Investors with a one-to-two year perspective can consider taking an exposure to the stock of Graphite India.
At current market price, the stock trades at about seven times its likely FY08 per share earnings on a fully diluted basis. Increasing demand for graphite electrodes coupled with a hardening of electrode prices, spell good times for Graphite India, a leading electrode manufacturer in the country. This apart, the increasing preference for steel manufactured through EAF (electric arc furnace) route the world over, in turn is likely to propel the demand for graphite electrodes.
Industry estimates, which peg the contribution of steel produced through the EAF route at about 38 per cent by 2010 compared to the 33 per cent now, point to strong demand prospects for graphite electrodes. Revenues are also likely to get a boost from exports, which contributed to about 68 per cent of the total revenues for FY07. Graphite India has facilities to generate captive power, which given the energy intensive operations, leads to cost savings. Savings from reduced freight cost and the zero impact of anti-dumping duty due to Graphite's presence in Germany is a positive.
For the quarter ended March 2007, Graphite witnessed a 22 per cent increase in revenues, helped by firm prices and improved capacity utilisation of its Durgapur plant. However, on the operational front, margins declined by about 500 basis points during the quarter. While rise in raw material and staff cost could be reasons for the shrinking of margins this quarter, exceptional charges from accounting for higher fuel costs also reduced margins. Going forward, higher realisations on graphite electrodes, are expected to more than offset the hike in input (needle coke) prices. Therefore, the pressure on margins is likely to ease in future. Any reversal in production trends in steel, unexpected changes in exchange rate pose risks to our recommendation.