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Mixed bag performance…

About the stock: Graphite India (GIL) is the largest Indian producer of graphite electrodes by total capacity. Its manufacturing capacity of 98000 tonnes per annum is spread over three plants at Durgapur & Nashik in India & Nuremberg in Germany.

* 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

Q3FY22 Results: Graphite India (GIL) reported a mixed set of numbers for Q3FY22. While the standalone operations reported a steady performance during the quarter, consolidated performance was adversely impacted by muted performance of German operations. For the quarter, German operations reported a loss at the EBITDA level primarily due to a steep rise in electricity and fuel costs despite higher realisations.

* For the quarter, Graphite India reported consolidated capacity utilisation of 90% compared to 65% in Q3FY21 and 81% in Q2FY22 (our estimate 83%). Consolidated topline for the quarter was at | 880 crore, up 76% YoY and 27% QoQ (our estimate: | 765 crore)

* Consolidated EBITDA was at | 137 crore, up 26% QoQ. Consolidated EBITDA margin came in at 15.6% compared to 15.8% in Q2FY22

* Ensuing consolidated net profit during the quarter was at | 132 crore, up 3% QoQ and 474% YoY but lower than our estimate of | 177 crore

What should investors do? GIL’s share price has given a return of 89% over the last two years (from ~| 267 on February 2020 to ~| 505 levels in February 2022).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value GIL at | 650, 6.5x FY23E EV/EBITDA

Key triggers for future price performance:

* The recovery of graphite electrode demand globally has led to improvement in realisations. Going forward also, the healthy demand momentum trend is likely to continue, which augurs well for graphite electrode realisation

* Indian steel production is expected to continue the positive momentum in 2022, driven by the government’s focus on infrastructure development including roads, railways, defence production and launch of PLI scheme

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

* JSL has a 1.1 million tonnes per annum (MTPA) integrated facility with backward integration.

* BUY with a target price of | 200

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