Buy Graphite India; target of Rs 725: ICICI Direct

ICICI Direct's research report on Graphite India

Graphite India has been one of the good wealth creators for investors with the stock price nearly multiplying ~3.3x since our Sector Update in July, 2017. However, we believe there is more leg room in the stock price appreciation given the bright outlook of the global graphite electrode sector. Graphite India is the largest producer of graphite electrodes by capacity in India and accounts for 12.6% of global capacity (ex-China).

Outlook

For H1FY18, Graphite India reported a strong performance driven by better capacity utilisation and a sharp increase in realisation. For H1FY18, the company reported standalone revenues of Rs 812.9 crore with EBITDA of Rs 165.4 crore implying an EBITDA margin of 20.3% (vs. H1FY17: standalone revenues of Rs 594.8 crore and EBITDA of Rs 24.6 crore, EBITDA margin of 4.1%). Going forward, we expect EBITDA margins and return ratios to improve substantially. We value the stock at 10x FY19E EV/EBITDA thereby arriving at a target price of Rs 725. Graphite India has a robust balance sheet, net cash status and healthy cash flow generation, which augurs well. We maintain our BUY recommendation on the stock.