Buy Graphite India; target of Rs 330: ICICI Direct

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ICICI Direct's research report on Graphite India

For Q2FY20, Graphite India reported operationally subdued set of numbers on the back of lower-than-expected capacity utilisation level. On a consolidated basis, capacity utilisation came in at 61%, lower than our estimate of 75% (75% in Q2FY19, 93% in Q1FY20). The company reported a consolidated topline of Rs 882 crore, lower than our estimate of Rs 940 crore. Consolidated EBITDA for the quarter was at Rs 140 crore. The corresponding EBITDA margin was at 15.9%. Graphite India reported tax credit to the tune of Rs 58 crore on account of a change in corporate income tax rate, which aided consolidated PAT. The reported consolidated PAT was at Rs 185 crore (our estimate: Rs 193 crore). While Graphite India’s Q2FY20 performance came in subdued, going forward, raw material cost are expected to decline from Q2FY20 levels, which should aid in an uptick in operating margins.

Outlook

After a subdued Q2FY20, the expected decline in needle coke prices in H2FY20 augurs well for the company as it is expected to lead to an uptick in both standalone as well as consolidated operating margins (from Q2FY20 levels). We model EBITDA margins of 26.5% in FY20E and 35.0% in FY21E. We value the stock at 6x FY21E EPS and arrive at a target price of Rs 330. We upgrade the stock from REDUCE to BUY.

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