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Muted performance

About the stock: Graphite India (GIL) is the largest Indian producer of graphite electrodes by total capacity. Its manufacturing capacity is 98000 tonnes per annum.

? While GIL manufactures a full range of graphite electrodes, it stays focused on the higher margin, large diameter, ultra-high power (UHP) electrodes

? GIL has over 40 years of technical expertise in the industry

Q1FY23 Results: GIL reported a muted set of Q1FY23 numbers, primarily on the back of lower-than-expected consolidated capacity utilisation and higher-thanexpected operating costs. The reported numbers were also impacted by a one-off charge. Damodar Valley corporation has revised electricity tariff rates and the net charge of | 75 crore had been clubbed under power & fuel costs for the quarter.

? For Q1FY23, Graphite India’s standalone capacity utilisation was at 80% (90% in Q1FY22 and 92% in Q4FY22). For Q1FY23, Graphite India reported standalone topline of | 798 crore, up 47% YoY, 4% QoQ. Reported standalone EBITDA for the quarter was at | 75 crore. However, after adjusting for the one-off charge adjusted standalone EBITDA was at | 150 crore. Ensuing standalone reported PAT for the quarter was | 63 crore

? For Q1FY23, Graphite India’s consolidated capacity utilisation was at 71% compared to 77% in Q1FY22 and 76% in Q4FY22. For Q1FY23, Graphite India reported consolidated topline of | 866 crore, up 42% YoY, 3% QoQ. Reported consolidated EBITDA for the quarter was at | 28 crore. However, after adjusting for the one-off charge adjusted consolidated EBITDA was at | 103 crore, down 27% YoY but up 17% QoQ. Ensuing consolidated reported PAT for the quarter was at | 24 crore

What should investors do? GIL’s share price has given a negative return of 20% over the last six months (from ~| 523 in February 2022 to | 417 in August 2022).

? Going forward, we expect GIL’s consolidated operating performance to remain subdued, primarily due to muted performance from European operations. Hence, we downgrade the stock from HOLD to REDUCE

Target Price and Valuation: We value GIL at | 390, 6x FY24E EV/EBITDA.

Key triggers for future price performance:

? Going forward, demand for graphite electrode and realisation are expected to remain volatile in the near term while cost inflation may continue to add pressure on margins

? Over FY22-24E, we expect GIL’s consolidated topline to grow at 5% CAGR while consolidated EBITDA and consolidated PAT are expected to register a CAGR of 23% and 12%, respectively

Alternate Stock Idea: In our metal coverage, we like Jindal Stainless.

? Jindal Stainless (JSL) has a 1.1 million tonnes per annum (MTPA) integrated facility with backward integration

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