16.8 18.2
PAT (`m)
623 1,058 795 1,067 1,339
EPS (`)
15.6 26.5 19.9 26.7 33.5
EPS growth (%)
(48.1) 69.8 (24.8) 34.2 25.5
PE (x)
12.1 7.1 9.4 7.0 5.6
P/BV (x)
1.0 0.9 0.8 0.8 0.7
EV/EBITDA (x)
7.8 6.7 8.0 6.6 5.2
ROACE (%)
10.8 11.8 8.2 9.9 12.3
Source:Company, Anand Rathi Research
Shareholding (%) Sep'13 Jun'13 Mar'13
Promoters 58.3 58.3 58.3
Foreign Institutions 0.9 0.9 0.9
Domestic Institutions 10.7 10.7 10.7
Public 30.1 30.1 30.1
Rating: Buy
Target Price: `235
Share Price: `188
Anand Rathi Research
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■ Established in 1977, HEG is the premier company of the `50bn LNJ Bhilwara group, a
diversified conglomerate with business interests in power, graphite electrodes, textiles
and IT services
■ Largest single-location, integrated graphite electrode plants in the world, processing
sophisticated UHP (ultra-high power) electrodes
■ Diversified customer portfolio including ArcelorMittal, SAIL, Tata Steel, Jindal Group,
Nucor, POSCO, etc.
■ Plant located at Mandideep, Madhya Pradesh - captive power generation capacity of
~77 MW.
Management Team
■ Mr. L. N. Jhunjhunwala, Chairman-Emeritus
■ Mr. Ravi Jhunjhunwala, Chairman & Managing Director
■ Mr. Shekhar Agarwal, Vice-Chairman
■ Mr. K. Vaidyanathan, Chief Operating Officer
■ Mr. Raju Rustogi, Chief Financial Officer
■ Mr. Ashish Sabharwal, Company Secretary
HEG : Background
Plant Location Capacity
GE plant, Mandideep 80,000 tonnes
Thermal Power, Mandideep 64MW
Hydel Power, Hoshangabad 13.5MW
Relative price performance
Source: Bloomberg
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HEG : Operational model
Source: Company, Anand Rathi Research
Operational model
Year end: Mar FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e
Capacity (tons) 52,000 60,000 66,000 66,000 80,000 80,000 80,000 80,000 80,000
Chg YoY (%) 0.0 15.4 10.0 0.0 21.2 0.0 0.0 0.0 0.0
Capacity utilisation levels (%) 99.7 83.7 66.4 80.0 70.0 75.0 75.0 79.5 84.3
Chg YoY (%) 20.1 (16.1) (20.6) 20.4 (12.5) 7.1 - 6.0 6.0
Realization (US$/ton) 4,531 4,471 5,442 4,628 5,306 4,969 4,075 4,238 4,407
Chg YoY (%) 8.2 (1.3) 21.7 (14.9) 14.6 (6.3) (18.0) 4.0 4.0
Expenses (US$/ton) 3,227 3,356 3,817 3,714 4,405 4,072 3,453 3,528 3,604
Chg YoY (%) (2.2) 4.0 13.7 (2.7) 18.6 (7.6) (15.2) 2.2 2.2
EBITDA (US$/ton) 1,304 1,116 1,625 914 901 898 622 710 803
Chg YoY (%) 46.8 (14.5) 45.6 (43.7) (1.5) (0.3) (30.7) 14.2 13.1
Revenue and EBITDA margin
Source: Company, Anand Rathi Research
RoAE and RoACE
Source: Company, Anand Rathi Research
Anand Rathi Research
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Fig 1 – Income statement (`m)
Year-end: Mar
FY12 FY13 FY14e FY15e FY16e
Revenues 14,246 16,226 15,403 16,981 18,719
Revenue growth (%) 27.9 13.9 (5.1) 10.2 10.2
- Op. expenses 11,828 13,295 13,052 14,135 15,308
EBIDTA 2,418 2,931 2,351 2,846 3,411
EBITDA margin (%) 17.0 18.1 15.3 16.8 18.2
- Interest expenses 407 636 790 764 712
- Depreciation 579 626 703 795 836
+ Other income 168 136 136 136 136
- Tax 48 195 199 356 660
Effective tax rate (%) 7.2 15.5 20.0 25.0 33.0
PAT 623 1,058 795 1,067 1,339
+/- Extraordinary items (928) (552) - - -
+/- Minority interest - - - - -
Attributable PAT 623 1,058 795 1,067 1,339
Adj. FDEPS (`/share) 15.6 26.5 19.9 26.7 33.5
Adj. FDEPS growth (%) (48.1) 69.8 (24.8) 34.2 25.5
Source: Company, Anand Rathi Research
Fig 2 – Balance sheet (`m)
Year-end: Mar
FY12 FY13 FY14e FY15e FY16e
Share capital 400 400 400 400 400
Reserves & surplus 7,223 8,233 8,721 9,377 10,199
Net worth 7,622 8,633 9,121 9,776 10,598
Minority interest - - - - -
Total debt 11,434 12,151 12,151 11,351 10,551
Def. tax liab. (net) 787 814 814 814 814
Capital employed 19,843 21,598 22,086 21,941 21,963
Net fixed assets 8,737 9,325 9,422 9,427 9,390
Investments 687 705 705 705 705
- of which, Liquid - - - - -
Net working capital 10,926 12,127 11,861 12,326 12,375
Cash and bank balance 180 146 803 188 198
Capital deployed 19,843 21,598 22,086 21,941 21,963
Net debt 11,254 12,005 11,348 11,163 10,353
WC days 279.9 272.8 281.1 265.0 241.3
Book value (`/sh) 190.8 216.0 228.3 244.7 265.2
Source: Company, Anand Rathi Research
Fig 3 – Cash-flow statement (`m)
Year-end: Mar FY12 FY13 FY14e FY15e FY16e
PBT 671 1,253 994 1,423 1,999
Non cash items 579 626 703 795 836
Interest expense 407 636 790 764 712
Non operating items (12) (31) (136) (136) (136)
Chg in WC (1,327) (1,137) 266 (465) (48)
Tax paid (48) (195) (199) (356) (660)
Operating cash-flow 271 1,152 2,418 2,025 2,703
Capex (2,030) (1,494) (800) (800) (800)
Investments 381 46 136 136 136
CF from investing (1,649) (1,448) (664) (664) (664)
Chg in share capital (675) - - - -
Chg in debt 2,979 1,272 - (800) (800)
Dividend, int and others (863) (1,010) (1,097) (1,176) (1,229)
CF from financing activities 1,440 262 (1,097) (1,976) (2,029)
Net cash-flow (885) (34) 657 (615) 10
Source: Company, Anand Rathi Research
Fig 4 – Ratio analysis @ `188
Year-end: Mar FY12 FY13 FY14e FY15e FY16e
P/E (x) 12.1 7.1 9.4 7.0 5.6
P/B (x) 1.0 0.9 0.8 0.8 0.7
P/CF (x) 6.2 4.5 5.0 4.0 3.5
EV/Sales (x) 1.3 1.2 1.2 1.1 1.0
EV/EBITDA (x) 7.8 6.7 8.0 6.6 5.2
Dividend yield (%) 2.7 4.3 3.5 4.7 5.9
Dividend payout (%) 32.1 30.2 33.0 33.0 33.0
RoAE (%) 7.9 13.0 9.0 11.3 13.1
RoACE (%) 10.8 11.8 8.2 9.9 12.3
Debt/Equity (x) 1.5 1.4 1.3 1.2 1.0
EBIT/Interest (x) 4.5 3.6 2.1 2.7 3.6
EBITDA growth (%) 9.9 21.2 (19.8) 21.0 19.9
EBITDA margin (%) 17.0 18.1 15.3 16.8 18.2
EBIT margin (%) 12.9 14.2 10.7 12.1 13.8
PAT margin (%) 4.4 6.5 5.2 6.3 7.2
Source: Company, Anand Rathi Research
HEG : Financials
Anand Rathi Research
Appendix
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The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking,
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Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Other Disclosures
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