Buy Graphite India; target Rs 68: ICICIdirect.com

"Graphite India's (GIL's) Q1FY14 performance was marginally below our estimate on the back of muted capacity utilisation. Capacity utilisation during the quarter under review stood at 67 percent, lower than our expectation of 74 percent. Subsequently, the standalone topline during the quarter stood at Rs 403.8 crore, lower by 21.0 percent QoQ and 3.3 percent YoY and below our estimate of Rs 464.2 crore. Electrode prices improved YoY although electrode sales volumes were lower during the quarter. Standalone EBITDA margin during the quarter was at 16.3 percent, broadly in line with our estimate of 16.7 percent and notably higher than 12.1 percent reported in Q4FY13. The subsequent standalone EBITDA for Q1FY14 came in at Rs 65.8 crore (our estimate: Rs 77.7 crore) while the consequent standalone PAT was at Rs 39.3 crore (our estimate: Rs 45.0 crore). Going forward, we believe currency depreciation will aid the operating margins in absolute terms. We have modelled consolidated capacity utilisation of 67 percent and 70 percent (on expanded capacity of 98,000 tonne) in FY14E and FY15E, respectively, and arrived at a BUY rating on the stock with a target price of Rs 68."

"On the back of a muted global steel demand scenario, the demand for graphite electrodes is likely to remain subdued over the short to medium term. However, GIL is trading at a substantial discount (~38 percent) to its international peers, thus making the case for upgrading the stock from HOLD to BUY. Going forward, we have modelled capacity utilisation of 67 percent and 70 percent (on a consolidated basis) in FY14E and FY15E, respectively. We have valued the company at a 30 percent discount to its global peer's average EV/EBITDA of 7.7x (resultant FY15E EV/EBITDA at 5.4x) and arrived at a target price of Rs 68 with a BUY rating on the stock," says ICICIdirect.com research report.

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