Buy Graphite India; target of Rs 650: ICICI Direct
ICICI Direct’s research report on Graphite India
For Q3FY19, Graphite India reported subdued results wherein topline, EBITDA and PAT came in below our estimate. The performance during the quarter was impacted by higher-than-expected operating costs (especially needle coke) and lower than expected volumes • The company reported a consolidated topline of Rs 1855 crore (up 81% YoY, down 21% QoQ) lower than our estimate of Rs 1926.1 crore. Consolidated EBITDA for the quarter was at Rs 1083 crore (Q3FY18: Rs 543 crore, Q2FY19: Rs 1640 crore, our estimate: Rs 1193 crore). The corresponding EBITDA margin was at 58.4% (Q3FY18: 53.0%, Q2FY19: 69.9%, our estimate: 61.9%). Sequentially, raw material cost (as percentage of sales) increased to 32.2% from 22.2% in Q2FY19 leading to moderation in EBITDA margin from Q2FY19 level. Ensuing consolidated PAT was at Rs 764 crore (vs. Q3FY18: Rs 359 crore and Q2FY19: Rs 1113 crore, our estimate of Rs 821.6 crore) • Standalone topline came in at Rs 1562 crore (up 67% YoY, down 22% QoQ) lower than our estimate of Rs 1605.2 crore. Standalone EBITDA for the quarter was at Rs 868 crore (Q3FY18: Rs 518 crore, Q2FY19: • Rs 1367 crore, our estimate: Rs 982.6 crore). Corresponding EBITDA margin was at 55.6% (Q2FY19: 68.1%, our estimate: 61.2%). Ensuing standalone PAT was at Rs 609 crore (our estimate: Rs 678.8 crore).
While Graphite India reported a healthy 9MFY19 on the back of favourable realisations and relatively subdued operating costs, we expect operating profit margins to decline from supernormal levels of 67.5% in 9MFY19 to ~41% in FY20E. This is on account of a steep rise in price of key raw material (needle coke) and the fall witnessed in price of graphite electrodes in both UHP grade (on account of recent weakness in steel prices) and HP grade (on account of removal of anti-dumping duty from China) electrodes. Taking into account the same, we downward revise our graphite electrodes realisation assumption for FY19 & FY20E while we upward revise the needle coke costs estimate. Aligning with the contraction witnessed in P/E of global graphite electrodes majors, we now value the stock at 6x FY20E P/E. Hence, we arrive at a target price of Rs 650 and assign a BUY rating on the stock. In the current volatile scenario, a healthy payout ratio coupled with a robust balance-sheet and strong track record of Graphite India comforts our positive stance.
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