Stock market Update on Graphite India for 1QFY2012

Stock market Update on Graphite India for 1QFY2012 with a Buy recommendation and a Target Price of `109 (12 months)

For 1QFY2012, Graphite India(GIL) posted top line of `319cr (`258cr), registering an increase of 23.3% yoy, which was below our expectation owing to the lockdown in its Powmex Steel Division. EBITDA margin contracted by 371bp yoy to 19.3%. Despite contraction in OPM, PAT increased by 7.2% to `37cr (`34cr), owing to higher sales. Going ahead also, the scenario is positive, as steel production has started again in June and is showing a strong rising trend. We maintain our Buy recommendation on the stock.

Strong sales growth but margin declines: GIL reported strong sales growth in 1QFY2012. Revenue increased by 23.3% yoy and 5.1% qoq to `319cr, despite a lockdown in its steel division, which started production post June this quarter. The steel division’s revenue declined by 58.4% yoy to `9cr. OPM declined marginally by 9bp qoq to 19.3%. PAT increased by 7.2% yoy but declined by 17.2% qoq on the back of lower other income. Consequently, PAT margin declined by 312bp qoq to 11.6% (14.7%).

Outlook and valuation: We remain positive on the prospects of GIL, owing to strong demand from steel manufacturers. Realisations are also set to increase, as global players have hiked their prices recently. Overall, we expect sales to post a 19.2% CAGR over FY2011–13E and PAT to increase at a 26.2% CAGR over the same period. At the CMP, the stock is trading at attractive valuations of 0.9x its FY2013E BV, respectively. We have valued the stock at its five-year median of 1.2x from earlier 1.3x one-year forward book value to arrive at a target price of `109 (`123). We maintain our Buy recommendation on the stock.