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March 24, 2010
Financials & Rating Grid
HEG Limited (HEG) CMP TP Upside Market Cap Net Sales EBITDA EBITDA % PAT EPS P/E EV/EBITDA Rs Cr Rs Cr % Rs Cr Rs x x FY09 1029.0 274.7 26.7 107.0 25.1 13.4 8.1 Rs Rs % Rs Cr FY10E 1069.7 380.9 35.6 181.6 44.5 7.6 5.4 STRONG BUY 338 466 38% 1380 FY11E 1155.9 369.3 31.9 155.6 38.1 8.9 5.5 FY12E 1352.4 431.6 31.9 191.6 46.9 7.2 4.8 ADD 88 95 8% 1740 FY11E 1443.4 295.3 20.5 166.4 8.4 10.5 5.5 FY12E 1766.8 366.7 20.8 207.6 10.5 8.4 5.0
Indian Graphite Sector
In a global outperformance phase…
The Indian graphite sector is currently going through a phase of global outperformance in a technology intensive industry on the back of cost competitiveness and sound operations of domestic graphite producers. Graphite demand has started improving globally. An improvement in steel production and robust product prices have led to a fine performance by Indian graphite players in 9MFY10 leaving global peers far behind. Capacity expansion is underway and low cost operations are ensuring better margins as compared to global peers. Hence, we expect Indian graphite companies to continue their outperformance over international players and increase their share in the global graphite market from ~13% in 2009 to ~18% in 2012E. We are initiating coverage on the graphite sector with a STRONG BUY rating on HEG Ltd and an ADD rating on Graphite India Ltd (GIL).
Graphite India Limited (CAREVE) CMP TP Upside Market Cap Net Sales EBITDA EBITDA % PAT EPS P/E EV/EBITDA Rs Cr Rs Cr % Rs Cr Rs x x FY09 1501.0 307.6 20.5 235.5 13.8 6.4 6.0
Rs Rs % Rs Cr FY10E 1294.9 359.3 27.8 205.6 12.0 7.3 4.3
Bounce back in steel production to propel graphite electrode demand
Steel demand suffered a sharp drop from Q4CY08 and through much of 2009. This was on account of the global financial crisis that led to a severe drop in EAF steel production and the resultant graphite electrode demand. With the recovery in steel production growth firmly in place, we expect graphite demand to increase by ~17% YoY in 2010 on the back of steel production scaling back to pre-crisis levels.
Ongoing capacity expansion ensures economies of scale
Indian graphite manufacturers enjoy competitive operating advantages with low manpower costs, captive power feeds and strategic location benefits. Brownfield capacity expansion (ranging from 13% to 21%) at existing locations being carried out by both Indian graphite producers would lead to further cost savings with economies of scale.
Comparative return metrics
HEG Graphite India 1M 2.1 13.1 3M -11.4 13.4 6M 28.9 44.8 12M 238.2 269.2
Price Movement (Stock vs. Nifty)
450 400 350 300 250 200 150 100 50 0 Mar-09 HEG Jul-09 Nov-09 GIL 6000 5000 4000 3000 2000 1000 0 Mar-10 NIFTY (In units)
Low cost structure ensures highest capacity utilisation, margins globally
Indian graphite producers have operated at higher capacity utilisation rates (45-75%) as compared to global peers (35-55%) even during recessionary periods (CY09) due to their low cost structure. Production cuts in response to a drop in demand have been more pronounced for high cost producers in the developed world. Domestic players have weathered the storm better. With the low cost structure being further improved upon, domestic players are expected to enjoy better margins (higher by 500-1000 bps) as compared to global peers, going forward.
Pankaj Pandey email@example.com Goutam Chakraborty firstname.lastname@example.org Abhisar Jain email@example.com
Indian graphite players have remained at the forefront of the recovery in graphite electrode demand globally. Apart from operating at higher capacity utilisation levels and achieving better profit margins as compared to global peers in the last few quarters, they have also announced capacity expansion plans recently. Despite possessing strong business models, the current valuations of domestic players are at a steep discount to global peers and leave room for upside. We are initiating coverage on the graphite sector with a positive view. HEG Ltd is our top pick in the space on account of its single location advantage, higher margins and value accretive investment in Bhilwara Energy Ltd.
Outlook and recommendation
ICICIdirect.com | Equity Research
Indian Graphite Industry
Table of Content
Global graphite electrodes industry dynamics
3 6 9 10 11 12
Technology intensive and oligopolistic in nature Bounce-back in steel production to propel graphite demand Graphite prices remain strong Scarce availability of raw material remains a concern Power a major cost, Indian players have captive advantage Indian players operating at higher margins
Risk & Concerns Financials Valuations & recommendation
13 14 16
HEG Ltd Investment Rationale
Capacity build-up spree continues Strong captive power base provides competitive edge Low cost structure ensures better margins
21 22 24
Financials Valuations Tables Graphite India Ltd Investment Rationale
Capacity expansion underway Diversification benefits through other businesses Realisation and cost of production to trend upwards On competitive footing with global peers
25 27 29
34 35 36 37
Financials Valuations Tables
38 40 42
ICICIdirect.com | Equity Research
Indian Graphite Industry
Global graphite electrodes industry dynamics
Technology intensive and oligopolistic in nature…
Graphite industry is technology intensive and constituted by just a few producers globally
The graphite electrode industry is characterised by a closely guarded technology with just a small bunch of producers globally. The replacement cost of a new greenfield plant is exorbitantly high and remains non-viable. The last greenfield project was set up by HEG way back in 1977 in India. The industry has oligopolistic competition because of the existence of only seven or eight players on a global basis. Graphite manufacturers are involved in the production of ultra high power (UHP) electrodes that find application in steel production through electric arc furnace (EAF) route.
Exhibit 1: Industry structure – Graphite electrode producers
Sr. No. 1 2 3 4 5 Company Graftech International, USA SGL Carbon, Germany Four Japanese producers Other Western producers China Sub-total Growth 6 7 HEG Graphite India Sub-total Growth Total - UHP Electrode Growth
Source: Industry data, ICICIdirect.com Research
No. of plants 5 7 7 2 6 27 1 4 5 31
Graphite capacity expansion is possible mainly through the brownfield route. Indian players have expanded capacity at a much faster pace as compared to their global peers
Production capacity (Tonne) Mid-1990's Current 200000 220000 190000 220000 220000 250000 60000 35000 75000 670000 800000 19.4% 20000 66000 25000 78000 45000 144000 220.0% 715000 944000 32.0%
Dependent on steel production growth through EAF route Graphite electrodes are used as a consumable item in the steel production process through the EAF route. EAF steel plants, also known as ‘mini-mills’ due to their relatively small size (1-3 MT) as compared to blast oxygen furnace (BOF) steel plants, typically consume one graphite electrode every 8-10 hours and require 1.5-2 kg of graphite electrode per tonne of steel production.
Exhibit 2: EAF steel share in global steel production rises smartly
1600 1400 1200 1000 800 600 400 200 0 1975 1980 1985 1990 1995 2005 2011E EAF Steel (MT) Total Steel Produced (MT) Graphite Electrode Demand('000 tonne) EAF Share (R.H.S) 18 283 405 23 25 691 450 473 539 28 803 33 34 32 40 35 30 20 15 10 5 (%) 25
Graphite electrode demand is dependent on steel production through the EAF route and has grown smartly due to the increasing share of EAF in world crude steel production
Source: Industry, ICICIdirect.com Research
ICICIdirect.com | Equity Research
Indian Graphite Industry
The demand for graphite electrodes has increased consistently on the back of strong growth in overall steel production and increasing share of steel produced through the EAF route over the last two decades (EAF steel share has increased from 25% to 34% over 1985-2005). EAF route enjoys strategic advantages over BOF method EAF route method of producing steel is continuously increasing its share in the world’s total steel production due to several advantages over the traditional blast furnace method. Some of these include: •
EAF route of steel production enjoys strategic advantages over BOF method like lower cost of production and easy switch on and off options
Lower initial productivity
• • •
Smaller size leading to easy switch on and off options (can be done every two or three hours), which allows flexibility in production Suitable for producing high-end special steel and batch process of production allows easy change in the product mix Lower cost of production as compared to non-integrated BOF steel producers
Exhibit 3: EAF steel production cost break-up
EAF Production Particulars Steel Scrap (tonne) Power (KwH) Ferro Alloys (tonne) Graphite Electrodes (Kgs) Transport Labour Others Total Cost/tonne Cost/unit (US$/tonne) 375 0.075 1200 5 10 20 I/P Reqd/tonne Cost (US$) 1.13 424 600 45 0.01 12 1.8 9 1 10 1 20 10 530
Source: Industry, ICICIdirect.com Research
Exhibit 4: BOF steel production cost break-up
BF Production Particulars Iron Ore Coking coal Coke conversion Power (KwH) Scrap Ferro alloys Other Raw Material Transport & Others Labour Total Cost/tonne Cost/unit (US$/tonne) 90 200 30 0.075 375 1200 30 30 25 I/P Reqd 1.7 1 1 500 0.1 0.015 1 1 1 Cost 153 200 30 38 38 18 30 30 25 561
Source: Industry, ICICIdirect.com Research
EAF route more pronounced in the western world and Middle East … Against the share of ~31% on a global basis, the EAF route accounts for 40-50% of steel produced in the western world and ~85% in Middle East. This is due to better availability of scrap (major ingredient in EAF steel making) and higher demand of special/alloy steel that is produced mainly
ICICIdirect.com | Equity Research
This is due to lesser capacity addition on account of higher operational and capital costs and lower cost competitiveness as compared to Indian players like HEG and GIL who enjoy lower power and manpower costs. Due to higher share of EAF produced steel.6 Exhibit 6: EAF steel production break-up 2008 2009 Crude EAF EAF Crude EAF EAF Steel Steel Share Steel Steel Share (%) Location (MT) (MT) (%) (MT) (MT) EU(27) 198 82 41 139 56 40 USA 91 53 58 58 35 60 Middle-east 16 14 88 17 15 85 Asia 767 160 21 795 159 20 World 1323 405 31 1220 341 28 Source: Industry. ICICIdirect.Indian Graphite Industry through EAF route.1 37. ICICIdirect. the western world and Japanese share is steadily coming down. ICICIdirect.com | Equity Research Page 5 . graphite electrode demand is driven largely from these markets. ICICIdirect.com Research Crude Steel (MT) 151 72 20 830 1329 2010E EAF EAF Steel Share (%) (MT) 60 40 43 60 17 85 166 20 399 30 …but supply of graphite electrodes has increased mainly from India Exhibit 7: Share in world graphite production 35 30 25 (% Share) 20 15 10 5 0 US Mid-1990s Source: Industry.com Research 31 28 24 21 27 24 21 27 24 India's share increasing steadily 18 13 6 India’s share in overall supply of graphite electrodes has increased due to build-up in capacities by Indian players on account of better cost competitiveness and brownfield expansion capability Europe Current Japan India 2011-12E While India has been increasing its market share (up from 6% to 13% in the last 10-12 years) of graphite electrode production steadily over the years (through brownfield expansion).com Research EAF Steel (MT) 82 53 18 14 161 405 EAF Share (%) 41.1 87 21 30.4 58. Exhibit 5: EAF steel share -2008 (Country wise) EAF share in steel production is ~58% in the US and ~41% in Europe Total Steel Country produced (MT) Europe (EU 27) 198 USA 91 Central & South America 48 Middle-east 16 Asia 767 Total 1323 Source: IISI.
Exhibit 8: Strong bounce back expected in demand Steel EAF Implied UHP Graphite Production Production Electrode Demand (MT) EAF Share (MT) ('000 tonne)* 2005 1144 34% 389 700 2006 1247 32% 393 707 2007 1346 32% 427 769 2008 1323 31% 405 729 2009 1219 28% 341 614 2010E 1329 30% 399 718 2011E 1395 32% 446 804 * Graphite electrode demand based on 1. Exhibit 9: EAF capacity pipeline in the next five or six years New EAF Capacity (MT) 45 10 20 75 35 110 Additional UHP Graphite electrode demand ('000 tonne) 81 18 36 135 63 198 Rationale for New EAF capacity build-up Higher demand for special steel. Flexibility in production Better availability of captive power to run EAF plants Higher availability of cheap gas as a source of power EAF capacities planned to be on stream in the next five to six years are ~110 MT.com Research The majority of the new EAF capacity (75 MT. With the recovery in steel production growth firmly in place. However. Industry. which is ~68% of the total) is expected to be in the Asian and Middle East region.35 lakh tonne of graphite electrode demand from these regions in the next five or six years.com | Equity Research Page 6 . This will be on the back of steel production scaling back to pre-crisis levels of ~1330 MT and EAF steel production going up to 399 MT.org. This was due to the global financial crisis that./tonne of EAF steel produced Source: Worldsteel. led to massive production cuts in the developed world on account of shrinking demand.com Research The expected rise in steel production to the tune of 9% is expected to result in EAF production growth and ~17% YoY rise in UHP electrode demand Growth 1% 9% -5% -16% 17% 12% Significant EAF capacity additions planned in Asia and Middle East…. This led to a severe drop in EAF steel production and the resultant graphite electrode demand. It is produced through the EAF route. The advent of the global recession has led to significant demand destruction and production cutbacks in the developed world. in turn. This will create demand for graphite electrode.8 Kgs reqd. ICICIdirect. EAF capacity to the tune of 110 MT is planned to be on stream in the next five to six years resulting in additional graphite electrode (UHP grade) demand of ~2 lakh tonne. we expect graphite demand to increase by ~17% YoY in 2010E. This could result in additional UHP electrode demand of ~ 2 lakh tonne Location China India Middle-east Sub-Total Other locations Total Source: Industry. We estimate an additional demand of ~1.Indian Graphite Industry Bounce-back in steel production to propel graphite electrode demand Steel demand suffered a sharp drop from Q4CY08 and through much of 2009. Asia and Middle East have shown strong resilience. This is due to the fact that captive power availability remains strong in these regions and the requirement for special steel is on the rise. ICICIdirect. which can be catered to easily by Indian producers due to close proximity. They have continued on their strong growth path with steel production growing over 13% in China and ~3% in India and the Middle East in 2009. ICICIdirect.
ICICIdirect. The capacity expansions are slated to be completed by 2012E Both Indian manufacturers have almost tripled their installed graphite electrode capacities during the last 15 years on the back of brownfield expansions and focus on cost competitiveness with backward integration.500 tonne. HEG is slated to increase its capacity by ~21% to 80.com Research While HEG is increasing its capacity by ~21%.Indian Graphite Industry ….com | Equity Research Page 7 . This reflects their intention of achieving growth and a larger footprint in the global graphite electrodes market.000 tonne whereas Graphite India Ltd has announced plans to augment its existing capacity by ~13% to 88.and graphite electrodes capacity expansions in India already underway Indian producers have announced capacity expansion plans to cater to increased demand in the next few years and increase their share in the graphite electrode industry further Keeping in mind the bounce-back in steel production and subsequent graphite electrode demand. 14000 80000 10500 88500 53000 78000 Source: Company. Exhibit 10: Graphite electrode capacity build-up (Indian players) 100000 90000 80000 70000 (In tonne) 60000 50000 40000 30000 20000 10000 0 Mid 1990s Addition Current Expansion 2012E 20000 25000 46000 66000 HEG Ltd. The increased capacities are expected to be on stream by 2012 and help increase the volumes and sales growth for both companies. GIL is implementing a capacity increase of ~13%. Graphite India Ltd. ICICIdirect. Indian graphite electrode manufacturers have announced capacity expansions ranging from 13-21% recently. A strong balance sheet and robust operational cash flows provide ample comfort towards meeting capital requirements for the same.
com Research The capacity utilisation trend is expected to improve. going forward.Indian players stay ahead 80% 70% 63% 56% 41% 43% 36% 47% 40% 38% 42% 63% 56% 69% 75% 65% Indian producers have been able to operate at a higher plant utilisation factor as compared to their global peers during the tough times of slump in steel production 60% 50% 40% 30% 20% 10% 0% Q1CY09 Graftech Source: Company. ICICIdirect.com | Equity Research Page 8 . going forward Exhibit 12: Indian players capacity utilisation trend 110% 100% 90% 80% 70% 60% 50% 40% FY07 83% 82% 100% 94% 84% 85% 70% 71% 60% 85% 80% 80% FY08 FY09 HEG FY10E GIL FY11E FY12E Source: Company. ICICIdirect. This reflects the cost competitive production ability of Indian players and their inherent strength in snatching share from big global producers during tough times. due to bounce-back in steel production and improvement in graphite electrode demand India’s graphite electrode manufacturers have been able to operate at capacity utilisation levels above 80% during FY07-09 on account of robust global steel production. …and further improvements expected. Indian players are expected to increase production during FY11-12E and operate closer to pre-crisis utilisation levels. After operating at lower utilisation rates for FY10 due to drop in steel production and graphite electrode demand.Indian Graphite Industry Indian players operating at higher capacity utilisation… Exhibit 11: Plant capacity utilisation . ICICIdirect.com Research Q2CY09 SGL Q3CY09 GIL HEG Q4CY09 The plant capacity utilisation factor for Indian players has remained well above their global counterparts during the recessionary phase in 2009.
going forward Blended realisations/tonne of Indian manufacturers has remained strong during FY07-09. ICICIdirect.Indian Graphite Industry Graphite prices remain strong despite volatile steel prices Although benchmark steel (HRC) prices have suffered huge volatility over the last few years due to the fluctuating steel cycle globally.com Research Blended realisations/tonne for Indian players has increased steadily but is expected to remain subdued. overall volatility remains low as compared to steel prices and the trend remains positive. Though the realisations are expected to remain subdued in 2010. ii) small share of graphite cost in overall production cost metrics of EAF producers. Exhibit 14: Blended realisation/tonne of Indian manufacturers 260000 240000 (In Rs/tonne) 220000 200000 180000 160000 140000 FY07 HEG Source: Company. iii) high cost of its key raw material needle coke and iv) oligopolistic nature of the graphite industry.com | Equity Research Page 9 . ICICIdirect.com Research FY08 GIL FY09 ICICIdirect. graphite electrode prices Graphite prices are not cyclical in nature like steel and have remained firm 250 200 150 100 50 0 2005 2006 HRC 2007 2008 2009 GE Prices *Prices Indexed to 100 at 2005 Source: HEG presentation. Exhibit 13: HRC prices vs. graphite electrode prices have remained in an uptrend due to i) production cuts by global graphite players.
Prices in 2010 were booked at approximately the same levels as that of 2009. with increase in EAF production and subsequent increase in UHP electrode demand. in US and Japan.3 HEG GIL Source: Company. This. ConocoPhillips of US controls ~60% of the needle coke market. going forward.5 FY09 48290 29. We believe that without a further build-up in needle coke capacity there could be a potential shortage of needle coke in CY11E. Coke cost accounts for ~22-23% of blended realisations/tonne of graphite electrodes for Indian producers. production of ultra high power (UHP) electrodes (that is used extensively in steel EAFs) requires a special type of coke named needle coke.2 56959 29.7 44683 29. ICICIdirect.com | Equity Research Page 10 .6 22. was settled at ~40% higher over 2008 prices. The current capacity of needle coke globally is ~8 lakh tonne. going forward 2007 2008 2009 2010E 2011E EAF Share 32% 31% 28% 30% 32% Source: Industry.7 23. in turn. Exhibit 15: Needle coke requirement Steel Production (MT) 1346 1323 1219 1329 1395 EAF Production (MT) 427 405 341 399 446 Implied UHP Graphite Electrode Demand ('000 tonne) 769 729 614 718 804 Needle coke Requirement (tonne) 769 729 614 718 804 Needle coke availability remains tight and could be a cause for concern for graphite electrode manufacturers.Indian Graphite Industry Scarce availability of raw material remains a concern In the production of various types of graphite electrodes. could lead to substantial contract price escalation and increase the costs for graphite electrode manufacturers globally. in turn. The availability of needle coke remains scarce in global market and is in the hands of just four producers globally.3 23. we estimate that needle coke supplies could remain tight.1 23. This. As approximately 1 tonne of needle coke is required to manufacture an equivalent amount of UHP electrode. Indian companies specify the total coke cost in terms of CP coke in their annual filings. Exhibit 16: Coke cost comparison Coke cost/tonne (Rs) As % to costs As % to sales Coke cost/tonne (Rs) As % to costs As % to sales FY08 42883 34.com Research ICICIdirect.com Research Coke cost comprises 30-35% of the total cost of producing graphite electrode Needle coke prices are set on a yearly contract basis. ICICIdirect. The industry as a whole keeps the cost of needle coke a closely guarded secret. Current needle coke prices are in the range of US$1700-1800/tonne.
Power cost constitutes between 13-23% of total costs for Indian producers. Indian players enjoy captive advantage Apart from the need for coke supplies.0 31.4 32.4 27.8 37. Exhibit 18: Power cost metrics (as % to total cost) FY08 FY09 Power sourcing HEG 27% 23% 77 MW CPP GIL 13% 13% 33 MW CPP CPP-Captive power plant Source: Company.Indian Graphite Industry Exhibit 17: Raw material cost as percentage of sales 50 41.com Research Q4FY09 Q1FY10 GIL Q2FY10 Q3FY10 Power a major cost component.2 38. It is sourced through captive power plants and state grids. Indian players enjoy the advantage of sourcing relatively cheap power through their captive power plants as compared to other global producers.2 40 (%) 30.9 29. ICICIdirect. graphite electrode manufacturing requires a huge amount of power (~6.0 33. ICICIdirect.5 20 Q1FY09 Q2FY09 Q3FY09 HEG Source: Company.com | Equity Research Page 11 .000 units of power are required to produce one tonne of graphite electrode).7 30 29.com Research Indian players enjoy captive power plant advantage to meet power requirements in graphite electrode production % Captive 100% 20% ICICIdirect.3 33.6 34.3 39.2 32.
Exhibit 19: EBIT margin trend . better product mix and reduction in costs.com Research The total cost as a percentage of sales has come down for both Indian producers in the last few quarters due to the combined effect of robust realisations.6 74.com | Equity Research Page 12 .Indian producers stay ahead 35 30 25 23 19 19 15 9 6 18 17 28 29 26 21 20 19 32 Indian producers are operating at higher operating margins as compared to global producers due to lower cost structure and better product mix 20 15 10 5 0 Graftec SGL Tokai Carbon CY08/FY09 HEG CY09/9MFY10 GIL CY07/FY08 Source: Company. Exhibit 20: Indian player’s total cost as percentage of sales 90 83.2 Q4FY09 Q1FY10 GIL Q2FY10 Q3FY10 ICICIdirect. ICICIdirect.9 63. ICICIdirect.7 80 (%) 70 60 50 Q1FY09 Q2FY09 Q3FY09 HEG Source: Company.Indian Graphite Industry Indian producers operating at higher margin compared to global peers Indian graphite electrode producers have operated at comparatively higher operating margins as compared to global peers and have been able to achieve much higher margins in CY09 as compared to global graphite manufacturers due to better realisations.9 67. efficient product mix and reduction in costs.5 74.com Research 77.
global players are expected to increase production with a bounce back in demand and product prices could dip more than expected due to competition among players and higher production levels. lowerthan-expected EAF steel production could potentially result in lower graphite electrode demand and affect the sales volume and profit of the graphite producers negatively. Lower-than-expected EAF steel production and graphite demand We expect global steel production to increase by ~9% in 2010 resulting in increased production even through the EAF route. ensured that prices remained firm. Going forward. Any major fluctuations in the currency would negatively impact the earnings of graphite producing companies. This exposes them to adverse currency risk. ICICIdirect. However. Sudden spurt in raw material prices As discussed earlier. This increases the risk of a sudden spurt in raw material costs for graphite manufacturers and negatively affects the profitability. This.com | Equity Research Page 13 . the supply of needle coke required to manufacture graphite electrodes remains scarce and in the hands of a few producers globally.Indian Graphite Industry Risks and concerns Decrease in product prices due to competition The global graphite industry had to resort to massive production cuts with a drop in steel production and graphite electrode demand in 2009. in turn. Adverse currency movements Indian graphite producers have a major dependence on exports of graphite electrodes to various steel players across the globe.
ICICIdirect. GIL is expected to increase volumes and sales on account of higher capacity utilisation. We expect HEG to clock revenue CAGR of 9.100 tonne in FY12E.5% GIL-Cons .com Research We expect HEG to clock revenue CAGR of 9.5% over FY09-12E on the back of ~6% volume CAGR over FY09-12E to 56. GIL is expected to exhibit revenue CAGR of 5.5% over FY09-12E on the back of ~6% volume CAGR over FY09-12E to 56.6% during FY09-12E CAGR (FY09-12E) HEG .6% 1332 1501 1295 1443 946 1029 1070 1156 1352 FY10E GIL-Cons FY11E FY12E EBITDA margin to remain robust. While HEG is expected to increase sales volume in FY11E due to additional capacity of 6000 tonne created through debottlenecking.100 tonne in FY12E. Exhibit 21: Revenue growth to remain moderate 3500 3000 2500 1767 (Rs Crore)) 2000 1500 1000 500 0 FY08 FY09 HEG Source: Company. GIL is expected to exhibit revenue CAGR of 5.9. Though we expect lower graphite electrode prices in FY11E. margins are expected to remain firm as needle coke supplies for 2010 have been secured and other costs are under control. We expect HEG to achieve EBITDA margin of ~32% in FY11 and FY12E and GIL to have a consolidated EBITDA margin of ~21% in FY12E.6% during FY09-12E.5. ICICIdirect.com | Equity Research Page 14 .Indian Graphite Industry Financials Revenue growth to remain moderate Both Indian graphite companies are expected to show moderate revenue growth in the next two years due to steady build-up in sales volume but subdued realisations. going forward Both Indian graphite players have seen margin expansion in 9MFY10 on account of product price increase and reduction in costs.
respectively 12.0% 10.6% 35.9% 13.2% 16.0% We expect HEG to achieve EBITDA margin of ~32% in FY11 and FY12E and GIL to have a consolidated EBITDA margin of ~21% in FY12E 32.5% 20. We expect the PAT margin to show a dip in FY11E in conjunction with the EBITDA margins but improve in FY12E and stay at a robust level considering the industry dynamics.8% 20.com Research FY10E FY11E GIL-Cons FY12E ICICIdirect. Exhibit 23: PAT margin trend 20.2% and 11.0% 15.8% FY10E FY11E GIL-Cons FY12E PAT margins to exhibit similar trend PAT margins in FY10E are expected to be higher due to excellent performance by both Indian graphite players in 9MFY10.5% 11.8% 4.0% 30.0% 10.0% 10.0% 15.5% 14.Indian Graphite Industry Exhibit 22: EBITDA margin trend 40.9% 25. ICICIdirect.7% 27.1% 26.com Research 20.8% 20.0% FY08 FY09 HEG Source: Company.0% 20.7% 17.0% 35.0% FY08 FY09 HEG Source: Company.4% 11.8% in FY12E.9% 31.5% 31.7% 8.com | Equity Research Page 15 .5% We expect HEG and GIL to achieve PAT margins of 14.0% 15. ICICIdirect.0% 15.
We expect the domestic graphite players to keep up their outperformance over global players. who together account for ~70% of global graphite market. the global graphite industry has seen a smart pick-up in capacity utilisation levels and is gearing for double-digit volume growth. domestic players are trading at steep discount as compared to global peers on both P/E and EV/EBITDA basis. Though the product prices are expected to remain subdued and raw material price fluctuation remains a concern. Currently for domestic players. in turn suggests that current valuation of domestic players leaves room for upside.Indian Graphite Industry Valuations & recommendation With the fortunes of the global steel industry taking a sharp turn for the better during the last few months. We also note that forward estimates of EBIT margins and return ratios for Indian players are higher as compared to global peers. domestic players are trading at steep discount as compared to global peers on both P/E and EV/EBITDA basis. Despite having strong fundamentals. Average EV/EBITDA is at a discount range of 23-32% based on 1-2 years forward earnings and enterprise value. HEG Ltd is our top pick in the sector with highest margin in the industry and additional value from its stake in Bhilwara Energy Ltd. the average P/E is at a discount range of 45-56% based on 1-2 years forward earnings. the average P/E is at a discount range of 45-56% based on 1-2 years forward earnings. Based on the above reasoning. Valuation – Indian players trading at sharp discounts Despite having strong fundamentals. ICICIdirect. We are initiating coverage on HEG Ltd with a STRONG BUY rating and GIL with an ADD rating. Indian graphite producers have a competitive advantage on a global basis due to their low cost structure.com | Equity Research Page 16 . robust business models and better margins. Average EV/EBITDA is at a discount range of 23-32% based on 1-2 years forward earnings and enterprise value. we value the Indian graphite companies at a discount of 30% on P/E basis and 15% on EV/EBITDA basis. robust business models and better margins. Tokai Carbon and Showa Denko. going forward. Considering the industry dynamics and domestic player’s solid business profiles. SGL Carbon. we remain cautious of the fact that bigger size and reach of global majors gives them the advantage of being price and industry setters and leave Indian players as just followers. This. While we are impressed by the low cost structure of Indian players resulting in higher margins. We are initiating coverage on the Indian graphite sector with a positive view. respectively. as compared to global peers. Currently for domestic players. We are initiating coverage on the Indian graphite sector with a STRONG BUY rating on HEG Ltd and ADD rating on GIL. We have valued the Indian graphite companies on P/E and EV/EBITDA basis in comparison to global graphite players like Graftec. going forward. we are ascribing a P/E multiple of 10x and EV/EBITDA multiple of 6x to domestic players and taking the average of FY11E and FY12E earnings to arrive at our target price of Rs 466 for HEG Ltd and Rs 95 for GIL. Indian players have remained at the forefront of the recovery and apart from operating at higher capacity utilisation levels and better profit margins as compared to global peers have also announced capacity expansion plans.
0 30.6 4.8 43.4 2.1 19.5 12.5 CY09/FY10 7.3 NA 1.2 1.1 1.7 1.8 CY11/FY12 1.5 2.2 CY10/FY11 5.0 1.0 CY10/FY11 8.1 9.7 24.9 10.9 5.7 8.4 1.3 25.6 1.3 CY09/FY10 27.8 3.6 14.2 12.9 1. ICICIdirect.5 CY11/FY12 27.2 7.0 5.2 CY08/FY09 P/E (x) HEG GIL Graftec SGL Tokai Carbon Showa Denko Average for domestic players Average for global players Discount (%) 13.8 CY10/FY11 27.1 1.0 1.3 16.0 15.3 13.4 7.1 2.0 5.7 11.8 7.9 1.9 7.4 CY11/FY12 7.4 4.4 10.5 6.9 1.1 3.5 6.3 26.4 10.7 NA 7.3 4.1 1.7 7.1 6.1 14.2 CY08/FY09 EV/EBITDA (x) HEG GIL Graftec SGL Tokai Carbon Showa Denko Average for domestic players Average for global players Discount (%) 8.0 0.2 1.0 10.0 20.4 5.4 4.5 8.2 1.com | Equity Research Page 17 .7 21.7 CY10/FY11 1.3 CY08/FY09 RONW (%) HEG GIL Graftec SGL Tokai Carbon Showa Denko 18.4 1.0 16.0 4.9 12.1 19.9 1.1 -1.5 CY09/FY10 5.5 5.8 5.0 20.8 9.0 16.4 CY10/FY11 20.7 6.8 25.7 CY09/FY10 1.0 15.7 1.6 22.8 17.2 -61.1 72.2 8.9 6.7 16.com Research CY09/FY10 31.2 20.0 18.7 14.2 19.Indian Graphite Industry Exhibit 24: Global peer comparison CY08/FY09 EBIT (%) HEG GIL Graftec SGL Tokai Carbon Showa Denko 22.2 19.5 1.6 1.0 5.1 59.0 12.2 2.4 -31.4 7.5 8.0 1.1 9.2 27.5 82.5 7.6 6.6 6.0 29.4 9.3 1.3 24.1 5.3 13.3 19.2 41.7 4.5 42.2 11.8 29.4 1.2 9.3 CY08/FY09 P/BV (x) HEG GIL Graftec SGL Tokai Carbon Showa Denko Average for domestic players Average for global players Discount (%) Source: Bloomberg.5 7.7 1.6 ICICIdirect.4 CY11/FY12 4.9 13.6 7.2 4.6 11.6 1.3 12.8 30.6 -16.8 5.4 6.5 5.1 54.1 CY11/FY12 21.4 6.8 13.
ICICIdirect.com Research GIL Exhibit 26: One year forward EV/EBITDA chart 12 10 8 6 4 2 0 Apr-06 Apr-07 Apr-08 Apr-09 Aug-06 Aug-07 Aug-08 Aug-09 Dec-06 Dec-07 Dec-08 Dec-09 Apr-10 HEG Source: Company.com Research GIL ICICIdirect.com | Equity Research Page 18 .Indian Graphite Industry Exhibit 25: One year forward P/E chart 18 15 12 9 6 3 0 Apr-06 Apr-07 Apr-08 Apr-09 Aug-06 Aug-07 Aug-08 Aug-09 Dec-06 Dec-07 Dec-08 Dec-09 Apr-10 HEG Source: Company. ICICIdirect.
2 9.7 7.9 12.8x. Also.7 107.4 27.000 tonne of capacity through de-bottlenecking recently.000 tonne by FY12E.9 4.5 6.6 76.9 369.2 1.1 18.9 146. We expect HEG to register an FY09-12E CAGR of 9.Initiating Coverage March 24. Nifty) 450 400 350 300 250 200 150 100 50 0 Mar-09 Jul-09 HEG Nov-09 NIFTY 6000 5000 (In units) 4000 3000 2000 1000 0 Mar-10 Strong captive power base provides competitive edge HEG holds a competitive edge over its peers on account of its strong captive power base with 77 MW of installed capacity.6 38.0 Current & target multiple PE (x) Target PE (x) EV/EBITDA (x) Target EV/EBITDA (x) FY09 13.2 5. lowest manpower costs globally and economies of scale ensure high operating margins.2 19.0 10.8 54. Exhibit 27: Key Financials FY08 946.4 4.1 10. the company is expected to increase its graphite electrode capacity through the brownfield route by ~21% (14.1 412/94 40. with captive power providing the competitive edge and low cost of operations ensuring higher margins as compared to global peers.3 Stock Metrics Bloomberg/Reuters Code Sensex Average volumes Market cap (Rs Cr) 52 week H/L Equity capital (Rs Cr) Promoter's stake (%) FII holding (%) DII holding (%) HEG.com Goutam Chakraborty goutam.6 10.0 274. Apart from being self-sufficient in terms of its captive requirement of power even at expanded capacity.5 8.4 431.1 FY10E 7.1 -3.9 FY10E 4.6 69.3 155.9 FY11E 8. (In rs) Low cost structure ensures high margin The company’s low-cost structure on account of cost efficiencies.6 13.com Research ICICIdirect. Price movement (Stock vs.4% in net sales and net profit.6 191. which is an added advantage.1 FY11E 1155. We are initiating coverage on the stock with a STRONG BUY rating.9 FY12E 7.com Net Sales (Rs cr) EBITDA (Rs cr) Net Profit (Rs cr) EPS (Rs) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) Source: Company. We value the stock using P/E and EV/EBITDA in comparison with global peers and assign a target price of Rs 466 to the stock with a STRONG BUY rating. HEG finds itself a stretch ahead of the competition.7 2.9 1.2x FY12E EPS of Rs 46.4 2. the company is currently also enjoying the benefits of surplus power sales.9 23.4 6.9 5.5 20.4 19.0 -14.9 -23.3 FY12E 1352.5 FY09 1029. We expect an upward re-rating of the stock on the back of a strong operational performance.4 8.0 25.4 33.0 16.7 380.5 HEG is the world’s largest single location graphite electrode producer with an installed capacity of 66. Capacity build-up spree continues HEG has achieved organic growth through a smart build-up in capacity in graphite electrode and captive power during the last decade by leveraging its technological expertise and single-location advantage.1 13.IN/HEGL.4 18.000 tonne) to 80.0 38.9 and FY12E EV/EBITDA of 4. 2010 Rating Matrix Rating Target Target Period Potential Upside : : : : Strong Buy Rs 466 12 months 38% HEG Ltd (HEG) Ahead of the competition… FY12E 17.jain@icicisecurities. After adding 6.1 23.8 At the CMP of Rs 338.com | Equity Research .0 303.2 2.8 -9.3 21. Organic growth through brownfield expansion and better capacity utilisation is expected to drive sales volume. Valuations FY11E 8.BO 17451 35000 1380. This places it well ahead of its global peers in terms of profitability and capacity utilisation levels. going forward.5 7.5% and 21.8 6.6 44.8 21.7 5. respectively.8 15.6 1.8 21. ICICIdirect. the stock is currently trading at cheap valuations of 7.3 -14.000 MT of UHP grade graphite electrode and captive power plants of 77 MW.9 7.6 46.9 181.1 8.0 Analyst’s name Pankaj Pandey pankaj.6 -firstname.lastname@example.org Abhisar Jain abhisar.0 32.9 FY10E email@example.com 5.1 Rs 338 YoY Growth (%) Net Sales EBITDA Net Profit EPS (Rs) FY09 8.
ICICIdirect. France.000 tonne to 66.7 54. Since 1990s HEG has invested ~Rs 825 crore in capex and has increased its graphite electrode capacity from 10. HEG operated as a JV partner with Pechiney till early 1990s with a capacity of 10.4 15. Nucor. is Asia’s leading graphite electrode manufacturer and exporter.HEG Ltd (HEG) Promoter and institutional holding trend (%) 60 50 40 (%) 30 20 10 0 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Promoter holding Institutional holding 17. ICICIdirect. Posco and Tata Steel.7 53. which was originally sourced from ‘SERS’ – a subsidiary of Pechiney.1 51.2 16. 14% 8% 3% India .com Research Asia. 26% Europe .000 tonne.7 Company Background HEG Ltd.5 52.000 MT of UHP graphite electrodes and 77 MW of power. Currently the company has interests in graphite electrode and power with an installed capacity of 66. a flagship of the LNJ Bhilwara group. After the exit of its French partner Pechiney. 20% Source: Company.com | Equity Research Page 20 . 14% Well distributed sales mix by geography with focus on Middle East and India markets Middleeast. Exhibit 28: Sales break-up (By region-FY09) Source: Company. the company started to grow and expand its capacity rapidly. The company was set up in 1977 and had graphite manufacturing technology.com Research North America. The company exports ~80% of its production outside India to more than 100 customers across 30 countries around the globe.000 tonne of mainly lower grade electrodes.9 16. 15% ICICIdirect. HEG has an established global customer base comprising steel majors like Arcelor Mittal.
000 tonne in 1990 to 30. ICICIdirect. during FY09-12E. Capacity build-up spree continues HEG has achieved a smart build-up in capacity in graphite electrode and captive power during the last decade by leveraging its technological expertise and single-location advantage HEG has achieved a smart build-up in capacity in graphite electrode and captive power during the last decade by leveraging its technological expertise and single-location advantage.000 tonne) to 80.000 tonne by FY12E at a competitive cost of Rs 225 crore. Bhopal by ~21% (14.000 tonne in 2002 and 66.000 tonne by FY12E at a competitive cost of Rs 225 crore. respectively and a CAGR of 9. This is impressive when considered along with the fact that it has fully owned captive power plants providing self-sufficiency and diversification through merchant power sales and access to cheap manpower resulting in lowest employee costs globally. we expect the company to achieve higher sales volume. Continuous brownfield expansion has resulted in the graphite electrode capacity increasing from just 14. going forward. The company has also set up three captive power plants with a total capacity of 77 MW during this period and spent ~Rs 825 crore on its expansion activities. ICICIdirect. respectively.com Research The company is expected to increase its graphite electrode capacity through the brownfield route at its existing location in Mandideep.com | Equity Research Page 21 .5% and 22%. Capacity expansion is in progress continuously at HEG. the company is expected to increase its graphite electrode capacity through the brownfield route at its existing location in Mandideep. Bhopal by ~21% (14.4 crore and Rs 191. Exhibit 29: Capacity build-up spree continues 90 80 70 (In '000 tonne) 60 50 40 30 20 10 0 Graphite Electrode Power(MW) 14 30 52 66 80 77 77 1990 2002 2006 2009 2012E Source: Company. We are initiating coverage on the stock with a STRONG BUY rating and a target price of Rs 466.000 tonne) to 80. The additional capacity is expected to be on stream by H2FY12E and would result in YoY topline growth of ~17% in FY12E.HEG Ltd (HEG) Investment Rationale HEG owns the world’s largest capacity of manufacturing graphite electrodes (UHP Capacity: 66000 MT) at a single location creating cost efficiencies and economies of scale.000 tonne of capacity through de-bottlenecking recently. With a bounce-back in steel production across the globe already underway and subsequent increase in graphite electrode demand looking inevitable.000 tonne in 2009 (up by 120% in seven years). This will be through better capacity utilisation resulting in revenue and net profit of Rs 1352.6 crore in FY12E. After adding 6.
HEG has surplus power that is sold to third parties at attractive rates.000 tonne 54.000 units of power for producing one tonne of graphite electrode.HEG Ltd (HEG) Strong captive power base provides the competitive edge HEG enjoys a strategic advantage and holds a competitive edge over its peers on account of its strong captive power base comprising two thermal power plants with rated capacity of 63 MW and a hydro-electrical power plant of 13.0 50.5% of overall production costs during the last few years. Exhibit 30: Power revenue metrics 250.0 0. Cost of production to remain under control Apart from enjoying the benefits of economical captive power. ICICIdirect.com | Equity Research Page 22 .0 53.0 100. We expect the manpower cost to account for ~6% of overall costs in FY11E and FY12E ICICIdirect.1 5.0 200.com Research HEG’s current power capacity of 77 MW is enough to meet all the captive power requirements even at expanded capacity base of 80. HEG has the distinction of having the lowest manpower costs in the industry globally on account of its single site location of graphite electrode manufacturing and efficient production processes. HEG’s manpower costs have remained at an industry low of ~5.8 107.9 3.5 MW. through sales of surplus power. respectively. We believe the company would have surplus power for selling on a merchant basis before commissioning its additional capacity.9 75. Taking into account the fact that graphite manufacturing process is power intensive and requires ~6.0 FY08 FY09 9MFY10 FY10E FY11E FY12E Captive Sales Source: Company.1 63. the hydro-electric power plant is situated at just about 80 km from the graphite plant.8 97. While the thermal power plants are located adjacent to its graphite electrode manufacturing facility. We expect the manpower cost to account for ~6% of overall costs in FY11E and FY12E.1 We believe the company would have surplus power for selling on a merchant basis before commissioning its additional capacity and expect the company to clock net revenues of ~Rs 54 crore and ~Rs 63 crore in FY10E and FY11E. through sales of surplus power 144.2 106. the current capacity of 77 MW is enough to meet all captive power requirements even at HEG’s expanded capacity of 80.000 tonne. respectively.5 67. HEG’s manpower costs have remained at an industry low of ~5.5 135. We expect the company to clock net revenues of ~Rs 54 crore and ~Rs 63 crore in FY10E and FY11E.0 (Rs Crore)) 150.5% of overall production costs during the last few years.4 Outside Sales Currently.
ICICIdirect. despite the increase in cost of its key raw material needle coke. ICICIdirect. Exhibit 31: Cost of production break-up 180 160 140 ('000 Rs/tonne) 120 100 80 60 40 20 0 FY07 Coke FY08 Pitch FY09 Other RM FY10E Power FY11E Labour FY12E Others Source: Company. thus ensuring robust operating margins for the company We expect the overall cost as percentage of sales to remain at ~68% in both FY11E and FY12E. thus ensuring robust operating margins for the company.com Research 90 80 70 60 50 40 30 FY09 Cost FY10E FY11E FY12E Cost as % to sales (%) ICICIdirect. lower manpower costs and operational efficiencies reducing other costs.com | Equity Research Page 23 .com Research We expect the overall cost as percentage of sales to remain at ~68% in both FY11E and FY12E. going forward.HEG Ltd (HEG) We expect the overall cost of production to remain under control for HEG. Exhibit 32: Cost metrics 1600 1400 1200 (Rs Crore)) 1000 800 600 400 200 0 FY07 FY08 Net Sales Source: Company. This will be due to reduction in costs on account of power.
Exhibit 33: EBIT margin comparison 35 30 25 (%) 20 15 10 5 0 Graftec CY07/FY08 HEG's EBIT margins well ahead of global peers SGL CY08/FY09 Tokai Carbon CY09/FY10E HEG CY10/FY11E GIL CY11/FY12E Source: Company.Sales volume 60000 55000 50000 (Tonne) 45000 40000 35000 30000 FY08 FY09 FY10E FY11E FY12E Graphite Electrode Sales Qty Source: Company. ICICIdirect.com Research 56100 52366 47246 44220 52800 ICICIdirect. whereas consensus estimates for global peers indicate EBIT margins well below 20% in the next few years.HEG Ltd (HEG) Low cost structure ensures better margins as compared to global peers We expect HEG to achieve EBIT margins of ~27% in both FY11E and FY12E. whereas consensus estimates for global peers indicate EBIT margins of well below 20% in the next few years Due to its low cost structure. HEG has enjoyed better EBIT margins as compared to global peers in the last few years.com Research Exhibit 34: Key Assumptions .com | Equity Research Page 24 . We expect it to stay well ahead of the competition in terms of profitability. ICICIdirect. going forward. We expect HEG to achieve EBIT margins of ~27% in both FY11E and FY12E.
4 crore.0 crore in FY08 and FY09. respectively.0 1400.0 1029.8% The company reported a topline of Rs 946.9% and 14. in FY12E. Exhibit 35: Steady revenue growth 1600. The topline has grown at a CAGR (FY07FY09) of 10.0 200. Going forward.0% 15. backed by sales volume CAGR (FY09-12E) of 5.1% 31. backed by sales volume CAGR (FY09-12E) of 5.5% 10.9 crore in FY08 with EBITDA margin of 32.1%.5% to Rs 1352.com Research Sales CAGR (FY09-12E) .0% 10.0 1069. After a slight drop in profitability in FY09. ICICIdirect.com | Equity Research Page 25 .1% FY10E FY11E YoY Growth FY12E Healthy EBITDA margin. we expect the company to maintain healthy EBITDA margins on account of its low-cost structure and robust demand.0% 35.HEG Ltd (HEG) Financials Steady revenue growth We expect the topline to grow at a healthy CAGR (FY09-FY12E) of 9.0 1200.0% 6.0 800.0 400. in FY12E 30.0% 13.2% We expect the company to maintain healthy EBITDA margins on account of its low-cost structure and robust demand.9.0 600.7% 20.2%.9% 0.0% FY08 FY09 EBITDA % Source: Company. We expect the company to clock EBITDA and PAT margin of 31.6% 26. ICICIdirect.8% 4.0 0.0% 8.0 (Rs crore)) 1000.0% 22.0% 14.5% 1352.1% CAGR (FY07-09) in sales volume. the company has shown a very strong performance in 9MFY10 and reported EBITDA margin of 34%. Exhibit 36: Margins to sustain at higher levels 40. going forward HEG reported a strong EBITDA of Rs 303.2%. on account of 6.0 crore and Rs 1029.0% 10.0% 946.7 8.9% 31.9 17.0% 2. respectively.4% 17.5% 14.com Research FY10E FY11E PAT % FY12E ICICIdirect.0% 18.9% and 14.8%.4 1155.4 crore. respectively.0 FY08 FY09 Net Sales Source: Company. We expect the company to clock EBITDA and PAT margin of 31. We expect the topline to grow at a healthy CAGR (FY09-FY12E) of 9.0% 32.5% to Rs 1352.1%.
8 21. The company expects to complete its expansion largely through internal accruals accumulated from strong cash flow generation.0 0. However.5% and 22.2 (Ratio) 1.0 10.8 0. We expect the company to maintain strong return ratios.3 21.com | Equity Research Page 26 .8 21.0 800.0 (%) 20.6 0.HEG Ltd (HEG) Strong return ratios We expect the company to maintain strong return ratios. going forward.0 32.2 0.3% and 22. respectively.0 15.4 1.0 0. going forward.0 1000.0 400.1 20. ICICIdirect. respectively.4 30.6 1.5%.com Research 1.2 and net worth of ~Rs 700 crore.8 by FY12E. it suffered a drop in FY09 due to a drop in demand on account of recession. in FY12E on the back of strong operational performance overall. ICICIdirect.9 FY09 FY10E RoCE FY11E FY12E RoIC Balance sheet strength provides comfort The company boasts of a strong balance sheet with debt-equity ratio of 1.com Research 27. We expect the net worth of the company to increase to ~Rs 973 crore and debt-equity ratio to drop to 0.0 5.8 19.3 22.0 FY08 RoNW Source: Company. and achieve RoNW and RoIC of 21. in FY12E on the back of an overall strong operational performance HEG reported strong return ratios in FY08 on account of higher profitability.0 FY10E Debt FY11E FY12E D/E ICICIdirect.9 15.0 18. and achieve RoNW and RoIC of 21.0 25.3 19.5 21.5 22.4 0.2 20. Exhibit 38: Strong balance sheet 1200.5%.8 16.0 FY08 FY09 Net Worth Source: Company.0 200.0 (Rs crore)) 600. Exhibit 37: Strong return ratios 35.
P/E based valuation of Rs 462/share We value the stock at 10x (30% discount to global average) the average of FY11E and FY12E EPS At the CMP of Rs 338.com | Equity Research Page 27 . We have valued HEG’s graphite business using P/E and EV/EBITDA methodology to arrive at a target price of Rs 466.51 13.8 30% 10 425.HEG Ltd (HEG) Valuations HEG is the better of the two graphite players in India and has the best margins on a global basis currently due to its low-cost business model.4 13.1 Source: Company.0 16.2x FY12E EPS of Rs 46.9/share.5 82.5 Graftec 6.1 36.7 CY11/FY12 7.5 42.2 9.8 21. ICICIdirect.9 12.0 15.1 72.9.7 NA 42.8 SGL 7. The stock is trading at a discount of ~47% as compared to global average on CY11/FY12 earnings. the stock is trading at 8.1 and 7.1 Tokai Carbon 9.1/share for its core graphite business.0 20.0 CY10/FY11 8.9x FY11E EPS of Rs 38.8 30.com Research FY11E 38. The total fair value based on P/E methodology works out to Rs 462/share.91 0. We value the stock at 10x (30% discount to global average) the average of FY11E and FY12E EPS and arrive at a fair value of Rs 425.6 22.1 57.1 Average for global players 13.11 0.8 47. ICICIdirect.0 FY12E 46.9 462.5 Exhibit 40: Global P/E valuation comparison CY08/FY09 P/E HEG 13. HEG’s other investment value comes out to Rs 36. Exhibit 39: P/E based valuation (Rs) EPS Weightage Adj.7 14.4 ICICIdirect.0 29.6 24.0 Showa Denko 30. We are initiating coverage on the stock with a STRONG BUY rating.com Research CY09/FY10 7.3 Discount (%) -2. EPS Average global P/E (x) Discount given P/E (x) Core business value/share Other investment value/share Total Value/Share Source: Company.
2 4.com | Equity Research Page 28 . of shares (Cr) Total value/share (Rs) 2402.2 14.4 crore for its core graphite business. ICICIdirect.com Research CY10/FY11 5.4 Tokai Carbon 4.2 5. We value the stock at 6x (15% discount to global average) the average of FY11E and FY12E EBITDA and arrive at a fair value of Rs 1768.4 150.5 6.8 5.3 1768.2 22. We are initiating coverage on the stock with a STRONG BUY rating.8 CY11/FY12 4.7 6. Exhibit 41: EV/EBITDA based valuation (Rs Cr) FY11E EBITDA 369.4 Average for domestic players 5.3 Weightage 0.7 6. ICICIdirect. we have arrived at a target price of Rs 466 for the stock.0 Discount given 15% EV/EBITDA (x) 6 EV Less: Net debt Core business value Other investment value Total market cap No.com Research Exhibit 42: Global EV/EBITDA valuation comparison CY08/FY09 CY09/FY10 EV/EBITDA HEG 8.5 7.4 Average global EV/EBITDA (x) 7.5 10.0 Source: Company.8 1919.5 7.6 SGL 4.6 11.6 0.1 Showa Denko 8.7 634.HEG Ltd (HEG) EV/EBITDA based valuation of Rs 470/share We value the stock at 6x (15% discount to global average) the average of FY11E and FY12E EBITDA The stock is trading at a discount of ~20-30% as compared to the global average on CY10-11 earnings.5 Adj.1 Discount (%) -51.8 crore.7 55. The total fair value based on EV/EBITDA methodology works out to Rs 470/share.4 12.5 Source: Company.8 5. EBITDA 400. HEG’s other investment gives an additional value of Rs 150.2 9.9 7.1 470.2 12.6 Based on the average of the above two valuation methodologies.5 Graftec 4. ICICIdirect.6 6.8 29.0 FY12E 431.
0 -26.0 155.0 976.1 1632.4 0.7 907.3 548.6 0.3 702. Depreciation Net Block Capital WIP Net Fixed Assets Investments Cash Trade Receivables Loans & Advances Inventory Total Current Asset Current Liab.5 605. PAT after MI Adjustments Adj.7 -10.9 FY10E 1069.5 6.1 1615.7 0.1 51.7 235.6 594.5 935.6 0.7 366.2 (Rs Crore) FY12E 40.5 94.0 155.6 795.4 564.9 76.8 764. & Prov.2 83.0 45.3 (Rs Crore) FY12E 1352.6 1330.4 0.2 348.0 191.0 416.0 64.0 181.0 617.4 0.7 64.6 69.5 289.6 FY09 42.0 45.6 229.0 688.1 258.2 288.6 0.0 672.7 593.0 76.1 1855.5 396.0 1550.7 -9.6 16.0 75.7 4.0 155.4 692.3 -3.4 1166.2 66.1 188.0 84.7 0.0 76. ICICIdirect.0 83.6 303.HEG Ltd (HEG) Table and Ratios Exhibit 43: Profit & Loss account Net sales Growth (%) Op.2 783.6 1330.6 0.0 76.8 0.8 771.0 107.6 FY10E 40.6 -14.7 409.2 334.5 FY11E 40.0 191.3 73.6 0.1 54.6 17.8 56.1 786.1 188.1 794.4 190.5 53.5 162.7 165.com | Equity Research Page 29 .2 0.1 273.com Research Exhibit 44: Balance sheet Equity Capital Preference capital Reserves & Surplus Shareholder's Fund Minority Interest Secured Loans Unsecured Loans Deferred Tax Liability Source of Funds Gross Block Less: Acc.3 83.9 0.0 107.9 80.8 380.4 -22.9 8.6 853.4 212.1 Source: Company.2 23.6 23.2 698.3 140.9 Source: Company.6 0.0 767.3 819.0 124.9 313.2 719.3 43.2 60.8 431.1 218.0 181.0 619.4 17.8 17.7 290. Expenditure EBITDA Growth (%) Other Income Depreciation EBIT Interest PBT Growth (%) Tax Extraordinary Item Rep.0 407.4 44.5 49.3 533.4 FY09 1029.0 146.6 0.1 98.1 83.0 146.5 699.0 264.8 712.5 1615.5 545.2 0.4 77.9 199.6 5.0 0.0 932.6 0.3 963.3 234.0 920.2 274.8 70. PAT before MI Minority interest (MI) Rep.5 340.3 17.4 817.6 207.0 191.2 838.4 328.4 1855.0 330.8 50.2 0.1 188.2 811.3 963.6 FY11E 1155.8 17.0 134.5 180.com Research ICICIdirect.1 0. ICICIdirect.0 0.5 461.2 30.0 146.5 829.9 38.0 55.0 8.3 487.2 972.5 9.0 181.6 222.2 413.0 246.6 369.4 1550.2 1095.0 107.0 0.0 1632.4 483.7 161.0 664.9 0.9 1255. Net Profit Growth (%) FY08 946. Net Current Asset Application of funds FY08 44.0 639.8 17.4 0.0 539.6 83.9 124.
7 5.3 204. ICICIdirect.0 9.0 0.3 FY11E 20.8 21.4 19.3 111.4 -120.7 51. in Investment CF from Investing Inc.8 218.4 103.8 12.2 17.2 6.0 22.3 66.2 110.0 117.0 8.3 70.6 53./(Dec.4 10.0 0.2 64.1 244.4 FY10E 264.8 196.6 34.0 0.HEG Ltd (HEG) Exhibit 45: Cash flow statement Profit before Tax Depreciation CF before change in WC Inc.0 -216.7 4.2 306.6 80.0 0.6 9.1 70.1 21. Inc.0 26.9 25.0 0.0 -120.8 22.7 354.2 45.7 54.0 -72.5 21.6 9.3 20.2 110.0 FY10E 27.9 0.2 FY09 161.0 -100.1 22. ICICIdirect.1 252.2 -189.4 176.8 66.9 116.0 FY12E 21.0 135.) in Net worth CF from Financing Opening Cash balance Closing Cash balance FY08 207.2 27.0 92.1 72.3 FY09 18.0 -34.5 66.0 79.2 292.1 -176.2 226.4 71.4 53.1 4.9 16.3 -26.2 19.2 -53.3 43.0 80.0 -44.0 75.6 207.5 43.2 87.3 70.8 22.7 55.5 0.6 5.0 92.)/Dec.2 315.3 66.3 12.0 -50.6 0. in Current Assets CF from operations Purchase of Fixed Assets (Inc.8 -49.1 32.3 -1.9 69.8 193.1 31.0 159.com Research Exhibit 46: Key Ratios (%) Return ratios RONW ROCE ROIC DuPont ratio analysis PAT/PBT PBT/EBIT EBIT/Net sales Net Sales/ Total Asset Total Asset/ Networth Spread of RoIC over WACC RoIC WACC EVA (Rs Crore) RoIC-WACC Turnover ratios (days) Inventory turnover Debtor turnover Creditor turnover Current Ratio Quick ratio Source: Company./(Dec.9 12.8 6.9 291./Dec.7 -136.1 27.) in Debt Inc.1 27.3 67.2 ICICIdirect.8 87. in Current Liab./Dec.5 6.2 6.8 10.2 16.8 12.3 21.6 77.1 21.9 190.com | Equity Research Page 30 .8 0.8 112.4 45.3 148.4 22.5 12.2 49.0 Source: Company.8 68.5 89.8 -120.0 -55.6 79.5 66.0 180.2 (Rs Crore) FY12E 290.0 -120.com Research FY08 32.4 -72.9 66.8 15.3 -187.0 FY11E 235.9 193.0 71.5 5./Dec.4 261.1 115.4 170.5 193.0 0.3 9.4 -256.3 130.8 21.9 34.9 20.5 59. in Advances Inc.
9 0.0 Book Value 123.1 174.4 17.3 3.7 7.5 46.9 1.2 331.5 3.3 2.7 Exhibit 48: Valuation ratios Valuation (x) P/E P/BV EV/EBITDA FCF Yield (%) EV/Sales Div Yield (%) Source: Company.9 11. Invst.5 12.0 262.0 FY11E 31.4 4.9 13.5 33.2 503.6 17.com | Equity Research Page 31 .2 238.4 21.5 FY12E 31.6 1.5 ICICIdirect.7 524.6 Attributable EPS 33.0 22.4 FY09 13.5 1.4 2.2 32.7 2.1 -5.4 8.3 203.9 FY11E 8.6 2.5 3.com Research FY09 26.5 EV per share 482.7 38.5 283.9 14.0 507.9 5.0 Cash per share (Incl.1 9.7 10.5 Per share data (Rs) Revenue per share 213.0 1.com Research FY08 10.2 1.2 FY10E 7.1 PAT Margin 15.HEG Ltd (HEG) Exhibit 47: Profitability and per share data Profitability ratios (%) FY08 EBITDA Margin 32.1 139.0 Dividend per share 11.5 FY10E 35.1 7. ICICIdirect.2 2.8 6.2 2.1 25.8 FY12E 7.4 44.6 Source: Company.1 493.) 16. ICICIdirect.1 1.0 9.4 241.7 5.
0 13. going forward. the stock is currently trading at cheap valuations of 8.4 295.com Research ICICIdirect.5 FY12E 1766.2 4.5 277.com | Equity Research .8 Rs 88 YoY Growth (%) Net Sales EBITDA Net Profit EPS (Rs) FY09 12.3 FY11E 1443.0 25.7 6.5 11.0 5.5 -17. respectively.4 9. Nifty) 100 90 80 70 60 50 40 30 20 10 0 Mar-09 Jul-09 GIL Nov-09 NIFTY 6000 5000 4000 3000 2000 1000 0 Mar-10 (In units) Diversification benefits through other businesses The company has a small exposure to other business segments like impervious graphite equipment business.4 1.2 56. Organic growth through brownfield expansion and better capacity utilisation is expected to drive sales volume.9 359. Capacity expansion under way GIL has achieved a smart build-up in capacity during the last five years through a mix of organic and inorganic route by leveraging its strong balance sheet.0 Stock Metrics Bloomberg/Reuters Code Sensex Average volumes (BSE) Market cap (Rs Cr) 52 week H/L Equity capital (Rs Cr) Promoter's stake (%) FII holding (%) DII holding (%) GRIL.1 5. GIL has remained on a competitive footing as compared to global peers in the last few years.4 6. Price movement (Stock vs.5 6.3 4.4 18.IN/GRPH.7 FY11E 11.2 FY10E -13. Current & target multiple PE (x) Target PE (x) EV/EBITDA (x) Target EV/EBITDA (x) FY09 6.com Source: Company.7 207.7 10.7 -12.9 4. GRP pipes & tanks business and speciality steel business that provides it with diversification benefits.4 46.3 6. We expect GIL to register an FY09-12E CAGR of 5.6 12. Exhibit 48: Key Financials Net Sales (Rs cr) EBITDA (Rs cr) Net Profit (Rs cr) EPS (Rs) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) FY08 1331.8 24.2 95/23 34.com Abhisar Jain abhisar.6 firstname.lastname@example.org 17.6 crore in FY12E. We expect it to stay slightly ahead of the competition in terms of profitability.4 20.0 16.7 16. with EBIT margins of ~19% in both FY11E and FY12E.8 6.7 FY11E 10.3 166.8 email@example.com 7.6% and 6. The company has been making good progress in these segments.500 tonne and set up a captive power plant of 50 MW at Durgapur by FY12E.3 5.3 FY10E 1294.0 307.5 Graphite India Ltd (GIL) is India’s largest graphite electrode producer with an installed capacity of 78000 MT of graphite electrode and captive power plants of 33 MW.Initiating Coverage March 24. ICICIdirect. We expect the total revenue from its other businesses to more than double from Rs 102 crore in FY09 to Rs 228.0x. Also.8 6.2 24.6 FY09 1501. with backward integration insulating margins and diversification benefits from other businesses of GRP tanks & pipes and high speed steel.8 65.5 1.8 -19.9 6.4 24. 2010 Rating Matrix Rating Target Target Period Potential Upside : : : : Add Rs 95 12 months 8% Graphite India Ltd (CAREVE) Niche capabilities… FY12E 22.4 Valuations At the CMP of Rs 88.4 Analyst’s name Pankaj Pandey pankaj.0% in net sales and operating profit.0 -30.3 7. We initiate coverage on the stock with an ADD rating.5 13.5 8.2 18.BO 17451 165000 1740. GIL has the distinction of possessing niche capabilities in a technology intensive global graphite industry.0 14.4 9.4x FY12E EPS of Rs 10. We have valued the stock using P/E and EV/EBITDA in comparison with global peers and assigned a target price of Rs 95 to the stock with an ADD rating. (In rs) On competitive footing with global peers Due to its low cost structure on account of India advantage.6 235.6 10.0 5.8 -12.4 9.4 FY10E 7.3 1.3 6.4 8.0 5.0 6.4 10. The company is expected to increase its graphite electrode capacity through the brownfield route by ~13% (10500 tonne) to 88.5 firstname.lastname@example.org 1.0 FY12E 8.3 19.5 and FY12E EV/EBITDA of 5.3 1.3 205.com Goutam Chakraborty goutam.
com | Equity Research Page 33 .com Research ICICIdirect.8 Company Background Graphite India Ltd is India’s largest graphite electrode manufacturer by capacity. Nucor. ICICIdirect.com Research Source: Company. 6% Power. Germany with a capacity of 18.7 12. 90% Source: Company. The company has an established global customer base comprising steel majors like Arcelor Mittal. Germany Total Capacity (MT/year) 34000 13000 13000 18000 78000 13. Posco and JSW Steel. The company was set up in 1963 in collaboration with “The Great Lakes Carbon Corporation” of US. it also has installed power generation capacity of 33 MW through hydel and multi-fuel routes. the company has three graphite manufacturing plants in India with a total capacity of 60. The company has diversification benefits through exposure and sales through its graphite equipment business. The company exports ~60% of its electrode production outside India to more than 150 customers across 50 countries around the globe. Apart from manufacturing calcined petroleum (CP) coke (capacity: 30.9 Promoter holding Institutional holding Source: Company.1 53.8 56. 4% Graphite & Carbon.8 12. ICICIdirect.000 tonne.Graphite India Ltd (CAREVE) Promoter and institutional holding trend (%) 60 50 40 (%) 30 20 10 0 Q4FY09 Q1FY10 Q2FY10 Q3FY10 15. Exhibit 49: Plant wise capacity Plant location Durgapur Bangalore Nasik Nuremberg.000 tonne and one in Nuremberg. Exhibit 50: FY09 revenue share Steel & Others.000 tonne) for use in graphite electrode manufacturing. GRP pipes and tanks business and special steel business. Currently.2 54.com Research GIL boasts of backward integration. ICICIdirect. GIL has core expertise in manufacturing value-added ultra-high power (UHP) electrodes and 85% of its capacity is in UHP electrodes.7 56.
com Research The company is expected to increase its graphite electrode capacity through the brownfield route at its existing location in Durgapur by ~31% (10.Graphite India Ltd (CAREVE) Investment Rationale GIL is the largest producer of graphite electrodes in India. Exhibit 51: Capacity build-up 100 90 80 70 ('000 tonne) 60 50 40 30 20 10 0 FY04 Durgapur Nasik FY05 Bangalore FY07 Germany FY09 Durgapur addition FY12E Durgapur expansion 60 13 13 14 34 44.500 tonne by FY12E at a competitive cost of Rs 187. Capacity expansion underway again GIL has achieved a smart build-up in capacity in graphite electrode manufacturing during the last five years through brownfield expansion at Durgapur and investment in its overseas subsidiary in Germany GIL has achieved a smart build-up in capacity in graphite electrode manufacturing during the last five years through brownfield expansion at its manufacturing facility in Durgapur and investment in its overseas subsidiary in Germany.500 tonne) to 44. The additional capacity is expected to be on stream by H2FY12E and would result in YoY topline growth of ~22% in FY12E on a consolidated basis for the company. We are initiating coverage on the stock with an ADD rating and a target price of Rs 95. The company is in the midst of a brownfield expansion with planned capacity expansion of 10. This will be through better capacity utilisation resulting in revenue and EBITDA of Rs 1766. ICICIdirect. respectively.5 18 20 78 18 13 13 10. ICICIdirect. With a bounce-back in steel production across the globe already under way and subsequent increase in graphite electrode demand looking inevitable. during FY09-12E on a consolidated basis. Brownfield expansion has resulted in the graphite electrode capacity increasing from just 14. capacity expansion is underway again at GIL. The company also acquired an 18.5 crore. The focus of the expansion plan is to provide the existing facility with advanced technology and greater energy efficiency.500 tonne by FY12E at a competitive cost of Rs 187. we expect GIL to achieve higher sales volume.000 tonne currently. respectively. and a CAGR of 5. The company possesses niche capabilities with backward integration and diversification benefits in place.500 tonne) to 44.8 crore and Rs 366.com | Equity Research Page 34 .5 crore In view of the improved graphite demand in the medium term. going forward.5 18 13 13 Source: Company.000 tonne manufacturing facility in Nuremberg. Germany during FY05 in order to increase its reach in the European markets.000 tonne at Durgapur in FY04 to 34.6% and 6%.7 crore in FY12E.5 88.500 tonne of graphite electrodes and setting up of 50 MW thermal captive power plant at Durgapur. The company is expected to increase its graphite electrode capacity through the brownfield route at its existing location in Durgapur by ~31% (10.
0 49.0 100. We expect the total revenue from its other businesses to more than double from Rs 102 crore in FY09 to Rs 228. which provides it with diversification benefits.com Research Diversification benefits through other businesses The company has been making good progress in these segments. GRP pipes & tanks business and speciality steel business.8 42.6 crore in FY12E./tonne (units) 6000 Total power reqd.0 47.com Research ICICIdirect.0 50.2 45. The company has been making good progress in these segments.com | Equity Research Page 35 . which provides backward integration benefits.0 61. Taking this into account.1 9.4 68. We expect the total revenue from its other businesses to more than double from Rs 102 crore in FY09 to Rs 228.6 45. Graphite manufacturing process is power intensive and requires ~6000 units of power for producing one tonne of graphite electrode.0 FY07 IGE FY08 FY09 GRP pipes & tanks FY10E FY11E Special steel FY12E 60.9 76.3 Source: Company.9 59.000 tonne and captive power plants of 33 MW through hydel and multi-fuel routes.(mn units) 204 The company is expanding its captive power capacity by 50 MW at Durgapur to reduce its power costs and achieve better backward integration Plant Durgapur Current sourcing Supply from DVC FY12 sourcing CPP of 50 MW Nasik 13000 6000 Bangalore 13000 6000 Supply from KSK Supply from MSEB energy at lower cost 18 MW Hydel power plant. ICICIdirect. The captive power capacity is being expanded by 50 MW at the company’s Durgapur plant at a capex of Rs 214 crore.0 44.0 59.8 50.0 200.0 72.Graphite India Ltd (CAREVE) Partial backward integration and power capacity build-up an added advantage GIL enjoys an added advantage over its peers on account of its CP coke manufacturing capacity of 30. ICICIdirect. supply from 78 grid 78 Source: Company.500 tonne.5 0. Exhibit 53: Revenue from other business segments 250. Exhibit 52: Power sourcing metrics Capacity (tonne) 34000 Power reqd. the new capacity of 50 MW is enough to meet all the captive power requirements of the company’s Durgapur plant even at its expanded capacity of 44.0 (Rs Crore)) 150.2 80.6 crore in FY12E The company has small exposure to other business segments like impervious graphite equipment business (IGE).
com | Equity Research Page 36 . due to reduction in costs on account of power. This is despite the increase in cost of its key raw material. Exhibit 54: Blended realisation movement 240 220 200 ('000 Rs/tonne) 180 160 140 120 100 80 FY07 FY08 FY09 FY10E FY11E FY12E Blended Realisation Source: Company.com Research We expect the overall cost of production to keep trending upwards but remain largely under control for GIL. needle coke.com Research ICICIdirect. lower manpower costs and operational efficiencies reducing other costs. ICICIdirect. ICICIdirect. Exhibit 55: Cost of production break-up 160 140 120 ('000 Rs/tonne) 100 80 60 40 20 0 -20 FY07 Coke FY08 Pitch FY09 Other RM FY10E Power FY11E Labour FY12E Others Source: Company.Graphite India Ltd (CAREVE) Realisation and cost of production to trend upwards Graphite electrode prices have risen gradually during the last few years due to robust demand. We expect graphite electrode prices to remain subdued in FY11E before rising again in FY12E on the back of strong demand. going forward. increase in raw material prices and oligopolistic nature of the industry.
GIL has remained on a competitive footing as compared to global peers in the last few years.com Research We expect the overall cost as percentage of sales to remain at ~80% in both FY11E and FY12E. thus ensuring ~20% operating margins for the company 1200 1000 800 600 400 200 0 FY09 Cost FY10E FY11E FY12E Cost as % to sales On competitive footing with global peers Due to its low cost structure on account of India advantage. going forward.com Research ICICIdirect.com | Equity Research Page 37 (%) . Exhibit 57: EBIT margin comparison 35 30 25 20 (%) GIL's EBIT margins slightly ahead of global peers 15 10 5 0 Graftec CY07/FY08 SGL CY08/FY09 Tokai Carbon CY09/FY10E GIL CY10/FY11E HEG CY11/FY12E Source: Company. We expect GIL to achieve EBIT margin of ~19% in both FY11E and FY12E.Graphite India Ltd (CAREVE) We expect overall cost as percentage of sales to remain at ~80% in both FY11E and FY12E. consensus estimates for global peers indicate EBIT margins well below 15% in the next few years for players like SGL and Tokai Carbon. Exhibit 56: Cost metrics 2000 1800 1600 1400 (Rs Crore)) 90 80 70 60 50 40 30 FY07 FY08 Net Sales Source: Company. thus ensuring ~20% operating margin for the company. ICICIdirect. ICICIdirect. We expect it to stay slightly ahead of the competition in terms of profitability. In contrast.
0 1331. backed by sales volume CAGR (FY09-12E) of 11%.0 (Rs crore)) Sales CAGR (FY09-12E) .0 1800.9 1443.6% to Rs 1766.0 0.com Research FY10E FY11E PAT % FY12E ICICIdirect.5% 15. the subdued performance of its overseas subsidiary is expected to keep the consolidated margin at a lower level.1%.4%.4 11.8% and 11.0% 20.5% 11.0% FY08 FY09 EBITDA % Source: Company.Graphite India Ltd (CAREVE) Financials Steady revenue growth We expect the topline to grow at CAGR (FY09FY12E) of 5.5% on a consolidated basis.0 1000. Exhibit 58: Steady revenue growth (Consolidated) 2000. However.0% FY08 FY09 Net Sales FY10E FY11E YoY Growth FY12E Source: Company. in FY12E.6 crore in FY09 with EBITDA margin of 20.6% to Rs 1766.0 1600.0% -20.0% -13. Exhibit 59: Margins to sustain at higher levels 30.6% 1766.0 crore in FY08 and FY09.5 12.0% 1501.9% 11.5 crore and Rs 1501.com Research Healthy EBITDA margin.4% 30.7% -10. We expect the company to clock EBITDA and PAT margin of 20.7% 15. respectively.5.5% 20.8 22. backed by sales volume CAGR (FY09-12E) of 11% The company reported a consolidated topline of Rs 1331. going forward GIL reported strong EBITDA of Rs 307. we expect the company to maintain healthy EBITDA margins on account of its low cost structure and robust demand.8% 20.7% 1294.8 crore.8%.8 crore.8% 20.8% 20. We expect the topline to grow at a CAGR (FY09-FY12E) of 5.5% 1400.0 600.0% 10.0% 20.8% We expect the company to clock EBITDA and PAT margin of 20. ICICIdirect.com | Equity Research Page 38 .0% 10. in FY12E 0. respectively. The topline has grown at a CAGR (FY07-FY09) of 10.0 800. Going forward. respectively. ICICIdirect.0 400.0 1200.8% and 11. The company has shown a very strong standalone performance in 9MFY10 and has reported standalone EBITDA margins of 35.0% 27.7% 10.8%.
100 crore and cash of more than Rs 250 crore.4 20.3 20.0 FY08 RoNW Source: Company.4% and 20.6 0. net worth of ~Rs 1. respectively.5 0.2 0. ICICIdirect.0 0.3 16. in FY12E on the back of strong operational performance overall and completion of its expansion and capex programme.0 13. Exhibit 60: Strong return ratios 30.com Research 0.1 0. and achieve RoCE and RoIC of 16.0 FY10E Debt FY11E FY12E D/E (Ratio) ICICIdirect.3%.4% and 20. and achieve RoCE and RoIC of 16.8 0. The company expects to complete its expansion largely through internal accruals accumulated from strong cash flow generation.3 19.0 400.0 1600.0 (%) 15. in FY12E on the back of a strong operational performance overall and completion of its expansion and capex programme HEG reported strong return ratios in FY09 on account of higher profitability. We expect the net worth of the company to increase to ~Rs 1.0 (Rs crore)) 1000.0 1400.0 25.3 0.5.com Research 25.com | Equity Research Page 39 .4 0.9 0. respectively.0 200.2 21.1 14. going forward. We expect the company to maintain good return ratios.0 20.671 crore and debt-equity ratio to drop to 0.0 800. Exhibit 61: Strong balance sheet 1800.4 19.5 20.0 5.0 FY08 FY09 Net Worth Source: Company.3 17. ICICIdirect.7 0.3 by FY12E.6 18.4 12.0 1200.3%.4 18.7 23.0 FY09 FY10E RoCE FY11E FY12E RoIC Balance sheet remains extremely strong The company boasts of an extremely strong balance sheet with debtequity ratio of 0.0 10.Graphite India Ltd (CAREVE) Good return ratios We expect the company to maintain good return ratios going forward.0 600.
1 72.1 Average for global players 13. We are initiating coverage on the stock with an ADD rating.8 30% 10 94.com Research CY09/FY10 7.0 29. EPS Average global P/E (x) Discount given P/E (x) Total Value/Share Source: Company.0 16.8 CY10/FY11 10.7 14.4 13.4 9. We value the stock at 10x (30% discount to global average) the average of FY11E and FY12E consolidated EPS and arrive at a fair value of Rs 94.0 15. the stock is trading at 10.3 Discount (%) 51.8 39. P/E based valuation of Rs 94.6 FY12E 10.6/share.4 Graftec 6.6/share We value the stock at 10x (30% discount to global average) the average of FY11E and FY12E consolidated EPS and arrive at a fair value of Rs 94.4 0.1 50.5.8 21.6 22.5 9.4 CY11/FY12 8.8 Source: Company. The stock is trading at a discount of ~39% as compared to global average on CY11/FY12 earnings.4 and 8.0 20. Exhibit 62: P/E based valuation (Rs) EPS (Cons.3 24.4x FY12E EPS of Rs 10.6/share At the CMP of Rs 88. ICICIdirect. It enjoys a production presence in Europe and has diversification benefits through GRP pipes/tanks and special steel businesses.8 SGL 7.0 Showa Denko 30.5 12.5x FY11E EPS of Rs 8.com | Equity Research Page 40 .com Research FY11E 8.Graphite India Ltd (CAREVE) Valuations GIL is the larger of the two graphite players in India.5 0.8 30.2 ICICIdirect.) Weightage Adj.1 Tokai Carbon 9.7 NA 42.5 13.5 82. ICICIdirect.5 Exhibit 63: Global P/E valuation comparison CY08/FY09 P/E GIL 6. We have valued GIL using P/E and EV/EBITDA methodology to arrive at a target price of Rs 95.
7 1886.0 4. We value the stock at 6x (15% discount to global average) the average of FY11E and FY12E consolidated EBITDA and arrive at a fair value of Rs 1768.1 Discount (%) -11.3 19.2 9.com Research FY12E 366.) 295.4 crore for its graphite business.7 6.7 6.8 29.8 95.0 5.6 SGL 4.5 10.0 99. ICICIdirect.6 11.0 Discount given 15% EV/EBITDA (x) 6 EV Less: Net debt Total market cap No.4 CY11/FY12 5.4/share.2 12.7 0.0 Average global EV/EBITDA (x) 7.2 18.Graphite India Ltd (CAREVE) EV/EBITDA based valuation of Rs 95.4/share The stock is trading at a discount of ~18-30% as compared to global average on CY10-11 earnings.com | Equity Research Page 41 .5 Adj.3 Graftec 4. we have arrived at a target price of Rs 95 for the stock and initiate coverage on the stock with an ADD rating.6 6.3 Weightage 0.5 7.3 Source: Company.7 Based on the average of the above two valuation methodologies.4 12.5 1986.4 Tokai Carbon 4. of shares (Cr) Total value/share (Rs) Source: Company.5 6.9 7.2 14. ICICIdirect.8 5.1 Showa Denko 8.6 64.5 7.4 crore for its graphite business which translates to a value of Rs 95.4 Exhibit 65: Global EV/EBITDA valuation comparison CY08/FY09 CY09/FY10 EV/EBITDA GIL 6. Exhibit 64: EV/EBITDA based valuation (Rs Cr) FY11E EBITDA (Cons.4/share We value the stock at 6x (15% discount to global average) the average of FY11E and FY12E consolidated EBITDA and arrive at a fair value of Rs 1768.com Research CY10/FY11 5. which translates to a value of Rs 95.4 Average for domestic players 5. EBITDA 331. ICICIdirect.
5 541.7 FY11E 1443.0 838.4 -19.0 235.8 755.6 359.9 35.7 0.8 129.9 62.1 295.0 384.5 0.0 295.2 1144.6 24.4 FY10E 1294.5 274.4 FY09 1501.6 164.6 10.6 51.6 394.2 (Rs Crore) FY12E 39.8 1708.0 42.9 25.6 0.6 34.6 1255.0 0.7 129.1 Source: Company. Depreciation Net Block Capital WIP Net Fixed Assets Investments Cash Trade Receivables Loans & Advances Inventory Total Current Asset Current Liab.0 142.5 339.6 300.4 0. PAT after MI Adjustments Adj.9 694.1 366.9 223.1 253.4 307.3 252.6 347.5 65.2 346. ICICIdirect.0 105.4 22.0 235.6 0.6 182.6 14.7 690.1 74.0 (Rs Crore) FY12E 1766.6 101.0 12.0 142.7 935.0 87.1 1708.6 0.8 0.5 303.com | Equity Research Page 42 .0 531. Net Profit Growth (%) FY08 1331.0 166.0 166.6 101.5 9.0 207.6 1527.8 27.5 22.0 207.9 79.6 0.9 1028.0 724.1 101.4 0.5 1978.6 101.7 FY11E 39.8 Source: Company.0 142.0 205.8 18.4 0.7 105.0 166.5 1148. Net Current Asset Application of funds FY08 30.1 1978.6 182.8 22.1 0.9 411.6 0.6 -12.1 834.0 1310.0 1221.3 0.6 0.5 0.2 1117.0 266.6 24.4 0.7 24.3 314.2 1813.6 FY10E 34.0 0.6 946.6 335.8 1132.0 1083.com Research ICICIdirect.8 47.1 80.8 435.0 340.3 -17.9 1246.0 684.0 345.0 288.2 0.0 650.5 422.7 65.1 1344.0 295.6 994.4 41.Graphite India Ltd (CAREVE) Table and Ratios Exhibit 66: Profit & loss account Net sales Growth (%) Oerating Expenditure EBITDA Growth (%) Other Income Depreciation EBIT Interest PBT Growth (%) Tax Extraordinary Item Rep.3 16.4 1444.7 0.8 107.0 220.2 0.6 445.0 1002.0 1487.7 311.0 661.1 281.2 33.2 797.2 28.8 13.0 396.4 222.4 1400.8 25.0 205.0 1104. ICICIdirect.0 1068.0 295.6 29. & Prov.5 699.8 354.6 506.4 355.5 1490.5 1813.0 235.8 30.6 75.6 125.0 205.2 0.9 79.1 -19.7 487.9 -13.0 1444.7 60.7 1044.0 773.2 131.com Research Exhibit 67: Balance sheet Equity Capital Preference capital Reserves & Surplus Shareholder's Fund Minority Interest Secured Loans Unsecured Loans Deferred Tax Liability Source of Funds Gross Block Less: Acc.5 1671.0 1631.2 0.8 318.7 566.3 533.2 1450.7 70.3 44.0 324.5 1054.9 129.6 2172.4 11.0 647.7 1193.4 0.0 277. PAT before MI Minority interest (MI) Rep.8 108.0 207.5 2172.1 FY09 34.9 0.0 85.9 79.
in Current Assets CF from operations Purchase of Fixed Assets Inc.3 71.0 92.8 152.5 23.2 8.2 87.5 165.9 51.1 66.9 FY09 235.9 -16.5 357. ICICIdirect.8 384.1 180.0 4.0 129.0 154.2 FY11E 12.6 19.4 91.0 20.4 12.0 44.4 184.4 91.8 Exhibit 69: Key ratios (%) Return ratios RONW ROCE ROIC DuPont ratio analysis PAT/PBT PBT/EBIT EBIT/Net sales Net Sales/ Total Asset Total Asset/ Networth Spread of RoIC over WACC RoIC WACC EVA (Rs Crore) RoIC-WACC Turnover ratios (days) Inventory turnover Debtor turnover Creditor turnover Current Ratio Quick ratio Source: Company.0 132.9 -86.9 116.7 212.7 4.0 -86.3 180.2 47.2 81.0 3.9 20. in Investment CF from Investing Inc./Dec. Inc.0 136.0 73.0 212.9 20./Dec.0 64.0 110.0 -50.0 0.1 FY12E 13.7 60.0 87.6 -173.5 19.0 70. in Current Liab.1 3.0 -290.0 91.0 -50.8 FY10E 205.0 -106.1 -63.3 FY10E 17.4 190.3 23.6 67.0 100.4 75.2 18.4 63.4 149.3 20.0 -70.6 54.5 19.6 63. in Debt Inc.0 0.2 191.8 -4.9 156.8 83.4 66.4 23.8 FY11E 166.7 65.2 11.3 66./Dec.2 1.8 19.5 204.4 (Rs Crore) FY12E 207.0 110. in Equity capital CF from Financing Opening Cash balance Closing Cash balance Source: Company.com | Equity Research Page 43 .1 8. ICICIdirect.4 290.0 -140.0 90.0 90.0 14.0 105.0 119.4 53.5 ICICIdirect./Dec.com Research FY08 142.3 7.4 144.0 91.0 -90.6 21.0 50.9 87.3 12.8 324.5 164.6 1.4 18.0 110.4 51.5 166.7 140.0 384.7 65.0 0.7 -4.5 0.1 0.0 0.8 87.1 80.0 324.0 4.1 12.6 92.3 130.4 0.2 FY09 25.9 4.9 19.0 158.4 12.4 220.0 0.7 92.7 12.8 23.9 9.3 21.0 41.3 -34.3 19.6 83.0 50.com Research FY08 20.1 -18.9 204.0 16.5 20.0 202.0 92.5 77.5 60./Dec.6 26.4 20.2 85.9 112.9 50.Graphite India Ltd (CAREVE) Exhibit 68: Cash flow statement Profit after Tax Dividend Depreciation Cash Profit Inc.0 76.
ICICIdirect.) 11.8 3.com | Equity Research Page 44 .3 1.4 FY10E 7.0 -12.9 FY10E 27.4 1.5 15.0 82.0 84. ICICIdirect.7 Per share data (Rs) Revenue per share 88.0 Cash per share (Incl.4 24.4 1.0 3.5 0.2 4.5 73.2 4.0 13.9 75.0 FY12E 8.5 1.9 FY11E 20.1 5.7 91.7 87.1 FY09 6.3 10.6 1.4 Attributable EPS 9. Invst.3 6.5 11.8 PAT Margin 10.1 3.1 1.8 15.8 107.5 3.com Research FY08 9.7 ICICIdirect.Graphite India Ltd (CAREVE) Exhibit 70: Profitability and per share data Profitability ratios (%) FY08 EBITDA Margin 20.4 Dividend per share 3.3 19.1 73.2 Exhibit 71: Valuation ratios Valuation (x) P/E P/BV EV/EBITDA FCF Yield (%) EV/Sales Div Yield (%) Source: Company.5 1.com Research FY09 20.0 3.6 Source: Company.3 4.8 89.6 Book Value 50.4 2.3 1.2 77.1 EV per share 117.0 -5.2 4.5 FY11E 10.5 8.8 6.6 FY12E 20.3 1.4 2.3 1.5 16.2 24.8 11.9 12.3 93.9 65.3 11.0 5.
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