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INDIA

BUY Graphite India Metals


Initiating Coverage 20 June 2017
Target Price Rs165 Key Data
Electrifying growth ahead, Initiate with a Buy Bloomberg Code GRIL IN
We initiate coverage on Graphite India (GIL) with a Buy rating and TP of Rs165 as CMP* Rs138 Curr Shares O/S (mn) 195.4
we see earnings at an inflection point with improved industry demand-supply Diluted Shares O/S(mn) 195.4
outlook led by closures, consolidation and reduced Chinese exports of both steel Upside 19.3% Mkt Cap (Rsbn/USDmn) 27/418.5

& electrodes. After several years of stagnation, Electric Arc Furnace (EAF) steel Price Performance (%)* 52 Wk H / L (Rs) 139.5/70

production is expected to grow at a CAGR of 4.6% during CY16-18E and drive 1M 6M 1Yr 5 Year H / L (Rs) 139.5/57

incremental annual electrode demand of 60kt by CY18E. With recent GRIL IN 21.5 90.7 74.6 Daily Vol. (3M NSE Avg.) 372646
Nifty 2.4 19.2 18.2
commissioning of key technology upgradation projects providing an improved
and flexible production base coupled with sharp improvement in gross profit/t, *as on 19 June 2017; Source: Bloomberg, Centrum Research

GIL is set to take a big leap in EBITDA/t over FY17-19E. Healthy balance sheet Shareholding pattern (%) *
with ~Rs4bn net cash, strong adj. FCF generation, high dividend payout and Mar-17 Dec-16 Sep-16 Jun-16

strong management pedigree are added positives. Promoter 65.2 65.2 65.2 65.2
FIIs 12.6 12.5 12.5 12.5
 Electrode prices on an electrifying run as demand-supply balance returns
DIIs 8.3 7.4 7.4 7.4
through closures and consolidation: Graphite electrode prices had slumped to a
Others 13.9 14.9 14.9 14.9
two decade low in H2CY16 after steadily declining for several years but have since
Source: BSE, * as on 19 June 2017
recovered very sharply and more than doubled in the last six months. The electrode
price rally has been triggered by a combination of large capacity closures (~20% ex- Graphite electrode industry capacity utilisation
China capacity shut), industry consolidation through aggressive M&A activity 100% 5000
involving the top three global producers, return of demand-supply balance, reduced 80%
4000
Chinese electrode exports and better pricing discipline by the incumbents in a loose
60%
oligopolistic set-up. We see electrode prices sustaining at long term average levels 3000
(above US$3,800/t) in the medium term led by improved industry structure and 40%
demand-supply balance. 2000

80%

83%

71%

69%

70%

64%

80%

90%
20%

63%
 EAF production outlook has turned conducive and is expected to drive
0% 1000
strong electrode demand growth: EAF share at global level has reduced to 25% in CY10 CY12 CY14 CY16 CY18E
CY16 (from 34% in CY02) led by China’s huge BF growth while Ex-China EAF share GE Capacity Utilisation - % GE Price (US$/t)
increased to 46% from 38% during the same period. Outlook for global EAF Source: Graftec, Centrum Research Estimates
production (the key catalyst for electrode demand) has turned conducive led by Incremental electrode demand of ~60ktpa by CY18E
multiple factors, such as i) stiff regulatory measures against Chinese steel imports 850 762 2.0
731 732
into key geographies which have high EAF share, ii) uptick in local steel production 695 701

in key markets led by demand revival and reduced Chinese imports, and iii) 600
1.7 1.7 1.7 1.7 1.7 1.8

increased competitiveness of EAF route of steelmaking vis-à-vis the more popular BF 430 409 412 431 448
1.5
route due to CoP convergence in the wake of cheaper as well as more freely 350
1.3
available scrap and increasing iron ore & coking coal prices. After years of stagnation,
we expect EAF steel production CAGR of 4.6% during CY16-18E which in turn would 100 1.0
create an additional annualised electrode demand of 60 kt by CY18E. CY14 CY15 CY16 CY17E CY18E
EAF Production (MT)
 Capex done, strong volume growth and EBITDA/t expansion in store: GIL has Electrode demand (kt)
Specific Consumption (Kg/t) - RHS
nearly completed its capex of ~Rs2bn, undertaken over the last few years for
Source: Bloomberg, WSA, Centrum Research Estimates
technology upgradation and modernisation of its production facilities in Durgapur
and Nasik which has increased its capability of achieving full capacity utilisation with Cons. EBITDA/tonne to expand materially
a better product basket. We expect strong expansion in gross profit/t for the industry as 1,000
818
well as GIL led by better spreads as global electrode producers are expected to maintain 800
pricing discipline in the coming years aided by a tight demand-supply balance, reduced
Chinese competition, and consolidated industry positioning. GIL would further benefit 600
US$/t

392
from the turnaround of its German subsidiary in FY18E and we expect consolidated 400
346 317
EBITDA/t to expand materially to US$392/818 in FY18E/19E.
200
 Valuation and risks - re-rating scope remains strong: We expect strong 82

earnings growth from current distressed levels led by solid volumes and improved 0
spreads. GIL scores strongly in our detailed corporate governance check (covered FY15 FY16 FY17 FY18E FY19E

in detail from page 25). Despite the recent up move in the stock, we see strong Source: Company, Centrum Research Estimates
scope for a re-rating and value GIL on our conservative AOCF/EV yield
methodology to arrive at a TP of Rs165 and initiate with a Buy. Key risk is margin
pressure due to forex losses & raw material volatility. Currently, the stock has no Abhisar Jain, CFA, abhisar.jain@centrum.co.in, 91 22 42159928
institutional sell side coverage. Prajwal Gote, prajwal.gote@centrum.co.in, 91 22 42159203

Y/E Mar(Rs mn) Rev YoY (%) EBITDA EBITDA (%) PAT YoY (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY15 17,107 (14.9) 1,368 8.0 632 (51.4) 3.2 3.6 3.1 28.9 13.1
FY16 15,323 (10.4) 1,346 8.8 828 31.1 4.2 4.7 4.2 18.0 10.1
FY17P 14,678 (4.2) 396 2.7 705 (14.9) 3.6 4.0 3.7 22.8 30.4
FY18E 17,753 21.0 2,138 12.0 1,393 97.7 7.1 7.7 6.9 19.4 10.5
FY19E 24,325 37.0 4,640 19.1 3,068 120.3 15.7 15.8 14.1 8.8 4.7
Source: Company, Centrum Research Estimates

34Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet


Table of Contents
Electrode prices on an electrifying run as demand-supply balance returns through closures and
consolidation .......................................................................................................................................... 3
Electrode prices have more than doubled after dipping for several years in a row .................................... 3
Substantial supply contraction through plant closures has improved demand-supply balance........... 4
China has clamped down on its own old & polluting capacities in induction furnaces and graphite
electrodes ............................................................................................................................................................................. 5
Industry consolidation has improved long term supply discipline outlook paving way for the return
of oligopolistic behaviour by incumbents ................................................................................................................. 6
EAF production outlook has turned conducive led by multiple factors and is expected to drive
strong electrode demand growth ......................................................................................................... 8
The regulatory clamp down on Chinese steel imports is aiding regional steel production in
geographies having higher EAF share ........................................................................................................................ 8
Uptick in BF CoP and subdued scrap prices has improved the competitiveness of EAF steel
production route ............................................................................................................................................................. 11
EAF production pick-up to prop up electrode demand..................................................................................... 13
Capex finished, strong volume growth and EBITDA/t expansion in store ...................................... 14
Capex spend to modernise and upgrade existing facilities coming to an end.......................................... 14
Strong expansion for gross profit/t and EBITDA/t in store as producers as well as GIL are not
expected to sacrifice on spreads ................................................................................................................................ 15
Other businesses in domestic operations remain steady.................................................................................. 16
Financial Analysis - Consolidated........................................................................................................ 17
Revenue growth to be aided by volume growth and sharp improvement in realisations .................... 17
EBITDA margins to trend upwards – driven by higher spreads....................................................................... 17
Consistent AFCF generation despite capex, balance sheet strongest ever ................................................ 18
Strong conversion of cash profit into adjusted operating cash flows (excl. interest) .............................. 18
Continuous improvement in working capital from high levels....................................................................... 19
Return ratios expected to be back in double digits in FY19E........................................................................... 19
Key Assumptions and Sensitivity ........................................................................................................ 20
Valuation – Re-rating scope remains, Initiate with Buy and TP of Rs165 ........................................ 21
Key risks to our thesis ........................................................................................................................... 23
Company Background .......................................................................................................................... 24
Corporate governance check – highlighting the finer points .......................................................... 25
Independent directors’ representation on the board – GIL stands out ........................................................ 25
Independent directors’ profile and compensation analysis – GIL outscores .............................................. 25
Promoter group compensation analysis – GIL tops with prudent payout .................................................. 26
Contingent liability ......................................................................................................................................................... 26
Related party transaction – clean history ................................................................................................................ 27
Auditor pedigree – Top class with PwC on board ................................................................................................ 27
Annexure - Graphite Electrode Industry............................................................................................. 29
Financials - Standalone ........................................................................................................................ 32
Financials - Consolidated (Historical) ................................................................................................. 33
Financials - Consolidated ..................................................................................................................... 34

2
Graphite India
Electrode prices on an electrifying run as demand-supply balance
returns through closures and consolidation
Electrode prices have more than doubled after dipping for several years in a row
Graphite electrodes are key consumables in EAF steel production and are manufactured by only few
global players due to technology constraints which act as a key entry barrier (refer annexure for details
on the graphite electrode industry from page 29). Despite being a product of a loose oligopolistic
industry, electrode prices have been steadily falling over the last five years led by i) excess supply due
to industry overcapacity, ii) low demand due to reducing EAF production, iii) high Chinese electrode
exports albeit of lower quality, and iv) unusual behaviour of pricing competition among incumbents
for gaining market share ignoring the loose oligopolistic set-up.
Electrode prices slumped to a two decade low in H2CY16 but have since recovered very sharply and more
than doubled in the last six months! This rally has been triggered by a combination of several factors
some of which have been under play since the last two years but have taken their full effect now (like
supply closures & industry consolidation) and others which have played out recently and surprised all
and sundry (like reduced Chinese exports of electrodes and improved steel production in EAF
dominated geographies in recent months after regulatory measures helped clamp down Chinese steel
imports in these regions). The fact that electrode prices and gross spreads therein had slumped to an
unrealistically low and unsustainable level in its downward slide helped provide legs and steam to the
rally in our view. In the sections ahead we dwell more into the reasons for electrode price movements
and why we believe they would sustain at their long term normalised levels going ahead in next few
years (>US$3800/t).
Exhibit 1: Graphite electrode prices – Sharp upswing underway
5500
Spot Prices are above 10 year
5000 average and currently
ranging between US$4000-
4500 4500/t
4000
3500
3000
2500
2000
1500
1000
Q1CY09
Q2CY09
Q3CY09
Q4CY09
Q1CY10
Q2CY10
Q3CY10
Q4CY10
Q1CY11
Q2CY11
Q3CY11
Q4CY11
Q1CY12
Q2CY12
Q4CY12
Q2CY13
Q4CY13
Q2CY14
Q4CY14
Q2CY15
Q4CY15
Q2CY16
Q4CY16
Q2CY17E*
Q4CY17E*

Graphite Electrode Price (US$/t) 10 Year avg. (US$/t) 20 year low (US$/t)

Source: Intracen.org, Centrum Research Estimates

3
Graphite India
 Subdued Industry capacity utilisation had dragged electrode prices; the reverse is in play
from start of CY17: Capacity utilisation in the global electrode industry moved down over the last
several years on reducing EAF steel production (and hence subdued electrode demand) and an
increase in electrode capacities (especially in China). This led to a steady fall in electrode prices as
the correlation of capacity utilisation with prices has been very strong (refer Exhibit 2). However,
with reduction in supply through closures (discussed below in the next point), industry
consolidation, clampdown in Chinese exports of both steel and electrodes and improved demand
outlook; the electrode industry’s capacity utilisation has started to improve materially in the last
few quarters. We expect industry utilisation of 80%/90% in CY17E/18E and this would lead to
sustenance of higher electrode prices in line with the historical trend.
Exhibit 2: Graphite electrode industry capacity utilisation improving materially from CY17E

100% 5000
90%
90% 4500
80% 83% 80%
80% 4000
71% 69% 70%
70% 64% 3500
63%
60% 3000

50% 2500

40% 2000

30% 1500

20% 1000
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E

GE Capacity Utilisation GE Price (US$/t) - RHS

Source: Graftec, Centrum Research Estimates

Substantial supply contraction through plant closures has improved demand-supply


balance
Electrode demand-supply balance has improved led by supply contraction through plant closures
(20% capacity cut in ex-China market) and this has led to strong improvement in capacity utilisation in
the ex-China market with the majority of producers being currently fully sold out for CY17E.
 High cost capacities have been closed permanently: Electrode capacities in ex-China market
(which are concentrated with only 8 players) have seen several closures in the last three years and
reduced the industry’s capacity by a whopping 20%. Our detailed analysis of closures (Exhibit 3)
reveals that five high cost plants with a total capacity of 170ktpa have been permanently shut in the
developed world while two Japanese plants have reduced capacity by ~40 ktpa. While these closures
were being talked about since CY14, we believe that the full impact of reduced supply has kicked
in from H2CY16 as few reductions were back-ended.
Exhibit 3: Capacity closures snapshot (Ex-China Electrode market)
Current Capacity Total Closures in last 3
Producer Details of capacity closures
(ktpa) years (ktpa)
SGL 170 (110) 3 plants closed (Canada, Frankfurt, Italy)
SDK 127 (18) Capacity at Omachi plant, Japan reduced in CY16
Graftec 195 (60) Plants closed at Brazil & South Africa (30ktpa each)
GIL 98
HEG 80
Tokai carbon 78 (22) Capacity reduced at Japan plant in CY15
SEC 35
Nippon Carbon 30
Total 813 (210) 20% capacity reduction at global (Ex-China) level
Source: SGL, Graftec, GIL, Centrum Research Estimates

4
Graphite India
 Most Ex-China producers are currently fully sold out: With improved electrode demand led by
increasing steel production in key geographies having a higher EAF share (discussed in detail on
pages 8-13), cutback in Chinese electrode exports and better supply discipline; most of the ex-
China electrode producers are currently fully sold out for the rest of the year and have very little
quantities to offer which has recently resulted in a few stray deals happening at exorbitant levels
according to industry sources (these levels are well above those discussed by us in Exhibit 1).
Exhibit 4: Capacity utilisation improving, most producers fully booked (Ex-China Electrode
market)
100% 95%

90% 85%

80% 76%

68%
70%

60%

50%

40%

30%
CY15 CY16 CY17E CY18E
Source: Company, Centrum Research Estimates

China has clamped down on its own old & polluting capacities in induction furnaces
and graphite electrodes
China led a big internal drive at the start of CY17 to shut down its old, polluting, inefficient and
environmentally unfriendly (also illegal in many cases) induction-based steel as well as electrode
capacities by June 2017. This led to the closure of several small induction furnaces with a combined
production of 30-40 mtpa (as per various press reports) and also led to the closure of substantial
electrode capacities (quantum not known). On account of this, China has seen increased availability of
scrap (more than 20 MT freed up from closed induction furnaces) for its own EAF units, which is also
pushing up the demand for electrodes. Additionally, the supply of electrodes within China has
reduced due to the closure of old electrode capacities on pollution related guidelines. This situation
has created a shortage of electrodes in Chinese markets and in turn skyrocketed electrode prices in the
country in the last few months.
 Substantial exports of electrodes from China could be going off from the market: We note
that Chinese electrode exports have been consistently trending down since CY14 but still stood at
a high level of ~160kt in CY16. However, with recent closures of old environmentally unfriendly
electrode capacities in China the exports of electrodes from China has reportedly gone down to nil
and hence exports from China could remain minimal in CY17E.
Exhibit 5: Chinese electrode exports are trending lower
3,00,000
Chinese electrode exports have
reportedly gone down to nil in
2,50,000 recent months due to shortage

2,00,000
Tonne

1,50,000

1,00,000

50,000

0
CY11 CY12 CY13 CY14 CY15 CY16 CY17E

Source: Intracen.org, Centrum Research Estimates

5
Graphite India
 China likely to be setting itself up for large internal scrap usage: We believe that after
unveiling its latest supply side reforms in steel & coal sectors and clamping down on polluting and
illegal steel capacities, China has started setting itself up for producing more steel through the
scrap route in future (essentially the EAF route), putting the traditional BF route in the backseat as
far as incremental steel production in China is concerned as China would require less of large
capacities (BF) while scrap generation could increase materially in the next decade which would
be better utilised in smaller EAFs. We note that China Association of Metal Scrap Utilization has
recently indicated that China was aiming to boost its annual steel scrap usage in production from less
than 100 MT currently to 150 MT by CY20, and to achieve a 30% scrap ratio by 2025 compared with
11% in 2016. This could be good news for EAF steelmaking in China and in turn for the graphite
electrode industry in our view and could create a huge sustainable demand of electrodes from
China in the next 5-10 years. China has also resorted to exporting excess scrap in CY17 but
prohibitive export duty of 40% on scrap keeps the same limited and incentivises China to
consume its scrap internally in its EAFs for converting into steel.

Industry consolidation has improved long term supply discipline outlook paving way
for the return of oligopolistic behaviour by incumbents
The electrode industry has witnessed successful execution of key M&A transactions in the last two
years which has not only led to consolidation but also improved the long term supply and price
discipline from the industry. While the largest producer (SGL) has been acquired by third largest
producer (Showa Denko) creating a new global leader with 35%+ market share, there has also been a
change of ownership of second largest producer (Graftec) with its new owner being an asset
management company. We believe that this significant change in the industrial structure coupled with
supply cuts (as discussed in previous sections) would pave the way for the return of oligopolistic behaviour
by the industry and hence mark the return of normalised profitability in a base case scenario while all time
high levels of profitability could also be the best case outcome.
We discuss these M&A actions in more detail below:
 Acquisition of SGL by Showa Denko creating the world’s biggest electrode entity: SGL’s
graphite electrode business is being acquired by Showa Denko (SDK) at an EV of Euro 350mn thus
creating the world’s biggest electrode entity with a combined capacity of ~280ktpa (~37% market
share in Ex-China market) and having production bases in Europe, US and Asia. The transaction is
expected to close by H1CY17 and SDK has come out with a detailed outline of its rationale for this
acquisition which is aimed at revitalizing its electrode business into a major profit source by CY20 (SDK
Press release of SGL acquisition).

Exhibit 6: Global electrode producers capacity and market Exhibit 7: Global electrode producers capacity and market
share (Ex-China) – pre cutbacks & consolidation share (Ex-China) – post cutbacks & consolidation

350 37% 40%


300 27% 30%
300 35%
250 25% 30%

Market Share - %
250 24%
25% 127 127
Market Share - %

Capacity (ktpa

21% 25%
200 20% 200
Capacity (ktpa)

14% 20%
150 15% 150
280 12% 15%
255 10% 9% 16% 10% 10%
8% 100 195 10%
100 10% 170 170
4% 4%
145 3% 50 98 80 78 5%
50 100 98 3% 5% 35 30
80 0 0%
35 30
SDK

HEG

carbon
SGL

Nippon
SGL+SDK

Graftec

GIL

SEC

Carbon

0 0%
Tokai
SDK

carbon

HEG
SGL

Nippon
Graftec

GIL

SEC

Carbon
Tokai

Source: Company Presentations, Centrum Research Estimates Source: Company Presentations, Centrum Research Estimates

 Acquisition of Graftec (World’s second largest producer) by Brookfield AMC: Graftec


International was acquired by Brookfield AMC in 2015 at an EV of US$1.25bn. Graftec has been in
substantial losses since CY13 and its CY16 loss stood at US$236mn. The total value of assets has
declined from US$1.8bn (in CY14 or at the time of acquisition) to US$1.2bn as of CY16-end. Graftec
has been the first producer to indicate a large hike in electrode prices in Sep’16 through a
notification on its website (Graftec Sep’16 electrode price notification).

6
Graphite India
 Both M&A deals consummated at healthy valuations despite muted profitability: We note
that both the M&A deals discussed above have been executed at healthy valuations (particularly
the Graftec acquisition by Brookfield) despite muted profitability metrics and poor return ratios.
This clearly indicates that though the business was under stress due to tough operating
conditions but its inherent strengths and future potential remained solid to attract high pedigree
investors and stakeholders. We believe that the new owners would bring in a mix of cost saving
measures, unviable capacity shutdowns and better pricing discipline. We are of a firm view that the
new owners would focus on profitability given the price that they have paid and they have indeed
stressed upon this intent already in their recent investor communications.
Exhibit 8: M&A deals valuation snapshot
7,000
6,410

6,000 Capacity Acquired:


Graftec - 195 ktpa
5,000 SGL - 70ktpa

4,000

3,000
2,265
2,000
1,250
1,000
385

0
Deal EV (US$ mn) EV/t (US$)

Graftec SGL

Source: Company, Centrum Research

 Focus on profitability likely to be back after years of margin contraction: Both SGL and
Graftec have seen profitability decline over the last few years with CY16 being the worst and
marked by large losses at PAT level. There have been enough indications from both the groups
that focus on profitability is back after years of margin contraction and we believe that global
electrode price uptick is being led by these two companies as they focus on getting back in black
under new owners and management.

Exhibit 9: SGL key financials snapshot Exhibit 10: Graftec key financials snapshot
700 14.0% 1500 13.6% 15.0%
11.9%
600 12.0%
500 10.0% 1000 10.0%
6.7% 6.3%
7.4%
Euro mn

US$ mn

400 8.0%
500 5.0%
300 5.9% 6.0%
200 4.0% 0 0.0%
-1.4%
100 2.0%
0 0.0% -500 -5.0%
CY13 CY14 CY15 CY13 CY14 CY15 CY16
Net Sales EBITDA EBITDA Margins (%) - RHS Net Sales EBITDA PAT EBITDA Margins (%) - RHS
Source: Company, Centrum Research Source: Company, Centrum Research

7
Graphite India
EAF production outlook has turned conducive led by multiple
factors and is expected to drive strong electrode demand growth
The regulatory clamp down on Chinese steel imports is aiding regional steel production
in geographies having higher EAF share
Large amounts of steel imports from China in recent years has been one of the key reasons for the
drop in total steel production (through all routes like BF, EAF etc) in various geographies of the world
and a slew of regulatory measures against cheap Chinese imports have started to correct this situation.
This has not only led to an overall increase in local steel production but also turned the outlook for EAF
production conducive as many of these geographies undertake a large proportion of their overall
production via the EAF route.
 EAF’s share’s drop in overall production has bottomed out; scale-up on the cards: EAF’s share
in world-wide production has dropped consistently over the last five years and stood at 25% in
CY16 (vs. ~30% in CY10) as China has added more capacity than the whole world in last six years
(essentially implying replacement of some production elsewhere by China through its imports)
and has added all this new capacity through the BF route thus leading to consistent drop in EAF
share (Refer Exhibit 11 below). Our analysis of EAF production share for last 15 years indicate that
in most of the geographies, EAF share has increased materially and it was only China where the
EAF share decreased significantly as China added large capacities in the BF route to achieve high
production scale.
We strongly believe that this trend would reverse in the coming years and EAF share would
increase. This would play out on a sustained basis due to higher scrap availability and Chinese
steel exports taking a back-seat in the global steel market due to regulatory restrictions (we
discuss the key rationale behind this thesis in sections ahead).

Exhibit 11: EAF steel production has reduced in last 5 years Exhibit 12: EAF production share has reduced to 25%
EAF % Share CY02 CY06 CY13 CY14 CY15 CY16
350 454 448 500
428 430
409 412 EU (28) 38 40 41 39 39 40
300
49 52
250 46 50 51 400 CIS 12 18 22 26 27 26
55
200 71 65 57 50 49 42 USA 50 57 61 63 63 67
MT

MT

21 23 27 300
150 25 27 29
52 52 53 55 49 53 Africa 54 59 66 69 62 61
100 25 200
27 26 27 27 27
50 Middle-East 82 86 89 91 92 93
76 70 66 66 65 64
0 100 China 17 10 10 6 6 5
CY11 CY12 CY13 CY14 CY15 CY16
India 38 57 65 58 57 57
EU (28) CIS USA Middle-East
China India Total World Total World 34 32 29 26 25 25

Source: Bloomberg, Centrum Research Source: Bloomberg, Centrum Research

Exhibit 13: Chinese high BF production and exports key reason for EAF drop globally
Steel Production CAGR CY11-16 - % Total Production Added % Share in
EAF BF Total during CY11-16 (MT) Addition

EU (28) (3.2) (0.9) (1.8) (16) (17.2)


CIS 1.3 (0.9) (2.0) (11) (11.6)
USA 0.2 (5.5) (1.9) (8) (8.6)
Africa (5.4) 0.1 (3.6) (3) (2.8)
Middle-East 7.0 (1.1) 6.3 8 9.0
China (9.9) 4.0 2.9 106 115.8
India 2.1 11.6 5.4 22 24.2
Total World (1.9) 2.6 1.2 92
Source: Bloomberg, Centrum Research

8
Graphite India
 Stiff & lasting measures against Chinese steel imports in various geographies: Key developed
markets like US & Europe and several developing markets like India have levied several regulatory
measures against Chinese imports (Exhibit 14) in the last 12-18 months in order to protect severe
damage to their domestic steel industry as China increased its imports substantially since CY14
and in many cases, the countries have proved dumping of steel by China. Anit-dumping duty
against China and several other countries (mostly from CIS region) are in place in some of the key
markets globally for next five years
Exhibit 14: Various regulatory actions against Chinese steel imports
Region Product Measure Date Quantum
CRC Anti-Dumping Duty Jul-16 19.8%-22.1%
Provisional Anti-Dumping Duty Oct-16 13.2%-22.6%
HRC
EU Anti-Dumping Duty Feb-17 18.1%-36.6%
Provisional Anti-Dumping Duty Oct-16 65%-74%
QP
Anti-Dumping Duty Feb-17 65%-74%
CRC Anti-Dumping Duty Jul-16 265%
USA
QP Anti-Dumping Duty Mar-17 68%
HRC Anti-Dumping Duty May-17 $478-$489
HR steel plates Anti-Dumping Duty May-17 $561/t
India
CRC Anti-Dumping Duty Apr-17 $576/t
Various Steel Products Minimum Import Price Feb-16

Source: Centrum Research

 Chinese steel imports into key markets having high EAF production have tapered off in
CY16/YTDCY17: Chinese steel imports into key geographies (with substantial EAF share in their
overall steel production) fell materially in CY16/YTDCY17 (Exhibit 15) and led to higher overall and
proportionate EAF steel production in those markets. Our analysis of Chinese steel imports into
various geographies indicates that imports into EU/US/Middle-East/India are down by a staggering
53%/64%/53%/68% in CY17 annualised (vs. CY15 annual peak levels). This augurs well for increasing
overall steel production on a sustainable basis in these markets and hence an increase in EAF
production also as large portion of their overall production is produced through an EAF route.
Exhibit 15: Chinese steel imports into key EAF dominated geographies have tapered-off

5.0 Imports fall of >50% in


4.5 most geographies in CY17

4.0
3.5
3.0
MT

2.5
2.0
1.5
1.0
0.5
0.0
CY14 CY15 CY16 CY17A*

EU (28) USA Africa Middle-East India

Source: Bloomberg, Centrum Research

9
Graphite India
 Outlook for steel consumption growth is healthy in key EAF markets as China takes a
backseat: As per WSA’s bi-annual consumption forecasts, outlook for steel consumption growth
in CY17E/18E is healthy in key EAF markets (like US, Middle-East, Africa & India) while China’s
demand growth is expected to remain in a negative zone.
Exhibit 16: Steel consumption growth outlook in key geographies
15

10

0
%

-5

Positive growth in all major


-10
geographies except China

-15
CY14 CY15 CY16 CY17E CY18E
EU US Africa Middle-East China India World
Source: WSA, Centrum Research

 Local steel production uptick is already visible in H2CY16/YTDCY17: Our analysis of monthly
steel production data over the last five years shows that steel production has shown a smart
uptick over the last several months starting H2CY16 in most geographies. We note that the trailing
12M steel production growth in most geographies (barring India) has been in a negative zone in
the last few years and has now turned positive with positive growth materializing in the last
several months. This clearly shows that local steel production has started picking up as the impact of
Chinese imports into those geographies has reduced and also demand pick-up has improved.
Exhibit 17: Trailing 12M steel production growth in key geographies

12

0
%

-4

-8

-12
Trailing 12M growth has truned positive in all geographies after long
-16
Dec-14

Dec-15

Dec-16
Jun-14

Aug-14

Oct-14

Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Feb-16

Apr-16

Jun-16

Aug-16

Oct-16

Feb-17

Apr-17

EU US Africa China India World

Source: WSA, Bloomberg, Centrum Research

10
Graphite India
Uptick in BF CoP and subdued scrap prices has improved the competitiveness of EAF
steel production route
The increase in prices of iron ore and coking coal in the last one year (though prices have again
softened now) led to an uptick in BF CoP while higher availability of scrap globally has kept the rally in
scrap prices in check. This led to the convergence of CoP between EAF route and BF route. Additionally,
the difference between HRC and scrap prices has increased materially in the last one year and the average
of this difference is now substantially higher as compared to its long term five year average. This equation
tilts the balance in favour of making steel through melting scrap in an EAF rather than going through
the BF route.
 BF CoP has increased due to iron ore and coking coal price increases: Coking coal and iron ore
prices have jumped up substantially in CY16 and have since cooled off in CY17 but the overall
increase in their prices has led to escalation in BF CoP.

Exhibit 18: Iron ore price trend Exhibit 19: Coking coal price trend
130 350
110 300
250
90
US$/t

US$/t
200
70
150
50
100
30 50
Sep-14

Dec-14

Sep-15

Dec-15

Sep-16

Dec-16
Jun-14

Mar-15

Jun-15

Mar-16

Jun-16

Mar-17

Jun-17

Sep-14

Dec-14

Sep-15

Dec-15

Sep-16

Dec-16
Jun-14

Mar-15

Jun-15

Mar-16

Jun-16

Mar-17

Jun-17
Iron Ore - 62% Fe Hard Coking Coal - AUS FOB

Source: Bloomberg, Centrum Research Source: Bloomberg, Centrum Research

 EAF is competitive with BF at current raw material prices: EAF CoP has converged with BF CoP
on account of a change in input costs in favour of EAF and this has increased EAF’s
competitiveness. We believe that this would incentivise the shift to EAF route of steelmaking in
various geographies particularly with increasing regulatory measures being taken by various
governments to promote environment friendly industrial activities (which in turn favours EAF
route also over the conventional and more polluting BF route).

Exhibit 20: BF CoP at current RM prices Exhibit 21: EAF CoP at current scrap prices
BF Production EAF Production
Cost/unit Cost/unit
Particulars I/P Reqd/tonne Cost (US$) Particulars I/P Reqd/tonne Cost (US$)
(US$/tonne) (US$/tonne)
Iron Ore (tonne) 55 1.7 94 Steel Scrap (tonne) 270 1.1 297
Met. Coke 275 0.57 157 Power (KwH) 0.062 600 37
Power (KwH) 0.062 550 34
Ferro Alloys (tonne) 1200 0.01 12
Scrap (tonne) 270 0.1 27
Ferro alloys (tonne) 1200 0.015 18 Graphite Electrodes (Kgs) 4000 1.7 6.8
Other Raw Material 30 1 30 Labour 20 1 20
Labour 30 1 30 Transport & Others 25
Transport & Others 25
Total Cost/tonne 398
Total Cost/tonne 414
Source: Centrum Research Source: Centrum Research

11
Graphite India
 Scrap prices remain subdued leading to widening gap with HRC and making EAF route
attractive: While the global steel prices have recovered in the last one year led by a general uptick
in commodity prices there has been higher uptick in HRC prices in several geographies due to
regulatory support measures. We note that the difference between HRC and scrap prices has
increased materially in the last one year and the average of this difference is now substantially
higher as compared to its long term five year average. This equation tilts the balance in favour of
making steel through melting scrap due to the availability of a large spread in between, which further
strengthens our view point that EAF’s share in steel production would continue increasing going ahead.
Exhibit 22: Difference between HRC and scrap is at its highest in several years
380

336
340
314

300
US$/t

260 249

220

180
5Y avg. 1Y avg. YTDCY17 avg
Source: Bloomberg, Centrum Research, *HRC price is avg. of US & Europe, Scrap price is Turkey heavy melt

 EAF steelmaking has several advantages: EAF route of steelmaking has several advantages
over the BF method namely i) lower capex requirements & higher productivity, ii) better
operational and production flexibility due to easy switch on and off options, iii) suitability for
producing high-end special steel and flexibility in changing product mix due to batch process, and
iv) lower production costs based on scrap availability. This generally makes EAF method a more
environment friendly and preferred mode of steel production and is widely used in developed
markets. The BF method is generally used for achieving high production scale as BF capacities are
generally significantly higher than EAF. EAF also uses more electricity on a per tonne basis and
requires easy scrap availability which sometimes acts as a constraint for setting up EAF’s.

12
Graphite India
EAF production pick-up to prop up electrode demand
We expect EAF steel production CAGR of 4.6% during CY16-18E based on our analysis of multiple
factors (discussed in previous sections) and our bottom-up forecast and this is expected to prop up the
electrode demand significantly. We expect an additional 60kt annual demand of electrodes from
CY18E based on higher EAF production.
 Incremental annual electrode demand of ~60ktpa likely by CY18E led by EAF production
CAGR of 4.6%: We note that EAF share in Ex-China market has been consistently increasing
(Exhibit 23) since last 15 years and China’s rapid production increase (with most of it through the
BF route largely) is the only reason which has led to drop in EAF share at a global level (incl. China).
We have done a bottom-up projection of likely EAF production in the world by i) projecting likely
steel production in key geographies based on their current production run-rates and WSA
demand forecasts for the next two years and ii) assuming the EAF share remains largely constant
in developed economies and increases marginally in China. Based on this we expect EAF production
to increase at a CAGR of 4.6% during CY16-18E and reach ~450 MT by CY18E. This is expected to create
an additional electrode demand of ~60kt on an annual basis spread equally in CY17E and CY18E
respectively. We believe that this trend is already playing out and pushing up electrode demand in
YTDCY17, resulting in most producers being already sold out completely in Ex-China market and
China market being in a shortage of electrodes itself as discussed previously by us in the report.

Exhibit 23: EAF production share has consistently risen in Exhibit 24: EAF production to reach ~450 MT by CY18E
Ex-China
50 46 46 20 400 448 500
17 45 45 44 45 430 431
409 412
45 43
16
300 400
40 38 50 56 60
10 10 12 51 55
200 50 49 52 300
MT

MT
35 49 42
%

6 6 6 7 27 27 29 30 31
5 8
30 34 55 49 53 54 56
32 100 200
27 27 27 27 28
25 29 4
27 66 65 64 67 68
26 25 25 26 0 100
20 0
CY14 CY15 CY16 CY17E CY18E
CY02 CY06 CY10 CY14 CY15 CY16 CY17E CY18E
EU (28) CIS USA Middle-East
Ex-China World China - RHS China India Total World
Source: WSA, Centrum Research Estimates Source: Bloomberg, WSA, Centrum Research Estimates

 Electrode specific consumption in EAFs has stabilised: Historically, electrode consumption in


EAFs had been dropping due to technological improvements in both the EAFs and the quality of
electrodes but the specific consumption drop has slowed down in recent years and the current
consumption rate stands at ~1.7kgs of electrodes consumed per tonne of steel produced through
the EAF route. While some of the most efficient furnaces also operate at a rate of 1.3kgs/t, the
average remains steady at 1.7kgs/t. Thus based on the same specific consumption assumption, we
expect incremental electrode demand of 60kt by CY18E led by higher EAF production.

Exhibit 25: Electrode consumption of 1.7kgs/t in EAF Exhibit 26: Incremental electrode demand of ~60kt
4.5 4.3 900 2
731 732 762
4.0 695 701
1.7 1.8
700 1.7 1.7 1.7 1.7
3.5
1.6
3.0 2.5 448
500 430 409 412 431
2.5 2.2
1.4
1.8 1.7 1.7 1.7
2.0 300
1.2
1.5
1.0 100 1
CY14 CY15 CY16 CY17E CY18E
0.5
EAF Production (MT)
CY90 CY00 CY05 CY10 CY12 CY14 CY16
Electrode demand (kt)
Kgs/Tonne Specific Consumption (Kg/t) - RHS
Source: WSA, Centrum Research Estimates Source: Bloomberg, WSA, Centrum Research Estimates

13
Graphite India
Capex finished, strong volume growth and EBITDA/t expansion in
store
Capex spend to modernise and upgrade existing facilities coming to an end
GIL has been implementing a capex spend of ~Rs2bn in the last few years for modernisation and
technological upgradation of its production facilities in Durgapur and Nasik. The capex involved i)
outlay of Rs800mn for replacement of an old first generation baking furnace in Durgapur with the
latest technology new generation furnace which would lead to lower fuel oil consumption, reduced
power consumption, and better uniformity in product, ii) outlay of Rs800mn for a new pitch
impregnation system in Durgapur aimed at increasing the flexibility of producing bigger sizes (30”
electrodes) and better product quality, and iii) outlay of Rs400mn for installation of new mixing
technology at Nasik for making large diameter electrodes. GIL has already spent ~Rs1.5bn of this capex
by FY17 and new equipment at both the locations has already been commissioned going into FY18E.
As a result of the technological upgradation of facilities, GIL has increased its capability of achieving full
capacity utilisation as well as having a better product basket for FY18-19E and also improved its cost
structure to some extent.
Exhibit 27: Snapshot of capex undertaken over FY16-17
Capex Amount
Facility Capex Details Benefits
(Rs mn)
New Generation Lower fuel oil consumption, better uniformity of product, enhanced
Durgapur 800
Baking Furnace production capacity

Pitch Impregnation
Durgapur 800 Bigger sizes production, better product quality
System

New Mixing
Nasik 400 Bigger diameter electrode production
Technology
Source: Company, Centrum Research

Better production flexibility to allow almost full capacity utilisation


GIL possesses better production flexibility and an improved product mix basket post the upgradation
of its facilities. This is expected to enhance the company’s ability to operate at full capacity utilisation
at a competitive cost (this was not possible earlier due to higher cost of operations with some of the
old equipment). Management has guided for 90-95% capacity utilisation for FY18E and we expect capacity
utilisation of 92%/95% in FY18E/19E for standalone operations and 87%/89% for consolidated operations.

Exhibit 28: GIL production capacity break-up Exhibit 29: GIL capacity utilisation trend
100% 95%
92% 90%
Plant Location Capacity (tpa)
90% 87%

Durgapur 54,000 79%


80%
74%
Bangalore 13,000 70% 70%
70% 67% 66%
Nasik 13,000
60%
Nurnberg (Germany) 18,000
50%
Total 98,000 FY15 FY16 FY17 FY18E FY19E
Cap Utlztn - Std. Cap Utlztn - Cons.
Source: Company, Centrum Research Source: Company, Centrum Research Estimates

14
Graphite India
Needle coke contracts see huge increase and bi-annual settlement but GIL is well
placed due to its strong stock position
Petroleum needle coke (Refer annexure on page 31 for details) is the key raw material used for
production of electrodes and is manufactured by only three producers in the world with Phillips 66
being the largest supplier with 65% market share. Needle coke is supplied to electrode manufacturers
through an annual contract with fixed quantities and generally a fixed price. However, price
fluctuations in recent years have been witnessed during the course of the year also with re-
negotiations happening more than once for a particular year. In line with the steady fall in electrode
prices, needle coke contract prices had also fallen from their highs of ~US$2300/t to ~US$400/t in FY17.
Needle coke contracts for FY18 have not only seen a huge increase in prices (>75% increase) but also a
bi-annual price settlement with re-negotiation on price expected to take place again in Sep’17 for
quantities supplied in H2FY18E. However, the annual quantities have already been negotiated and our
discussion with Indian producers indicates that needle coke suppliers have allocated lower quantities
than their requirements due to a perceived shortage of supply at their end.
GIL is not expected to suffer from needle coke supply constraints due to the presence of a high level of
inventories (which had got accumulated in its system from previous years and had a negative impact
on profitability over the last few years). GIL had contracted for higher needle coke supplies in CY10-11
(due to perceived large price increases) and has been carrying a higher level of needle coke inventory
since FY12 which is being accounted on a weighted average cost basis in its P&L. With needle coke
prices falling steadily since the last five years, GIL’s weighted average cost has remained higher and
this trend is now expected to reverse going into FY18E/19E and also give the flexibility to GIL to wind
down its needle coke inventories which it was not able to do earlier.

Strong expansion for gross profit/t and EBITDA/t in store as producers as well as GIL are
not expected to sacrifice on spreads
We expect strong expansion in gross profit/t led by better spreads as GIL along with other global
electrode producers are expected to maintain pricing discipline in the coming years with support of
tight demand-supply balance, reduced Chinese competition and consolidated industry positioning.
We believe that needle coke contract prices could rise materially over the next few negotiations but
electrode producers would be able to easily pass it on, on account of their pricing power amid the
tight demand-supply industry scenario. We expect the majority of gross profit/t improvement to flow
down to EBITDA/t and help in recovery of EBITDA/t to the previous normalised levels for GIL. We expect
standalone EBITDA/t to move up sharply to US$441/878/t in FY18E/19E.
Exhibit 30: Standalone EBITDA/t to scale back towards its normalised levels by FY19E

4,000
3,470 3,379
3,500
2,888
3,000 2,665
2,421
2,500 2,081 2,144
US$/t

1,815
2,000

1,500 1,130
906 829 878
1,000
457 413 441
500 179

0
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Gross Profit/t EBITDA/t

Source: Company, Centrum Research Estimates

15
Graphite India
Turnaround of German subsidiary an added shot in the arm
GIL’s subsidiary in Germany has been struggling with continued losses in the last few years and with
improvement in capacity utilisation and spreads coupled with cost reduction initiatives, we expect its
turnaround from FY18E with positive EBITDA/PBT. We note that there would be a swing of ~5.5mn
euros at PBT level for GIL’s consolidated operations in FY18E due to the turnaround of its overseas
subsidiary and this would boost the consolidated earnings of the company.
Exhibit 31: German operations to make positive EBITDA & PBT from FY18E

3.0 2.2 80%


2.0 1.4 70%
70%
1.0 65%
55% 60%
0.0
50%
-1.0 50% 50%
40%
-2.0
30%
-3.0 -2.4
-4.0 20%

-5.0 -4.2 -4.2 10%

-6.0 0%
FY15 FY16 FY17 FY18E FY19E
EBITDA - Euro mn PBT - Euro mn Capacity Utilisation - RHS

Source: Company, Centrum Research Estimates

Other businesses in domestic operations remain steady


GIL has few other businesses as part of its standalone operations and most of these businesses
continue to remain steady. Impervious graphite equipment business remains the most lucrative and
high margin business (25% EBITDA margins) while GRP pipes & tanks and steel business remain low
margin operations with a steady revenue profile. GIL management has in the past indicated about
their intent in selling the low margin non-core businesses if right valuations and buyers are found.
Exhibit 32: Revenue snapshot - other domestic businesses of GIL

1,200

1,000

800
Rs mn

600

400 EBITDA Margins:


IGE - 25%
200 GRP Pipes - 5%
High Speed Steel - 5%
0
FY13 FY14 FY15 FY16 FY17E FY18E FY19E

IGE GRP Pipes & Tanks High Speed Steel

Source: Company, Centrum Research Estimates

16
Graphite India
Financial Analysis - Consolidated
Revenue growth to be aided by volume growth and sharp improvement in realisations
We expect net sales CAGR of 28.7% for GIL during FY17-19E. This would be led by a combination of
strong volume CAGR (10.8%) as well as a sharp uptick in realisations (CAGR of 17.4%).

Exhibit 33: Revenue CAGR of 28.7% during FY17-19E Exhibit 34: Strong volume CAGR of 10.8% in electrodes
30,000 40.0 1,00,000
Cons. Volume CAGR
25,000 30.0 FY17-19E: 10.8%
80,000
20,000 20.0
60,000
Rs mn

Tonne
15,000 10.0
40,000
10,000 0.0

5,000 -10.0 20,000

0 -20.0 0
FY15 FY16 FY17 FY18E FY19E FY15 FY16 FY17 FY18E FY19E
Cons. Net Sales YoY Growth - % - RHS Domestic Overseas
Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

EBITDA margins to trend upwards – driven by higher spreads


We expect strong pick-up in GIL’s EBITDA from FY18E led by improvement in spreads driven by price
increase and operating leverage benefits through higher volumes. We note that the full benefit of higher
spreads would be visible only in FY19E as GIL had contracted a major portion of its FY18E order book before
prices started to rise and despite the strong push for renegotiations most of which was successful to some
extent, the company is able to realise only a portion of the overall spread gain in FY18E. We expect
consolidated EBITDA/t to increase to US$392 in FY18E and further expand to US$818/t in FY19E with
full benefit of spreads being available.

Exhibit 35: EBITDA margins set to expand Exhibit 36: Cons. EBITDA/tonne to expand materially
5,000 25.0 1,000
818
4,000 20.0 800

3,000 15.0
Rs mn

600
US$/t

2,000 10.0 392


400 346 317
1,000 5.0
200
82
0 0.0
FY15 FY16 FY17 FY18E FY19E 0
Cons. EBITDA Margin - % - RHS FY15 FY16 FY17 FY18E FY19E

Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

17
Graphite India
Consistent AFCF generation despite capex, balance sheet strongest ever
GIL has managed to generate AFCF (FCF excl. interest) consistently despite investing into operational
efficiency projects. GIL has been able to reduce its working capital (from substantially higher levels) in
the last two years which has supported cash flow generation despite pressure on profitability. GIL’s
balance sheet is in its healthiest ever state with consolidated net cash of ~Rs4bn.

Exhibit 37: Consistent & strong AFCF despite capex Exhibit 38: Growing net cash on books
3,500 25,000
3,000 20,422
2,239 20,000 17,511 17,761 18,425
2,500 2,171 17,464
2,000
1,290 15,000

Rs mn
1,169
Rs mn

1,500
826
1,000 10,000
500 5,297
3,998 4,659
0 5,000
FY15 FY16 FY17 FY18E FY19E 1,348
-500 341
(260) (550) (500) 0
-1,000 (700)
(896) FY15 FY16 FY17 FY18E FY19E
AOCF Capex AFCF Net Cash Net Worth
Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

Strong conversion of cash profit into adjusted operating cash flows (excl. interest)
We believe that one of the key signals of prudent capital management is the conversion of cash profits
(CP) into adjusted operating cash flows (AOCF=OCF-interest). GIL has generated strong cash flows
over the last few years which have been much higher than its cash profits due to the release of capital
stuck in working capital (particularly on the inventory side).
Exhibit 39: AOCF/CP trend

4,000 3,644 4.0

3,500 3,135 3.5

3,000 2,722 3.0


2.7
2,500 2.5
1,954
2,000 1,669 2.0
1,549 2.1 1,526
1,500 1,320 1.5
1,169
1,067 1.5
1,000 1.0
0.8
500 0.5 0.5

0 0.0
FY15 FY16 FY17 FY18E FY19E
Cash Profit AOCF AOCF/CP (x) - RHS
Source: Company, Centrum Research Estimates

18
Graphite India
Continuous improvement in working capital from high levels
GIL has been burdened with very high working capital since the last five years on account of its large
needle coke inventory (which got accumulated during FY10-13 on account of excess purchases to
guard against a potential large price increase) and increasing debtor days. GIL has reduced its working
capital materially in FY17 led mainly through reduction of inventory and management has guided
towards further improvements in the next two years as the excess needle coke inventory is expected
to be utilised, while debtors days are likely to normalise to the long term average.
Exhibit 40: Cash conversion cycle trend

300
259 253
250
212 206
200 178 180
160
150
Dsys

150 135
115 120
110
92 90 85
100
54
45 41 45 45
50

0
FY15 FY16 FY17 FY18E FY19E
Inventory Debtors Payables Cash Conversion Cycle
Source: Company, Centrum Research Estimates

Return ratios expected to be back in double digits in FY19E


GIL’s return ratios are expected to bounce back into mid-teens by FY19E led by higher margins and
profitability. GIL has maintained a strong dividend payout history and we expect the continuation of
the same particularly with strong cash balance on books.

Exhibit 41: ROE & ROCE trend Exhibit 42: ROIC trend
20 20
17.1
15.8
16 16

12 14.1 12
%

7.7 7.2
8 8
%

4.7 4.0
3.6 3.3
4 6.9 2.8
4
4.2 3.7 -0.5
3.1
0 0
FY15 FY16 FY17 FY18E FY19E FY15 FY16 FY17 FY18E FY19E
ROE ROCE -4
Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

19
Graphite India
Key Assumptions and Sensitivity
Exhibit 43: Key Assumptions
FY15 FY16 FY17 FY18E FY19E
Electrode Volumes (tonne)
India Operations 55,600 55,600 63,200 73,600 76,000
Germany Operations 9,058 9,264 9,000 11,700 12,600
Total 64,658 64,864 72,200 85,300 88,600

Electrode Realisations (US$/t)* 3,522 3,052 2,300 2,700 3,800

Needle Coke (US$/t)* 1,450 900 700 725 1,300

USD/INR 61.1 65.5 67.0 64.0 64.0


Source: Company, Centrum Research Estimates; * Projected for FY15-17 as company doesn’t report exact nos

Exhibit 44: Earnings Sensitivity


For 1% change % impact on EBITDA % impact on EPS
Electrode volumes 0.7 0.7
Electrode realizations 4.4 4.6
Source: Company, Centrum Research Estimates

20
Graphite India
Valuation – Re-rating scope remains, Initiate with Buy and TP of
Rs165
GIL’s stock has seen an up move recently led by strong uptick in electrode prices and expectations of
earnings recovery. Despite the up move, we believe there is still a strong scope for further re-rating.
We value GIL on our differentiated AOCF/EV methodology as well as conventional EV/EBITDA
methodology and initiate with a Buy rating and a TP of Rs165. We ascribe a premium to historical
multiples and specify key reasons for the same below.

AOCF/EV valuation – 25% premium ascribed to historical AOCF/EV yield


For AOCF/EV based valuation, we note that GIL’s five year average AOCF/EV yield stands at 11.4%. We
ascribe a 25% premium to this average for arriving at the target EV/AOCF multiple, which, in turn, is
used for deriving the target EV. We arrive at a target AOCF/EV yield of 8.5% for GIL, and hence, the
implied EV/AOCF multiple of 11.7x. We use average AOCF over FY16-19E and 11.7x EV/AOCF multiple
to arrive at our target EV and our TP of Rs163/sh (Exhibit 45).

EV/EBITDA valuation
For EV/EBITDA based valuation, we use our FY19E EBITDA estimates and ascribe an EV/EBITDA multiple
of 6x (in line with long term average). From this methodology we get a fair value of Rs170/share
(Exhibit 46).

Exhibit 45: AOCF/EV based valuation Exhibit 46: EV/EBITDA based valuation
Avg. CF basis FY19E
5 Year avg. AOCF/EV Yield - % (FY13-17) 11.4 EBITDA 4,640
Implied EV/AOCF Multiple (x) 8.8 Ascribed EV/EBITDA 6.0

Ascribed AOCF/EV yield - % (25% premium) 8.5


EV 27,840
Ascribed EV/AOCF Multiple (x) 11.7
Add: Net Cash (FY19E) 5,297
Avg. AOCF (Rs mn) - FY16-19 2,263

Fair value mkt cap 33,137


EV (Rs mn) 26,501
Add: Net Cash (FY19E) 5,297 No. of shares (mn) 195.4

Fair value mkt cap 31,798 Fair Value/share (Rs) 170


No. of shares (mn) 195.4

Fair Value/share (Rs) 163


Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

We believe that the premium assigned to the multiple is justified on account of the following reasons:
 Industry consolidation & better demand outlook provides visibility of strong earnings
sustenance: With industry consolidation happening after a long time and strong outlook on
improved demand, we believe the long term earnings outlook has improved materially and this
justifies premium to historical valuations.
 Material improvement in balance sheet and capital structure through reducing working
capital: GIL has released a large amount of working capital in the last few years and has also
turned into a net cash company with enough and more flexibility for undertaking any growth
projects in the future from both organic and inorganic route.
 Strong management focus and no unrelated diversification: GIL’s management pedigree
remains strong and management actions in the last few years when the going was tough have
further strengthened the company’s financial health. GIL is well poised to benefit from the upturn
in the industry’s fortunes going ahead. Management’s focus on utilising cash prudently for
suitable future growth options remains high in our view.

21
Graphite India
Exhibit 47: 1 year forward EV/EBITDA chart Exhibit 48: 1 year forward P/E chart
30 40
25
30
20
15 20
10
10
5
0 0
Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17
Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16
EV/EBITDA Mean P/E Mean
Mean + Std Dev Mean - Std Dev Mean + Std Dev Mean - Std Dev

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates

Exhibit 49: Peer comparison – Historical Financials


Net Sales (Rs mn) EBITDA (Rs mn) PAT (Rs mn) EBITDA Margin % PAT Margin %
Company
CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16

Domestic# (Rs mn)


Graphite India 17,107 15,323 14,678 1,368 1,346 396 632 828 705 8.0 8.8 2.7 3.7 5.4 4.8
HEG 12,271 8,201 8,331 1,996 1,248 806 364 -142 -441 16.3 15.2 9.7 3.0 (1.7) (5.3)
International (US$ mn)
SGL Carbon SE 1,336 790 770 51 60 68 (247) (295) (112) 3.8 8.8 9.2 (18.5) (37.4) (14.5)
Tokai Carbon Co 1,085 867 817 120 114 89 24 21 (73) 11.0 13.1 10.9 2.2 2.4 (9.0)
Showa Denko KK 8,265 6,410 6,188 595 637 745 28 8 114 7.2 9.9 12.0 0.3 0.1 1.8
Nippon Carbon Co 280 239 211 39 38 16 8 9 (50) 13.8 15.7 7.3 2.7 3.7 (23.6)
Fangda Carbon 532 349 337 86 22 27 45 5 10 16.3 6.2 7.9 8.5 1.4 3.0

CAGR 14-16 (%) ROE % Div Yield % P/E (x) EV/EBITDA (x)
Company
Revenue EBITDA PAT CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16

Domestic# (Rs mn)


Graphite India (5.0) (33.9) 3.7 3.6 4.7 4.0 3.7 5.2 2.4 28.9 18.0 22.8 13.1 10.1 30.4
HEG (12.1) (26.1) (206.6) 3.6 (1.4) (4.5) 1.4 0.0 0.0 23.8 (1.3) (4.2) 8.5 9.5 17.7
International (US$ mn)
SGL Carbon SE (16.8) 10.3 (23.2) (42.0) (31.0) (34.6) 0.0 0.0 0.0 (3.8) (15.6) (17.8) 33.3 16.1 26.4
Tokai Carbon Co (9.0) (9.4) (244.4) 2.0 (5.5) (5.5) 1.7 6.0 6.0 52.3 (16.9) (16.9) 8.1 8.8 8.8
Showa Denko KK (9.2) 7.8 60.0 1.0 8.7 8.7 2.0 30.0 0.0 122.8 28.3 28.3 9.6 6.0 6.0
Nippon Carbon Co (9.0) (26.2) (287.3) 2.6 (20.6) (20.6) 2.2 5.0 5.0 51.0 (7.4) (7.4) 8.1 38.2 38.2
Fangda Carbon (14.1) (32.3) (39.2) 4.9 2.2 2.2 0.0 0.0 0.0 68.1 276.5 276.5 32.0 154.0 84.5
Source: Bloomberg, Centrum Research, #CY14=FY15 for domestic cos

Exhibit 50: Valuation– Peer comparison


CAGR FY17-FY19E (%) EBITDA Margin (%) P/E (x) EV/EBITDA (x) RoE (%) Div Yield (%)
Company Mkt. Cap
Rev. EBITDA PAT FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
Domestic(Rs mn)
Graphite India 27,017 28.7 242.5 108.7 2.7 12.0 19.1 22.8 19.4 8.8 30.4 10.5 4.7 4.0 7.7 15.8 2.4 2.3 3.4
Vesuvius India# 25,814 13.9 14.5 18.7 18.0 18.0 18.2 20.8 24.3 20.9 10.9 13.5 11.4 16.4 17.3 17.6 0.7 0.8 1.0
IFGL Refractories 8,484 10.2 17.4 15.8 12.3 13.0 13.9 9.6 13.4 11.2 5.5 7.5 6.5 13.6 13.7 14.4 1.8 1.1 1.3
Orient Refractories 16,849 15.3 14.5 16.4 19.8 19.6 19.6 17.9 18.7 16.5 11.2 11.8 10.2 31.0 30.9 28.9 2.5 1.6 1.8
International#(US$ mn)
SGL Carbon SE 1,542 7.4 25.1 NA 9.4 11.1 12.7 (36.4) 221.9 41.2 16.6 16.7 15.2 (7.4) 2.4 6.6 0.0 0.2 0.6
Tokai Carbon Co 1,277 6.9 11.4 (4.5) 17.9 19.6 19.4 7.9 17.5 16.1 4.3 6.7 6.0 7.9 7.7 7.8 2.6 1.4 1.6
Showa Denko KK 3,295 2.9 0.9 4.8 12.7 12.7 12.2 7.1 12.5 11.1 5.5 6.8 6.8 10.0 8.7 8.4 3.3 1.5 1.5
Nippon Carbon Co 390 8.2 13.9 24.7 10.3 11.2 11.4 32.7 42.4 33.5 10.1 13.4 15.0 3.9 4.2 4.6 2.2 1.4 1.4
Source: Bloomberg Estimates, Centrum Research Estimates, #FY17=CY16 for Vesuvius India and global cos

22
Graphite India
Key risks to our thesis
 Foreign exchange fluctuations: GIL is dependent on exports of graphite electrodes to various
steel players across the globe which exposes them to adverse currency risk despite the natural
hedge to some extent on imported raw material. Any major fluctuations in currency can
negatively impact the earnings of the company.
 Lower-than-expected EAF production and in turn subdued electrode demand: We expect the
global steel production through EAF route to increase steadily in the next few years on increased
availability of scrap and higher production in key geographies which produce more through the
EAF route. But, lower-than-expected EAF steel production could potentially result in lower
graphite electrode demand and affect the company’s sales volume and profit negatively.
 High volatility in raw material prices (Needle Coke): The supply of needle coke required to
manufacture graphite electrodes remains scarce and in the hands of just a few producers globally.
This increases the risk of a sudden spurt in raw material costs for graphite manufacturers and can
negatively affect their profitability.
 Large cash deployment in an unrelated business: GIL has large amount of cash on books which
is steadily increasing and any unrelated diversification through deployment of this cash balance
could impact the financials and lead to a possible de-rating.

23
Graphite India
Exhibit 51: Shareholding pattern (%) Company Background
Mar-17 Dec-16 Sep-16 Jun-16
Promoter 65.2 65.2 65.2 65.2 Graphite India (GIL) headquartered in Kolkata and promoted by Mr. K K
FIIs 12.6 12.5 12.5 12.5
Bangur, is one of India’s largest producers of graphite electrodes (by
DIIs 8.3 7.4 7.4 7.4
capacity) and the third largest in the world. GIL was started back in 1967
Others 13.9 14.9 14.9 14.9
in collaboration with erstwhile Great Lakes Carbon Corporation, USA. It
has three manufacturing plants in India which are strategically located
Source: BSE
near steel manufacturers and close to three main ports of India, offering
Revenue
logistic advantages to both domestic and overseas clients. GIL has
Products Capacity (TPA) manufacturing capacity of 98,000 tpa (including 18,000 tpa at its
Share %
Graphite Electrode 84.5 German subsidiary) and co-generation power capacity of 33 MW (19.5
MW Hydel capacity and 13.5 MW multi fuel routes).
- India
Durgapur 54,000 The company manufactures a full range of graphite electrodes but
Bangalore 13,000 specialises in manufacturing of higher margin ultra-high power
Nasik 13,000 electrodes which currently account for nearly 85% of the current
- Overseas installed capacity. GIL also manufactures specialised impervious
graphite equipment, high speed steel, alloy steel, and GRP pipes &
Nurnberg (Germany) 18,000
tanks. Apart from operating the graphite electrode facility, the
Impervious graphite equipment 6.8
company also operates a carbon division with manufacturing of
GRP/FRP pipes & tanks 4.9 calcined petroleum coke. The company’s Graphite and Carbon segment
High Speed Steel 3750 5.2 continues to be its main source of revenue and profit, accounting for
Electricity (Million Units) 144 about 91% of the total revenue.
Source: Centrum Research

Exhibit 52: Graphite India company – Key Milestones

Source: Company

Exhibit 53: Key management personnel


Name Position Profile

Mr Bangur has over 30 years of experience in managing the affairs of companies and business activities. He has
been the director of Graphite India since 1988 and also the chairman of the company since 1993. He is the
Mr. K.K Bangur Chairman Chairman of the shareholders/investors Grievance Committee and Committee for Borrowings of the Company.
Apart from that, he is a past President of the Indian Chamber of Commerce, Kolkata, Executive Committee
member of FICCI, New Delhi and the President of All India Employers Organization, New Delhi.
Mr. M B Gadgil is the company’s executive director. He has over 38 years of industry experience and is
Mr. M.B Gadgil Executive Director responsible for management of company affairs and is also actively involved in the company’s
strategic/investment decisions. He is a mechanical engineer by profession and also has a management degree.
Source: Company

24
Graphite India
Corporate governance check – highlighting the finer points
Independent directors’ representation on the board – GIL stands out
The strong representation of independent directors on the board ensures that decisions are made in
all fairness and in the best interest of all the shareholders of the company, thereby gaining
shareholders’ trust. On absolute as well as on relative basis, GIL’s promoters have less influence on the
board of the company and the same has been maintained historically. GIL has maintained
independent director’s share at 70%+ consistently over the years.
Exhibit 54: Representation of independent and promoter directors on the company’s board
FY12 FY13 FY14 FY15 FY16
Graphite India
- Total Strength 10 10 10 10 11
- Promoter group Directors 1 1 1 1 1
- Independent Directors 8 8 8 7 8

- % share of promoters 10.0 10.0 10.0 10.0 9.0


- % share of independent 80. 0 80.0 80.0 70.0 73.0

HEG
- Total Strength 10 9 10 8 8
- Promoter group Directors 4 4 4 3 2
- Independent Directors 6 5 6 4 4

- % share of promoters 40.0 44.0 40.0 38.0 25.0


- % share of independent 60.0 56.0 60.0 50.0 50.0

Source: Company, Centrum Research

Independent directors’ profile and compensation analysis – GIL outscores


Graphite India ranks higher in terms of both profile and fair compensation of its independent directors.
While, nearly 75% of HEG's board earned remuneration exceeding Rs1mn, in case of GIL, none of the
directors except one earned such compensation. Applying the concept of 'Substance over Form', the
higher compensation to independent director overrides his independent status, making him
effectively an executive director. A few of the independent directors of Graphite India are also
directors in other well established public listed companies as for the other producer, HEG the same
phenomena is visible to a much lower extent. Independent directors of Graphite India bring varied
experience from various industries which is crucial in adding value to the board’s decisions and
activities for the company's benefit.
Exhibit 55: Independent directors profile and compensation
FY16
No. of directorship in As % to
Independent Director Name Name of companies in which Director Compensation
other public ltd cos FY16 PBT
(Rs mn)
N S Damani 3 Graphite India 0.28 0.0%
A V Lodha 3 Shalimar Paints, Graphite India 0.52 0.1%
Shalimar Paints, Graphite India,TTK
Dr. R Srinivasan 5 healthcare, Yuken India, HCL Tech, Elder 0.52 0.1%
Graphite India Pharma, Mind Tree, Kirloskar Oil engines
Graphite India, Saregama India, Cheviot
P K Khaitan 9 India, Gillanders Arbut, Warren Tea, 0.4 0.0%
Electrocast Ind
N Venkataramani 1 Graphite India 1.18 0.1%

Kamal Gupta 6 HEG, RSWM, Maral Overseas 1.13 1.1%


Om Parkash Bahl 1 HEG 1.07 1.0%
HEG Vinita Singhania 4 HEG 0.38 0.4%
HEG, RSWM, Maral Overseas, OCL, Cimmco,
D.N Davar 9 1.09 1.0%
Ansal Properties, Titagarh Wagons
Source: Company, Centrum Research;

25
Graphite India
Promoter group compensation analysis – GIL tops with prudent payout
We infer that GIL’s promoters are choosing to realize money from the business by way of dividends
and long term equity value instead of higher annual salary. This trait is positive for all shareholders
including the promoter as he is anyways the biggest shareholder. An interesting fact that stood out is
that Graphite India's executive director is compensated at par with the promoter director; thereby
ensuring the executive director’s independent working status in the company. GIL’s promoter’s
compensation is lower as well as consistent as a percentage to PBT whereas HEG’s promoter’s
compensation has remained high at absolute level and as a percentage to PBT it has increased over
the years.
Exhibit 56: Promoter group compensation summary *
(Rs mn) FY12 FY13 FY14 FY15 FY16 FY12-16 Total
Graphite India
- Chairman & MD (Promoter) 25 18 20 10 16 88
- % share of PBT 0.8 0.8 0.9 1.0 1.5 0.9
- Executive Director 13 15 17 17 16 78
- % share of PBT 0.4 0.7 0.8 1.6 1.5 0.8
- Promoter Group Total 25 18 20 10 16 88
- % share of PBT 0.8 0.8 0.9 1.0 1.5 0.9

HEG
- Chairman, MD & CEO (Promoter) 21 48 39 34 7 150
- % share of PBT 3.1 3.9 4.0 7.7 6.8 4.6
- Other Non-Exec Promoter Dir. 0.4 0.2 0.3 0.7 0.9 3
- % share of PBT 0.1 0.0 0.0 0.2 0.8 0.1
- Promoter Group Total 21 49 40 34 7 152
- % share of PBT 3.1 3.9 4.1 7.9 7.7 4.7
Source: Company, Centrum Research, * % share considered positive even when PBT is negative to show the absolute picture

Contingent liability
In our analysis of contingent liability, we have not encountered any potential liability which could
effectively lead to a change in the structure of the financials or emerge as a significant risk to GIL’s net
worth. GIL’s contingent liabilities have also remained substantially lower as compared to its peer HEG.
We do not foresee any significant risks with respect to the materialisation of GIL’s contingent liabilities.
Exhibit 57: Contingent liability trend*
(Rs mn) FY12 FY13 FY14 FY15 FY16
Graphite India
- For Taxation related 109 105 242 180 541
- Others 625 360 655 455 283
- Total 734 465 897 635 823
- % share of Net Worth 4.4 2.7 5.1 3.6 4.7
HEG
- For Taxation related 51 120 361 755 1038
- Others 696 751 571 597 565
- Total 747 871 933 1,352 1,603
- % share of Net Worth 8.8 9.2 9.3 13.3 16.1
Source: Company, Centrum Research, *% share considered positive even when Net worth is negative to show the absolute picture;
NM-Not Meaningful

26
Graphite India
Related party transaction – Clean history
Over the past several years, GIL has maintained a clean related party transaction history except for a
corporate guarantee given to its German subsidiary Graphite GMBH COVA. Its corporate guarantee
increased to Rs1915mn in FY16 from Rs620mn, amounting to 11% of its net worth. With the subsidiary
expected to turnaround from FY18E, we do not foresee any risk in this area. For HEG, there has been an
additional investment in its associate Bhilwara Energy which is into hydro power generation projects
and hence an investment into an unrelated area.
Exhibit 58: Related party transaction details
Nature of Transaction (Rs mn) Relationship FY16 FY15 FY14 FY13 FY12
Graphite India
Corporate Guarantee given on behalf of Graphite GMBH COVA Subsidiary 1,915 1,615 620 521 512
Loans and Advances to Matrix Commercial Private Ltd Subsidiary 250 - - - -
HEG
Investment in Equity of Bhilwara Energy Limited Associate 1,451 2,123 534 261 261
Bhilwara Energy Limited Rights Issue Subscription Associate 110 273 - -
Investment in Equity of Bhilwara Infotechnology Limited Associate 42 42 42 42 42
Amount received for Property Sale from Bhilwara Info technology Limited Associate - 11 24 - -
Sale of SHIS License to RSWM - 40 - - -
Source: Company, Centrum Research

Auditor pedigree – Top class with PwC on board


GIL is audited by PwC which is part of the world’s big four community. HEG’s auditors also appear well
established and are auditors for other midcap listed companies as well. GIL’s strong auditor pedigree
adds weight to its corporate governance standards.
Exhibit 59: Auditor details
Auditor Fees -
Auditor Name Type Other Companies Audited by the auditor As % to PBT
FY16 (Rs mn)
Graphite India Price Waterhouse Statutory Many Marquee Cos 6.2 0.6
Doogar & Associates Statutory TT, Maral Oversees, Poly Medicure, Omaxe
HEG Dalmia Bharat, ISGEC, Jindal Drilling, PI Inds, JK Paper, Shivam 2.7 2.5
S.S. Kothari Mehta & Co. Statutory
Autotech, PNC Infratec
Source: Company, Centrum Research

27
Graphite India
Exhibit 60: Quarterly financials – Standalone
Particulars (Rs mn) Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17
Net sales 3,165 3,122 3,482 3,416 2,713 3,146 3,308 3,662
Other Operating Income 60.1 61 84.5 76.7 38.9 50.6 67.7 71.7
Total Income 3,225 3,183 3,566 3,493 2,752 3,196 3,376 3,734
Accretion to Stocks in trade & work in
149.4 90.2 388.0 653.2 (73.3) (4.9) (79.9) 359.0
progress
Cost of Raw Materials consumed 1,197 1,141 1,217 1,044 1,302 1,350 1,261 1,260
Consumption of Stores & Spares 249 266 274 245 212 300 320 352
Power & Fuel 532 468 474 406 526 599 625 633
Staff Cost 358 336 347 317 351 371 388 411
Other Operational expenses 407 409 439 507 329 440 499 573
Operating Profit (Core EBITDA) 333 464 427 322 105 141 364 147
Depreciation 112 111 111 110 97 97 96 126
EBIT 221 353 315 212 8 44 268 21
Interest 20 21 13 20 14 18 21 11
Other Revenue/Income 45 87 72 84 178 220 129 312
Exceptional Items 0 0 0 0 0 0 0 0
Profit Before Tax 246 418 375 276 172 246 375 321
Tax 83 141 145 90 62 87 142 (299)
Profit After Tax 163 277 229 186 110 159 234 620

Growth (%)
Net Sales (13.8) (20.3) 12.1 (16.2) (14.3) 0.8 (5.0) 7.2
EBITDA (11.4) 16.5 2.2 (10.9) (68.5) (69.6) (14.8) (54.4)
Adj. PAT (40.6) 38.1 12.5 31.0 (32.7) (42.5) 1.9 233.0

Margin (%)
EBITDA 10.3 14.6 12.0 9.2 3.8 4.4 10.8 3.9
EBIT 6.9 11.1 8.8 6.1 0.3 1.4 7.9 0.5
PAT 5.1 8.7 6.4 5.3 4.0 5.0 6.9 16.6

Key Drivers
Volumes (tonne)
Average Capacity Utilization (Electrodes -
69.0 63.0 76.0 70.0 68.0 75.0 85.0 89.0
standalone)
Source: Company, Centrum Research, NA-Not Available

28
Graphite India
Annexure - Graphite Electrode Industry
Graphite Electrode – Key consumable in EAF as well as other furnaces
Graphite electrode is a consumable product in the steel making process that act as conductor of
electricity in the furnace, generating sufficient heat to melt scrap metal, iron ore or other raw materials
used to produce steel or other metals. Graphite electrodes are consumed primarily in EAF steel
production; the steel making technology used by all “mini-mills” and is currently the only known
commercially available product that has high levels of electrical conductivity and the capability of
sustaining the high levels of heat generated in the furnace. On an average the cost of electrode
represents about 1-2% of the total cost of producing steel in a typical electric arc furnace. High
quantity of energy is required to manufacture electrodes and accounts for about 30% of the cost of
production. On an average, one tonne of electrode requires 6500-7000 units of electricity.
Electrodes are manufactured in varies sizes depending upon the size of the furnace, the size of the
furnace’s electric transformer and the planned productivity of the furnace. In a typical furnace using
alternating current and operating at a typical number of production cycles per day, one of the nine
electrodes is fully consumed, on average, every eight to ten operating hours. The actual rate of
consumption and addition of electrodes for a particular furnace depends primarily on the efficiency
and productivity of the furnace. Needle coke is the key raw material required to manufacture graphite
electrodes. Electrode manufacturers combine petroleum or coal tar (“pitch”) needle coke with binders
and other ingredients to form graphite electrodes.
Exhibit 61: Graphite Electrode
Graphite Electrode

Source: Centrum Research

With respect to the consumption of graphite electrodes, on an average approximately 1.7 kilograms of
graphite electrodes are consumed per tonne of steel production, however, in some efficient furnaces it
is as low as 1.2 kilogram per tonne. The improved efficiency of electric arc furnaces has resulted in a
decrease in the average rate of consumption of graphite electrodes per metric tonne of steel produced
in electric arc furnaces over the years.
The key areas of graphite electrode consumption are as follows:-
 Steelmaking through the Electric Arc Furnace (EAF) route\
 Refining of steel in ladle furnaces
 Smelting processes such as production of titanium dioxide

29
Graphite India
Electric Arc Furnace and its advantages
An electric arc furnace is essentially a big recycling machine and is essentially a large pot into which
scrap steel, like old cars, bicycles, and refrigerators, are dumped. The furnace operators loads (called
charging the furnace) carefully screened and selected scrap steel into this big pot. The graphite
electrodes are part of the furnace roof structure and the size of the electrodes varies depending on the
size of the furnace, the size of the furnace’s electric transformer and the planned productivity of the
furnace. The electrodes are part of the furnace roof structure. Electrodes can be small, 75 mm (3
inches) in diameter, or quite large, up to 750 mm (30 inches) in diameter and as much as 2800 mm
long with the largest electrode weighing more than two tonne. Once the furnace lid is in place, the
electrodes are lowered until the tip of the electrode column almost touches the top of the scrap
steel. At the bottom of the electrode column, the electricity jumps (or arcs) from the electrode tip to
the nearest piece of scrap steel. The intense heat of this electric arc (>3000 degree Celsius) melts the
scrap steel, hence the name of the electric arc furnace. Electrodes are made of graphite because only
graphite can withstand this incredible temperature. Eventually, all the steel is melted
In a typical furnace using alternating current and operating at a typical number of production cycles
per day, one of the nine electrodes in the furnace is fully consumed (requiring the addition of a new
electrode), on average, every eight to ten operating hours. The actual rate of consumption and
addition of electrodes for a particular furnace depends primarily on the efficiency and productivity of
the furnace. Therefore, demand for graphite electrodes is directly related to the amount and efficiency
of EAF steel production. There are no current commercially viable substitutes for graphite electrodes in
EAF steel production.
Exhibit 62: Steelmaking in EAF

Source: Company

Electric Arc Furnace is the equipment which can be tailor designed, specifically suiting the
requirement of the process. In different countries based on the raw material availability, technology
suppliers adjust the design of EAF.
EAF route of steelmaking has several advantages over the BF method namely i) lower capex
requirements & higher productivity, ii) better operational and production flexibility due to easy switch
on and off options, iii) suitability for producing high-end special steel and flexibility in changing
product mix due to batch process, and iv) lower production costs based on scrap availability

30
Graphite India
Manufacturing p
process of Graphite Electrodes
The manufacturing
manufacturing of a graphite electrode takes, on average, about two months. Manufactur Manufacturing of
graphite electrodes includes six main processes: forming the electrode, baking the electrode,
special pitch that improves the strength, rebaking the electrode,
impregnating the electrode with a special
graphitizing the electrode using electric resistance furnaces and machining. Graphite electrodes range
in size up to 30 inches in diameters and over 11 feet in length, and weighing as much as 5,900 pounds
(2.5 metric tons). Petroleum needle coke,
coke, a crystalline form of carbon derived from decant oil, is used
primarily in the production of graphite electrodes. Graphite electrode producers combine petroleum
or coal tar (“pitch”) needle coke with binders and other ingredients to form graphite electrodes.
Petroleum and pitch needle coke, relative to other varieties of coke, are distinguished by their needle needle-
like structure and their quality, which is measured by the presence of impurities, principall
principallyy sulphur,
nitrogen and ash. The needle
needle-like
like structure of petroleum and pitch needle coke creates expansion
along the length of the electrode, rather than the width, which reduces the likelihood of fractures.
Impurities reduce quality because they increase the coefficient of thermal expansion and electrical
resistivity of the graphite electrode, which can lead to uneven expansion and a build-upbuild up of heat and
cause the graphite electrode to oxidize rapidly and break. Petroleum and pitch needle coke are
typically
typically low in these impurities. In order to minimize fractures caused by disproportionate expansion
over the width of an electrode, and minimize the effect of impurities, large large--diameter
diameter graphite
electrodes (18 inches to 32 inches) employed in high high-intensity
intensity electric
electric arc furnace applications are
comprised almost exclusively of petroleum and pitch needle coke.
Exhibit 63: Graphite Electrode manufacturing process
Electrode Manufacturing Flow Chart Electrode Manufacturing Process

Process Detailed Description


Premium quality calcined coke is crushed, screened, and hot-
hot
blended with pitch in controlled proportions. The green
Forming the Electrode
mixture of coke and pitch is extruded through a forming press
(1600–6300
6300 mt) creating so
so-called
called green electrodes.
Green electrodes are baked at temperature of up to 1000° C in
specially designed, computer-controlled
computer controlled furnaces. It takes 3–4
3
Baking & Rebaki
Rebaking
weeks of baking to coke the pitch and remove volatiles from
electrodes.
Baked electrodes are impregnated with pitch in autoclaves to
provide higher density, mechanical strength, and electrical
conductivity. This process can be repeated several times for
Impregnating
the production of connecting pins. Impregnated electrodes
are rebaked at 750°C
750°C to carbonize the pitch and remove
remaining volatiles
Electrode blanks are further graphitized in Castner or Acheson
furnaces. Electrodes are heated to over 2700–3000°C.
2700 3000°C. During
Graphitizing
the process of graphitization the amorphous structure of
bon is transformed into graphite.
carbon
During the last stage of production electrodes and connecting
Machining pins are machined to exact dimensions. Connecting pins and
sockets are threaded to assure optimal electrode-pin
electrode pin joint.

Source: SGL Carbon, Centrum Research

Manufacturing entry barrier – Our discussions with domestic producers and study of information
material of global producers’ points to various entry barriers related to manufacturing. There are
certain cost and technology barriers to entry into the industry, including the need for extensive
product and process know
know-howhow and other intellectual property and a high initial capital investment. It
also requires high quality raw material sources and a developed energy supply infrastructure.

31
Graphite India
Financials - Standalone
Exhibit 64: Income Statement Exhibit 66: Balance Sheet
Y/E Mar(Rs mn) FY15 FY16 FY17 FY18E FY19E Y/E Mar(Rs mn) FY15 FY16 FY17P FY18E FY19E
Revenues 14,972 13,467 13,058 15,616 21,125 Equity Share Capital 391 391 391 391 391
Materials cost 6,743 5,889 5,374 5,518 8,161 Reserves & surplus 17,145 17,381 18,049 18,685 20,471
% of revenues 45.0 43.7 41.2 35.3 38.6 Shareholders' fund 17,536 17,772 18,440 19,076 20,862
Employee cost 1,385 1,353 1,520 1,730 1,893 Total Debt 2,483 1,799 1,268 968 868
% of revenues 9.2 10.0 11.6 11.1 9.0 Def tax liab. (net) 821 728 728 728 728
Others 5,292 4,722 5,407 6,293 6,802 Total Liabilities 20,840 20,299 20,436 20,772 22,458
% of revenues 35.3 35.1 41.4 40.3 32.2 Gross Block 12,537 12,646 13,916 14,601 15,061
EBITDA 1,553 1,503 756 2,076 4,269 Less: Acc. Depreciation 6,629 7,237 7,652 8,163 8,690
EBITDA margin (%) 10.4 11.2 5.8 13.3 20.2 Net Block 5,908 5,409 6,263 6,437 6,370
Depreciation & Amortisation 388 444 416 511 527 Capital WIP 96 655 685 650 590
EBIT 1,165 1,058 340 1,565 3,742 Net Fixed Assets 6,004 6,064 6,948 7,087 6,960
Interest expenses 122 78 65 44 39 Investments 4,801 5,491 5,491 4,891 4,891
PBT from operations 1,043 980 275 1,521 3,703 Inventories 8,550 6,320 5,126 5,476 6,862
Other income 307 465 839 516 560 Sundry debtors 3,879 4,316 4,068 4,002 4,861
Exceptional items (56) - - - - Cash 114 163 1,621 2,062 2,613
PBT 1,294 1,445 1,114 2,037 4,263 Loans & Advances 964 784 879 1,053 1,430
Taxes 473 399 (9) 672 1,407 Other assets 164 182 176 211 286
Effective tax rate (%) 36.5 27.6 (0.8) 33.0 33.0 Total Current Asset 13,670 11,766 11,870 12,805 16,051
Reported PAT 822 1,046 1,123 1,365 2,856 Trade payables 1,868 1,582 2,108 1,896 2,573
Adjusted PAT 878 1,046 1,123 1,365 2,856 Other current Liab. 740 886 886 1,062 1,441
Source: Company, Centrum Research Estimates Provisions 1,027 554 879 1,053 1,430
Net Current Assets 10,036 8,744 7,997 8,794 10,607
Exhibit 65: Key Ratios Total Assets 20,840 20,299 20,436 20,772 22,458
Y/E Mar FY15 FY16 FY17P FY18E FY19E Source: Company, Centrum Research Estimates
Growth Ratio (%)
Exhibit 67: Cash Flow
Revenue (15.3) (10.1) (3.0) 19.6 35.3
EBITDA (45.4) (3.2) (49.7) 174.6 105.7 Y/E Mar(Rs mn) FY15 FY16 FY17P FY18E FY19E
Adjusted PAT (48.6) 19.2 7.3 21.6 109.3 Operating profit before WC 1,640 1,868 756 2,076 4,269
Margin Ratios (%) Changes in working capital 598 1,626 2,205 (356) (1,263)
EBITDA 10.4 11.2 5.8 13.3 20.2 Cash flow from operations 1,738 2,993 2,969 1,048 1,600
PBT from operations 7.0 7.3 2.1 9.7 17.5 Adj. OCF (OCF - Interest) 1,616 2,915 2,904 1,004 1,561
Adjusted PAT 5.9 7.8 8.6 8.7 13.5 Net Capex 323 518 1,300 650 400
Return Ratios (%) Adj. FCF 1,293 2,397 1,604 354 1,161
ROE 5.0 5.9 6.2 7.3 14.3 Cash flow from investments 52 (1,083) (461) 466 160
ROCE 4.5 5.4 5.8 6.7 12.8 Cash flow from financing (1,916) (1,799) (1,051) (1,072) (1,209)
ROIC 3.6 3.8 1.7 7.6 16.8 Net change in cash (126) 111 1,458 441 550
Turnover Ratios (days) Source: Company, Centrum Research Estimates
Gross block turnover ratio (x) 1.2 1.1 1.0 1.1 1.4
Debtors 95 117 114 94 84
Inventory 208 171 143 128 119
Creditors 46 43 59 44 44
Cash conversion cycle 257 245 198 177 158
Solvency Ratio (x)
Net debt-equity 0.1 0.1 0.0 (0.3) (0.3)
Debt-equity 0.1 0.1 0.1 0.1 0.0
Interest coverage ratio 0.1 0.1 0.2 0.0 0.0
Gross debt/EBITDA 1.6 1.2 1.7 0.5 0.2
Current Ratio 2.6 2.8 3.2 3.0 3.2
Per share Ratios (Rs)
Adjusted EPS 4.5 5.4 5.7 7.0 14.6
BVPS 89.7 90.9 94.4 97.6 106.8
CEPS 6.2 7.6 7.9 9.6 17.3
DPS 3.5 2.0 2.0 3.2 4.7
Dividend payout % 96.8 43.4 40.5 53.4 37.5
Valuation (x)* Avg Mcap
P/E (adjusted) 20.8 14.2 14.3 18.0 8.6
P/BV 1.0 0.8 0.9 1.3 1.2
EV/EBITDA 13.2 10.9 22.2 9.0 4.2
Dividend yield % 3.7 2.6 2.4 2.5 3.7
5 Yr Avg AOCF/EV yield % 8.6 15.1 19.2 14.9 11.1
Source: Company, Centrum Research Estimates

32
Graphite India
Financials - Consolidated (Historical)
Exhibit 68: Income Statement Exhibit 70: Balance Sheet
Y/E Mar(Rs mn) FY11 FY12 FY13 FY14 FY15 Y/E Mar(Rs mn) FY11 FY12 FY13 FY14 FY15
Revenues 14,439 19,125 19,488 20,093 17,107 Equity Share Capital 391 391 391 391 391
Materials cost 5,348 7,754 7,365 9,037 7,558 Reserves & surplus 14,828 16,166 16,728 17,202 17,073
% of revenues 37.0 40.5 37.8 45.0 44.2 Shareholders' fund 15,219 16,557 17,119 17,593 17,464
Employee cost 1,307 1,560 1,861 2,028 2,080 Total Debt 3,411 5,976 7,433 4,633 3,667
% of revenues 9.1 8.2 9.5 10.1 12.2 Def tax liab. (net) 616 696 950 897 821
Others 4,692 6,581 7,553 6,527 6,101 Total Liabilities 19,245 23,229 25,501 23,123 21,952
% of revenues 32.5 34.4 38.8 32.5 35.7 Gross Block 10,309 11,814 13,521 14,072 13,894
EBITDA 3,092 3,230 2,709 2,501 1,368 Less: Acc. Depreciation 5,277 5,783 6,392 7,109 7,496
EBITDA margin (%) 21.4 16.9 13.9 12.4 8.0 Net Block 5,031 6,031 7,128 6,963 6,398
Depreciation & Amortisation 486 487 620 581 435 Capital WIP 950 1,267 25 34 96
EBIT 2,606 2,743 2,089 1,920 932 Net Fixed Assets 5,982 7,297 7,154 6,997 6,494
Interest expenses 86 186 307 239 158 Investments 2,252 2,496 2,648 3,847 3,693
PBT from operations 2,519 2,556 1,782 1,681 774 Inventories 9,058 10,375 12,207 10,354 9,917
Other income 345 381 390 447 351 Sundry debtors 3,390 4,574 5,156 4,723 4,326
Exceptional items 0 0 0 0 56 Cash 481 189 167 305 315
PBT 2,864 2,938 2,172 2,128 1,069 Loans & Advances 1,485 1,865 1,983 1,546 1,064
Taxes 846 847 828 829 493 Other assets 239 360 203 192 142
Effective tax rate (%) 29.5 28.8 38.1 39.0 46.1 Total Current Asset 14,652 17,363 19,716 17,120 15,764
Reported PAT 2,019 2,091 1,344 1,299 576 Trade payables 1,701 1,869 1,823 2,416 2,094
Adjusted PAT 2,019 2,091 1,344 1,299 632 Other current Liab. 692 777 798 990 844
Source: Company, Centrum Research Provisions 1,248 1,282 1,396 1,436 1,060
Net Current Assets 11,011 13,436 15,700 12,278 11,766
Exhibit 69: Key Ratios Total Assets 19,245 23,229 25,501 23,123 21,952
Y/E Mar FY11 FY12 FY13 FY14 FY15 Source: Company, Centrum Research
Growth Ratio (%)
Exhibit 71: Cash Flow
Revenue 7.2 32.5 1.9 3.1 (14.9)
EBITDA (21.9) 4.5 (16.1) (7.7) (45.3) Y/E Mar(Rs mn) FY11 FY12 FY13 FY14 FY15
Adjusted PAT (14.0) 3.6 (35.7) (3.4) (51.4) Operating profit bef working
3,123 3,362 2,984 2,883 1,479
Margin Ratios (%) capital changes
Changes in working capital (2,153) (2,843) (2,192) 3,835 754
EBITDA 21.4 16.9 13.9 12.4 8.0
Cash flow from operations 201 (273) 303 5,799 1,708
PBT from operations 17.4 13.4 9.1 8.4 4.5
Adj. OCF (OCF - Interest) 114 (459) (4) 5,560 1,549
Adjusted PAT 14.0 10.9 6.9 6.5 3.7
Net Capex 970 1,346 516 241 260
Return Ratios (%)
Adj. FCF (855) (1,805) (520) 5,319 1,290
ROE 13.3 13.2 8.0 7.5 3.6
Cash flow from investments (1,198) (1,327) (478) (1,147) 72
ROCE 10.8 9.6 6.0 6.2 3.1
Cash flow from financing 675 1,292 154 (4,534) (1,734)
ROIC 11.1 9.5 5.7 6.2 2.8
Net change in cash (323) (308) (22) 118 45
Turnover Ratios (days)
Gross block turnover ratio (x) 1.4 1.7 1.5 1.5 1.2 Source: Company, Centrum Research
Debtors 86 87 97 86 92
Inventory 229 198 229 188 212
Creditors 43 36 34 44 45
Cash conversion cycle 272 250 291 230 259
Solvency Ratio (x)
Net debt-equity 0.0 0.2 0.3 0.0 (0.0)
Debt-equity 0.2 0.4 0.4 0.3 0.2
Interest coverage ratio 0.0 0.1 0.1 0.1 0.2
Gross debt/EBITDA 1.1 1.9 2.7 1.9 2.7
Current Ratio 2.6 2.2 2.2 2.4 2.5
Per share Ratios (Rs)
Adjusted EPS 11.8 12.2 6.9 6.6 3.2
BVPS 88.7 96.5 87.6 90.0 89.4
CEPS 14.6 15.0 10.1 9.6 5.2
DPS 3.7 4.0 3.5 3.5 3.5
Dividend payout % 36.9 37.8 58.8 61.3 138.5
Valuation (x)* Avg Mcap
P/E (adjusted) 8.8 7.7 12.3 11.4 28.9
P/BV 1.2 1.0 1.0 0.8 1.0
EV/EBITDA 6.0 6.0 7.8 6.1 13.1
Dividend yield % 3.6 4.2 4.1 4.6 3.7
5 Yr Avg AOCF/EV yield % 0.6 (1.0) (0.6) 8.5 7.5
Source: Company, Centrum Research

33
Graphite India
Financials - Consolidated
Exhibit 72: Income Statement Exhibit 74: Balance Sheet
Y/E Mar(Rs mn) FY15 FY16 FY17 FY18E FY19E Y/E Mar(Rs mn) FY15 FY16 FY17P FY18E FY19E
Revenues 17,107 15,323 14,678 17,753 24,325 Equity Share Capital 391 391 391 391 391
Materials cost 7,558 6,461 5,851 6,061 9,209 Reserves & surplus 17,073 17,120 17,370 18,034 20,031
% of revenues 44.2 42.2 39.9 34.1 37.9 Shareholders' fund 17,464 17,511 17,761 18,425 20,422
Employee cost 2,080 2,012 2,225 2,474 2,724 Total Debt 3,667 3,023 2,592 1,592 592
% of revenues 12.2 13.1 15.2 13.9 11.2 Def tax liab. (net) 821 728 821 821 821
Others 6,101 5,504 6,206 7,080 7,753 Total Liabilities 21,952 21,262 21,174 20,838 21,836
% of revenues 35.7 35.9 42.3 39.9 31.9 Gross Block 13,894 14,165 15,395 16,025 16,475
EBITDA 1,368 1,346 396 2,138 4,640 Less: Acc. Depreciation 7,496 8,253 8,717 9,277 9,854
EBITDA margin (%) 8.0 8.8 2.7 12.0 19.1 Net Block 6,398 5,912 6,678 6,747 6,621
Depreciation & Amortisation 435 492 464 561 577 Capital WIP 96 655 321 391 441
EBIT 932 854 (68) 1,577 4,063 Net Fixed Assets 6,494 6,567 6,999 7,138 7,061
Interest expenses 158 95 79 64 24 Investments 3,693 4,160 4,160 4,160 4,160
PBT from operations 774 759 (147) 1,514 4,040 Inventories 9,917 7,485 6,021 6,566 7,997
Other income 351 494 865 565 539 Sundry debtors 4,326 4,848 4,415 4,377 5,665
Exceptional items 56 0 0 0 0 Cash 315 212 2,430 2,092 1,730
PBT 1,069 1,254 718 2,079 4,578 Loans & Advances 1,064 1,123 1,206 973 1,333
Taxes 493 426 13 686 1,511 Other assets 142 171 162 195 267
Effective tax rate (%) 46.1 33.9 1.8 33.0 33.0 Total Current Asset 15,764 13,839 14,234 14,204 16,992
Reported PAT 576 828 705 1,393 3,068 Trade payables 2,094 1,712 2,166 2,189 2,999
Adjusted PAT 632 828 705 1,393 3,068 Other current Liab. 844 1,001 1,013 1,226 1,679
Source: Company, Centrum Research Estimates Provisions 1,060 589 1,037 1,247 1,698
Net Current Assets 11,766 10,537 10,017 9,542 10,616
Exhibit 73: Key Ratios Total Assets 21,952 21,262 21,174 20,838 21,836
Y/E Mar FY15 FY16 FY17P FY18E FY19E Source: Company, Centrum Research Estimates
Growth Ratio (%)
Exhibit 75: Cash Flow
Revenue (14.9) (10.4) (4.2) 21.0 37.0
EBITDA (45.3) (1.6) (70.6) 440.6 117.0 Y/E Mar(Rs mn) FY15 FY16 FY17P FY18E FY19E
Adjusted PAT (51.4) 31.1 (14.9) 97.7 120.3 Operating profit before WC 1,479 1,706 488 2,138 4,640
Margin Ratios (%) Changes in working capital 754 1,626 2,738 137 (1,436)
EBITDA 8.0 8.8 2.7 12.0 19.1 Cash flow from operations 1,708 2,817 3,214 1,589 1,693
PBT from operations 4.5 5.0 (1.0) 8.5 16.6 Adj. OCF (OCF - Interest) 1,549 2,722 3,135 1,526 1,669
Adjusted PAT 3.7 5.4 4.8 7.8 12.6 Net Capex 260 550 896 700 500
Return Ratios (%) Adj. FCF 1,290 2,171 2,239 826 1,169
ROE 3.6 4.7 4.0 7.7 15.8 Cash flow from investments 72 (871) (31) (135) 39
ROCE 3.1 4.2 3.7 6.9 14.1 Cash flow from financing (1,734) (1,911) (964) (1,793) (2,094)
ROIC 2.8 3.3 (0.5) 7.2 17.1 Net change in cash 45 35 2,218 (338) (362)
Turnover Ratios (days) Source: Company, Centrum Research Estimates
Gross block turnover ratio (x) 1.2 1.1 1.0 1.1 1.5
Debtors 92 115 110 90 85
Inventory 212 178 150 135 120
Creditors 45 41 54 45 45
Cash conversion cycle 259 253 206 180 160
Solvency Ratio (x)
Net debt-equity (0.0) (0.1) (0.2) (0.3) (0.3)
Debt-equity 0.2 0.2 0.1 0.1 0.0
Interest coverage ratio 0.2 0.1 (1.2) 0.0 0.0
Gross debt/EBITDA 2.7 2.2 6.6 0.7 0.1
Current Ratio 2.5 2.8 2.6 2.9 2.9
Per share Ratios (Rs)
Adjusted EPS 3.2 4.2 3.6 7.1 15.7
BVPS 89.4 89.6 90.9 94.3 104.5
CEPS 5.2 6.8 6.0 10.0 18.6
DPS 3.5 3.9 2.0 3.2 4.7
Dividend payout % 138.5 112.4 64.5 52.3 34.9
Valuation (x)* Avg Mcap
P/E (adjusted) 28.9 18.0 22.8 19.4 8.8
P/BV 1.0 0.9 0.9 1.5 1.3
EV/EBITDA 13.1 10.1 30.4 10.5 4.7
Dividend yield % 3.7 5.2 2.4 2.3 3.4
5 Yr Avg AOCF/EV yield % 7.5 13.8 21.5 13.0 9.8
Source: Company, Centrum Research Estimates

34
Graphite India
Appendix A
Disclaimer
Centrum Broking Limited (“Centrum”) is a full(service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock
Exchange of India Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum
has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our
research professionals provide important inputs into the Group's Investment Banking and other business selection processes.
Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other
businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this
material/report. Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the
preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act
as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Centrum or its affiliates do not own 1% or more in the
equity of this company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to
our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make
investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the
companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you
should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on
information barriers, such as "Chinese Walls" to control the flow of informaion contained in one or more areas within us, or other areas, units, groups or
affiliates of Centrum. Centrum or its affiliates do not make a market in the security of the company for which this report or any report was written.
Further, Centrum or its affiliates did not make a market in the subject company’s securities at the time that the research report was published.
This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy,
purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection
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discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all
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or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's
individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for
his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting
his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved
in the securities forming the subject matter of this document.
The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant
uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates
on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase
over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company.
These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accented accounting
principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not
regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, Centrum, the
authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you
should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the
assumptions underlying such projections and forecasts.
The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may
realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital
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change without notice. Centrum does not provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential
investment. Centrum and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies
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Certain transactions including those involving futures, options, and other derivatives as well as non(investment(grade securities give rise to substantial
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This report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No
representation or warranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes
current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in
this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change.
This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible
media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This
publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion
hereof may not be printed, sold or distributed without the written consent of Centrum.
The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform
themselves about, and observe, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any
damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with
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This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything
contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you
solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The
distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves
about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that
this report is accurate or complete.

35
Graphite India
The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking
and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this
report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.
This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its
directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its
directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or
any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection
therewith.
Centrum and its affiliates have not managed or co(managed a public offering for the subject company in the preceding twelve months. Centrum and
affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this
report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a
merger/acquisition or some other sort of specific transaction.
As per the declarations given by them, Mr. Abhisar Jain and Mr. Prajwal Gote, research analyst and and/or any of their family members do not serve as an
officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by them, they have not received any
compensation from the above companies in the preceding twelve months. They does not hold any shares by them or through their relatives or in case if
holds the shares then will not to do any transactions in the said scrip for 30 days from the date of release such report. Our entire research professionals
are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research
analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance.
While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are
under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum
from doing so.
Non(rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable
regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other
circumstances.
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country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject
Centrum Broking Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does
not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any
transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this
document may be distributed in Canada or used by private customers in United Kingdom.
The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading,
dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk
Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian
Securities Market.

Graphite India price chart


150

100

50

0
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
GRIL IN EQUITY

Source: Bloomberg, Centrum Research

36
Graphite India
Disclosure of Interest Statement
1 Business activities of Centrum Broking Limited Centrum Broking Limited (hereinafter referred to as “CBL”) is a registered member of NSE (Cash, F&O
(CBL) and Currency Derivatives Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash
segment), Depository Participant of CDSL and a SEBI registered Portfolio Manager.
2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing
/dealing in securities market.
3 Registration status of CBL: CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)

Graphite Vesuius IFGL Orient


India India Ref. Ref.
4 Whether Research analyst’s or relatives’ have any financial interest in the subject
No No No No
company and nature of such financial interest
5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more
in securities of the subject company at the end of the month immediately preceding No No No No
the date of publication of the document.
6 Whether the research analyst or his relatives has any other material conflict of interest No No No No
7 Whether research analyst has received any compensation from the subject company in
the past 12 months and nature of products / services for which such compensation is No No No No
received
8 Whether the Research Analyst has received any compensation or any other benefits
No No No No
from the subject company or third party in connection with the research report
9 Whether Research Analysts has served as an officer, director or employee of the subject
No No No No
company
10 Whether the Research Analyst has been engaged in market making activity of the
No No No No
subject company.

Rating Criteria
Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn
Buy Upside > 20% Upside > 15% Upside > 10%
Hold Upside between -20% to +20% Upside between -15% to +15% Upside between -10% to +10%
Sell Downside > 20% Downside > 15% Downside > 10%

Member (NSE and BSE)

Regn No.:
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239
CAPITAL MARKET SEBI REGN. NO.: NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233
(TRADING & CLEARING MEMBER)
CURRENCY DERIVATIVES: MCX-SX INE261454230
CURRENCY DERIVATIVES:NSE (TM & SCM) – NSE 231454233

Depository Participant (DP)


CDSL DP ID: 120 – 12200
SEBI REGD NO. : CDSL : IN-DP-CDSL-661-2012

PORTFOLIO MANAGER

SEBI REGN NO.: INP000004383

Website: www.centrum.co.in
Investor Grievance Email ID: investor.grievances@centrum.co.in

Compliance Officer Details:


Kavita Ravichandran
(022) 4215 9842; Email ID: compliance@centrum.co.in

Centrum Broking Ltd. (CIN :U67120MH1994PLC078125)


Registered Office Address Corporate Office & Correspondence Address
Bombay Mutual Building , Centrum House
2nd Floor, 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina,
Dr. D. N. Road, Santacruz (E), Mumbai 400 098.
Fort, Mumbai - 400 001 Tel: (022) 4215 9000

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