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On a strong footing…

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

Q1FY22 Results: Graphite India reported a steady set of numbers for Q1FY22.

* For the quarter, GIL reported consolidated capacity utilisation of 75% vs. 36% in Q1FY21 and 73% in Q4FY21 (our estimate 75%). Consolidated topline for the quarter came in at | 610 crore, up 49% YoY, 8% QoQ (our estimate: | 610 crore)

* Consolidated EBITDA came in at | 141 crore, up 81% QoQ, lower than our estimate of | 174 crore. Consolidated EBITDA margin came in at 23.1% compared to 13.8% in Q4FY21, lower than our estimate of 28.5%

* Consolidated other income for the quarter was at | 78 crore, up 39% QoQ, 15% YoY, higher than our estimate of | 64 crore. Better than expected other income aided consolidated PAT during the quarter. Ensuing PAT during the quarter was at | 150 crore, up 134% QoQ (our estimate: | 149 crore).

What should investors do?

Graphite India’s share price has grown by ~3.7x over the last 12 months (from ~| 188 on August 2020 to ~| 702 levels in August 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Graphite India at | 825, 6.5x FY23E EV/EBITDA.

Key triggers for future price performance:

* China’s steel exports are expected to decline in CY21. Lower steel exports from China will lead to higher production of steel in EAF steel producing countries, resulting in increased demand for electrodes. However, rising needle coke input prices in line with electrode pricing may exert some pressure

* Domestic demand for steel and electrode has started rising from June 2021 onwards with the easing of lockdown restrictions. With the normalisation of economic activity, there may be strong demand for steel and electrodes both in domestic and international markets.

Alternate Stock Idea: In our graphite electrode sector coverage, we also like HEG.

* HEG is a leading manufacturer of graphite electrodes in India and operates the world's largest single-site integrated graphite electrodes plant at Mandideep in Madhya Pradesh

* BUY with a target price of | 2800

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