Graphite India Limited (GIL) BSE Code: 509488 NSE Id: GRAPHITE

CMP (BSE): Rs. 94.85

CMP (NSE): Rs. 94.75

Industry: Other Industrial Goods

Graphite India Limited. (GIL) is the largest producer of graphite electrodes in India and is one of the largest producer globally. GIL accounts for almost 6.5% of the global electrode capacity. The principal manufacturers are GIL has a total of 4 manufacturing plants - 3 in India at Durgapur (34KT), Bangalore (13KT), Nashik (13KT) and the 4th one in Germany (14KT). The total manufacturing capacity comes to approximately 78000 tonnes per annum. GIL has over 40 years of expertise in the industry and is globally competitive. GIL exports around 65% of it production to caters to its clients in over 50 countries. GIL also has facilities designed for the manufacture of calcined petroleum coke (30KT), impervious graphite equipment and glass reinforced plastic pipes and tanks. It also has an installed capacity of 33 MW of power generation through hydel and multi-fuel routes.

GIL manufactures the full range of graphite electrodes but it stays more focused on the high margin, large diameter, ultra- high power (UHP) electrodes. Currently, approximately 85% of GIL's total capacity is UHP. GIL is well poised in the global graphite electrode industry through its quality, scale of operations and low cost production base.

Industry Overview:

Graphite Electode is used in the electric arc furnace (EAF) based steel mills for conducting current and is a consumable item for the steel industry. The estimated world capacity of the Graphite Electrode in EAF is over 1 million MT. There are 2 basic routes for the steel production - (1) Blast Furnace (BF) and (2) Electric Arc Furnace (EAF). The EAF route to steel production has increased over the last 2 decades from 26% to 32% at the global level. This share of EAF is expected to grow further in years to come due to 3 main reasons - (a) an environment friendly and less polluting process, (b) low capital costs, (c) faster project commissioning time. Fresh investments in the EAF steel mills are characterized by large diameter UHP electrodes. It is expected that the demand for UHP electrodes will grow in proportion.

Due to the global meltdown, the global production of steel during 2009 was 1.2 billion MT, down almost 8.1% compared to 1.31 billion MT in 2008. A relatively weak demand in the steel consuming sector resulted in a steep fall in the demand of crude steel as well as graphite electrodes. Though the developed economies like Europe, USA and Japan, still continue to reel under the recessionary pressure, steel production and electrode demand in India and some Asian economies have recovered back to the pre-recession levels or in some cases even more. Currently, there will be softening of the electrode prices due to American, European and Japanese suppliers entering the Indian and the Asian market due to the demand. However, it is expected that by mid 2011-2012 the steel industry would revive to its full potential.

Expansion:

Foreseeing the revival of demand in the steel industry, GIL revised its expansion plan at Durgapur plant from 10500 MTPA to 20000 MTPA. The additional capacity will be commissioned with a low incremental cost of Rs. 67.5 crore. This additional capacity will be installed with eco-friendly, energy- efficient advanced technology leading to a more cost efficient and sustainable operation in the long term.

Backward- Integration:

One of the many backward integration initiatives by GIL, is its coke division at Barauni. It is engaged in the manufacture of Calcined Petroleum Coke (CPC), Electrode paste and the Tamping paste. CPC is the raw material used in the manufacture of regular and high power grade Graphite Electrode. It is also a raw material for fine grained high density graphite used in speciality graphite products and Impervious Graphite Equipment. Electrode paste is used in ferro alloy smelters and Tamping paste is used as a lining in aluminium and steel smelters.

Other Businesses:

(1) Graphite Equipment Business: The Impervious Graphite Equipment (IGE) division is engaged in manufacturing and marketing heat exchangers, ejectors, pumps and turnkey plants at its Nashik plant. The Graphite Equipments have wide range of applications in corrosive chemicals industries such as pharmaceutical, agro-chemical, chloro alkali and fertilizer industries.

Modernization and expansion work of this division to improve the overall manufacturing efficiency has been completed.

(2) GRP Pipes and Tanks Business: Glass Reinforced Plastic (GRP) Pipes and Tanks Division is engaged in manufacturing and marketing of GRP Pipes and Tanks. GIL converts users of conventional pipes to GRP through re-engineering, strategic marketing, superior product quality, competitive pricing and value added services. Second manufacturing line which will enable production of pipes up to a diameter of 3000 mm has been commissioned during the year.

(3)Power: GIL has an installed capacity of 33 MW of power generation through hydel (19.5 MW) and multi-fuel routes (13.5 MW). Power is a major cost input in the manufacturing of Graphite Electrodes. The cost of power from grid continues to rise year-over-year. The power requirement at Durgapur Plant will go up with the on going expansion. In order to reduce dependence on grid power and ensure availability of quality power at economical rate, GIL is setting up a coal based thermal power plant of 50 MW capacity at Durgapur. This will enable GIL to further optimise its cost of production and increase its competitiveness in the global market. It has also entered into a long term agreement with Wardha Power Company (WPC), to receive power supply and in turn made a commitment to invest Rs. 9 crore in WPC and is expected to commence later in the year 2010-11.

(4) Powmex Steels Division (PSD): PSD is engaged in the business of manufacturing high speed steel and alloy steel having its plant at Titilagarh in the state of Orissa. PSD is the single largest manufacturer of High Speed Steel (HSS) in the country. Its current market share is estimated at around 60%. HSS is used in the manufacture of cutting tools such as drills, taps, milling cutters, reamers, hobs, broaches and special form tools. HSS cutting tools are essentially utilized in automotive, machine tools, aviation and DIY market.

The last year, in spite of challenging business scenario, GIL posted a satisfactory performance, primarily because of its continuous cost optimization efforts throughout all the divisions. Capacity utilization of graphite electrode segment was 52% in FY10 as compared to 85% in FY09. Production was attuned to demand. Lower demand resulted in lower sales. Despite lower sales, the higher sales realization, lower input costs and reduction in the operational costs helped it in improving the operating margins. In FY10, the gross sales were Rs.1178 crore as against Rs. 1183 crore in FY09. In spite of no significant difference in the gross sales, the PAT stood at Rs.232 crore for FY10 against Rs.194 crore in FY09, showing a growth of almost 19.5%. The graphite electrode division is the main contributor to the revenues for GIL. In FY10 it contributed nearly 82% to the total revenues. It has a total equity of Rs.34.30 crore and reserves of almost Rs.1149.22 crore. Against this it has total debt of Rs.249.26 crore which brings it debt equity ratio to just 0.21 because GIL has repaid a significant amount of debt in the last 4 years. Thus it has highly de-leveraged itself which makes it more attractive for me.

GIL is quoting at 1.47 times its book value and is available at a PE of 7.88 at the current price. Its EPS for the FY10 was Rs.13.54 per share. It has shown a growth of approximately 34% CAGR in its earnings since the last 5 years. It is a regular dividend paying company and it paid a dividend of Rs. 3.5 per share (175%, FV - Rs. 2 per share) which brings dividend yield at 3.7% at the current levels. GIL's recent decision to add capacity and backward integration initiatives would add to the volumes in the future. Growing demand for graphite electrodes with the revival of the global steel industry and all around improvement in the operating efficiency can lift GIL's topline as well as bottomline in the coming years.

GIL does not only offer its customers quality products and services. It conducts business with a respect for the environment at every stage of its product cycle across all its plants. As a result, GIL is committed to sustainable development. It is a green company. This thing might not be important for some of the investors but to me it is, because a company which does its business keeping the environment in mind is a good company to invest in. For me, the best CSR is to do business while sustaining the environment and this is definitely one of them.

Till the global economy is revivied, the performance of GIL will remain strained, however once the global economy picks up and the steel industry picks up, the growth will be tremendous. With the steel sector expected to pick up in the mid 2011-2012, I foresee huge growth potential and huge volumes for GIL with the new capacity additions. The future of this company seems very good. It may be considered as a VALUE pick. A good long term bet.

Buying at current levels and at further dips would be very attractive.

Happy Investing.