March 24, 2010

ICICIdirect.com | Equity Research

Initiating Coverage




In a global outperformance phase
The Indian graphite sector is currently going through a phase of global
outperformance in a technology intensive industry on the back of cost
competitiveness and sound operations of domestic graphite producers.
Graphite demand has started improving globally. An improvement in
steel production and robust product prices have led to a fine performance
by Indian graphite players in 9MFY10 leaving global peers far behind.
Capacity expansion is underway and low cost operations are ensuring
better margins as compared to global peers. Hence, we expect Indian
graphite companies to continue their outperformance over international
players and increase their share in the global graphite market from ~13%
in 2009 to ~18% in 2012E. We are initiating coverage on the graphite
sector with a STRONG BUY rating on HEG Ltd and an ADD rating on
Graphite India Ltd (GIL).
Bounce back in steel production to propel graphite electrode demand
Steel demand suffered a sharp drop from Q4CY08 and through much of
2009. This was on account of the global financial crisis that led to a severe
drop in EAF steel production and the resultant graphite electrode demand.
With the recovery in steel production growth firmly in place, we expect
graphite demand to increase by ~17% YoY in 2010 on the back of steel
production scaling back to pre-crisis levels.
Ongoing capacity expansion ensures economies of scale
Indian graphite manufacturers enjoy competitive operating advantages
with low manpower costs, captive power feeds and strategic location
benefits. Brownfield capacity expansion (ranging from 13% to 21%) at
existing locations being carried out by both Indian graphite producers
would lead to further cost savings with economies of scale.
Low cost structure ensures highest capacity utilisation, margins globally
Indian graphite producers have operated at higher capacity utilisation rates
(45-75%) as compared to global peers (35-55%) even during recessionary
periods (CY09) due to their low cost structure. Production cuts in response
to a drop in demand have been more pronounced for high cost producers
in the developed world. Domestic players have weathered the storm better.
With the low cost structure being further improved upon, domestic players
are expected to enjoy better margins (higher by 500-1000 bps) as
compared to global peers, going forward.

Outlook and recommendation
Indian graphite players have remained at the forefront of the recovery in
graphite electrode demand globally. Apart from operating at higher
capacity utilisation levels and achieving better profit margins as
compared to global peers in the last few quarters, they have also
announced capacity expansion plans recently. Despite possessing strong
business models, the current valuations of domestic players are at a
steep discount to global peers and leave room for upside. We are
initiating coverage on the graphite sector with a positive view. HEG Ltd is
our top pick in the space on account of its single location advantage,
higher margins and value accretive investment in Bhilwara Energy Ltd.


Indian Graphite Sector

Financials & Rating Grid

HEG Limited (HEG) STRONG BUY
CMP Rs 338
TP Rs 466
Upside % 38%
Market Cap Rs Cr 1380
FY09 FY10E FY11E FY12E
Net Sales Rs Cr 1029.0 1069.7 1155.9 1352.4
EBITDA Rs Cr 274.7 380.9 369.3 431.6
EBITDA % % 26.7 35.6 31.9 31.9
PAT Rs Cr 107.0 181.6 155.6 191.6
EPS Rs 25.1 44.5 38.1 46.9
P/E x 13.4 7.6 8.9 7.2
EV/EBITDA x 8.1 5.4 5.5 4.8
Graphite India Limited (CAREVE) ADD
CMP Rs 88
TP Rs 95
Upside % 8%
Market Cap Rs Cr 1740
FY09 FY10E FY11E FY12E
Net Sales Rs Cr 1501.0 1294.9 1443.4 1766.8
EBITDA Rs Cr 307.6 359.3 295.3 366.7
EBITDA % % 20.5 27.8 20.5 20.8
PAT Rs Cr 235.5 205.6 166.4 207.6
EPS Rs 13.8 12.0 8.4 10.5
P/E x 6.4 7.3 10.5 8.4
EV/EBITDA x 6.0 4.3 5.5 5.0
Comparative return metrics
1M 3M 6M 12M
HEG 2.1 -11.4 28.9 238.2
Graphite India 13.1 13.4 44.8 269.2

Price Movement (Stock vs. Nifty)
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Mar-09 Jul-09 Nov-09 Mar-10
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Analysts name
Pankaj Pandey
pankaj.pandey@icicisecurities.com

Goutam Chakraborty
goutam.chakraborty@icicisecurities.com

Abhisar Jain
abhisar.jain@icicisecurities.com




Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 2
Table of Content Page No

Global graphite electrodes industry dynamics 3
Technology intensive and oligopolistic in nature 3
Bounce-back in steel production to propel graphite demand 6
Graphite prices remain strong 9
Scarce availability of raw material remains a concern 10
Power a major cost, Indian players have captive advantage 11
Indian players operating at higher margins 12
Risk & Concerns 13
Financials 14
Valuations & recommendation 16

Companies:

HEG Ltd

Investment Rationale 21
Capacity build-up spree continues 21
Strong captive power base provides competitive edge 22
Low cost structure ensures better margins 24
Financials 25
Valuations 27
Tables 29

Graphite India Ltd

Investment Rationale 34
Capacity expansion underway 34
Diversification benefits through other businesses 35
Realisation and cost of production to trend upwards 36
On competitive footing with global peers 37
Financials 38
Valuations 40
Tables 42


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 3
Global graphite electrodes industry dynamics

Technology intensive and oligopolistic in nature
The graphite electrode industry is characterised by a closely guarded
technology with just a small bunch of producers globally. The replacement
cost of a new greenfield plant is exorbitantly high and remains non-viable.
The last greenfield project was set up by HEG way back in 1977 in India.
The industry has oligopolistic competition because of the existence of only
seven or eight players on a global basis. Graphite manufacturers are
involved in the production of ultra high power (UHP) electrodes that find
application in steel production through electric arc furnace (EAF) route.
Exhibit 1: Industry structure Graphite electrode producers
Sr. No. Company Mid-1990's Current
1 Graftech International, USA 5 200000 220000
2 SGL Carbon, Germany 7 190000 220000
3 Four Japanese producers 7 220000 250000
4 Other Western producers 2 60000 35000
5 China 6 75000
Sub-total 27 670000 800000
Growth 19.4%
6 HEG 1 20000 66000
7 Graphite India 4 25000 78000
Sub-total 5 45000 144000
Growth 220.0%
Total - UHP Electrode 31 715000 944000
Growth 32.0%
Production capacity (Tonne) No. of
plants

Source: Industry data, ICICIdirect.com Research

Dependent on steel production growth through EAF route
Graphite electrodes are used as a consumable item in the steel production
process through the EAF route. EAF steel plants, also known as mini-mills
due to their relatively small size (1-3 MT) as compared to blast oxygen
furnace (BOF) steel plants, typically consume one graphite electrode every
8-10 hours and require 1.5-2 kg of graphite electrode per tonne of steel
production.

Exhibit 2: EAF steel share in global steel production rises smartly
283
405
450
473
539
691
803
32
34
33
28
25
23
18
0
200
400
600
800
1000
1200
1400
1600
1975 1980 1985 1990 1995 2005 2011E
5
10
15
20
25
30
35
40
(
%
)
Total Steel Produced (MT) EAF Steel (MT)
Graphite Electrode Demand('000 tonne)

Source: Industry, ICICIdirect.com Research

Graphite industry is technology intensive and
constituted by just a few producers globally
Graphite capacity expansion is possible mainly
through the brownfield route. Indian players have
expanded capacity at a much faster pace as compared
to their global peers
Graphite electrode demand is dependent on steel
production through the EAF route and has grown
smartly due to the increasing share of EAF in world
crude steel production
EAF Share(R.H.S)


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 4
The demand for graphite electrodes has increased consistently on the back
of strong growth in overall steel production and increasing share of steel
produced through the EAF route over the last two decades (EAF steel share
has increased from 25% to 34% over 1985-2005).

EAF route enjoys strategic advantages over BOF method
EAF route method of producing steel is continuously increasing its share in
the worlds total steel production due to several advantages over the
traditional blast furnace method. Some of these include:
Lower initial capital expenditure requirements and higher
productivity
Smaller size leading to easy switch on and off options (can be done
every two or three hours), which allows flexibility in production
Suitable for producing high-end special steel and batch process of
production allows easy change in the product mix
Lower cost of production as compared to non-integrated BOF steel
producers

Exhibit 3: EAF steel production cost break-up
Particulars
Cost/unit
(US$/tonne) I/P Reqd/tonne Cost (US$)
Steel Scrap (tonne) 375 1.13 424
Power (KwH) 0.075 600 45
Ferro Alloys (tonne) 1200 0.01 12
Graphite Electrodes (Kgs) 5 1.8 9
Transport 10 1 10
Labour 20 1 20
Others 10
Total Cost/tonne 530
EAF Production

Source: Industry, ICICIdirect.com Research



Exhibit 4: BOF steel production cost break-up
Particulars
Cost/unit
(US$/tonne)
I/P Reqd Cost
Iron Ore 90 1.7 153
Coking coal 200 1 200
Coke conversion 30 1 30
Power (KwH) 0.075 500 38
Scrap 375 0.1 38
Ferro alloys 1200 0.015 18
Other Raw Material 30 1 30
Transport & Others 30 1 30
Labour 25 1 25
Total Cost/tonne 561
BF Production

Source: Industry, ICICIdirect.com Research

EAF route more pronounced in the western world and Middle East
Against the share of ~31% on a global basis, the EAF route accounts for
40-50% of steel produced in the western world and ~85% in Middle East.
This is due to better availability of scrap (major ingredient in EAF steel
making) and higher demand of special/alloy steel that is produced mainly
EAF route of steel production enjoys strategic
advantages over BOF method like lower cost of
production and easy switch on and off options


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 5
through EAF route. Due to higher share of EAF produced steel, graphite
electrode demand is driven largely from these markets.

Exhibit 5: EAF steel share -2008 (Country wise)
Country
Total Steel
produced (MT)
EAF Steel
(MT)
EAF Share
(%)
Europe (EU 27) 198 82 41.4
USA 91 53 58.1
Central & South America 48 18 37.1
Middle-east 16 14 87
Asia 767 161 21
Total 1323 405 30.6

Source: IISI, ICICIdirect.com Research

Exhibit 6: EAF steel production break-up
Location
Crude
Steel
(MT)
EAF
Steel
(MT)
EAF
Share
(%)
Crude
Steel
(MT)
EAF
Steel
(MT)
EAF
Share
(%)
Crude
Steel
(MT)
EAF
Steel
(MT)
EAF
Share
(%)
EU(27) 198 82 41 139 56 40 151 60 40
USA 91 53 58 58 35 60 72 43 60
Middle-east 16 14 88 17 15 85 20 17 85
Asia 767 160 21 795 159 20 830 166 20
World 1323 405 31 1220 341 28 1329 399 30
2008 2009 2010E

Source: Industry, ICICIdirect.com Research

but supply of graphite electrodes has increased mainly from India

Exhibit 7: Share in world graphite production
28
27
31
6
24 24
27
13
21 21
24
18
0
5
10
15
20
25
30
35
US Europe Japan India
(
%

S
h
a
r
e
)
Mid-1990s Current 2011-12E
India's share
increasing
steadily

Source: Industry, ICICIdirect.com Research
While India has been increasing its market share (up from 6% to 13% in the
last 10-12 years) of graphite electrode production steadily over the years
(through brownfield expansion), the western world and Japanese share is
steadily coming down. This is due to lesser capacity addition on account of
higher operational and capital costs and lower cost competitiveness as
compared to Indian players like HEG and GIL who enjoy lower power and
manpower costs.
EAF share in steel production is ~58% in the US and
~41% in Europe
Indias share in overall supply of graphite electrodes
has increased due to build-up in capacities by Indian
players on account of better cost competitiveness and
brownfield expansion capability


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 6
Bounce-back in steel production to propel graphite electrode demand
Steel demand suffered a sharp drop from Q4CY08 and through much of
2009. This was due to the global financial crisis that, in turn, led to massive
production cuts in the developed world on account of shrinking demand.
This led to a severe drop in EAF steel production and the resultant graphite
electrode demand. With the recovery in steel production growth firmly in
place, we expect graphite demand to increase by ~17% YoY in 2010E. This
will be on the back of steel production scaling back to pre-crisis levels of
~1330 MT and EAF steel production going up to 399 MT.

Exhibit 8: Strong bounce back expected in demand
Steel
Production
(MT) EAF Share
EAF
Production
(MT)
Implied UHP Graphite
Electrode Demand
('000 tonne)* Growth
2005 1144 34% 389 700
2006 1247 32% 393 707 1%
2007 1346 32% 427 769 9%
2008 1323 31% 405 729 -5%
2009 1219 28% 341 614 -16%
2010E 1329 30% 399 718 17%
2011E 1395 32% 446 804 12%
* Graphite electrode demand based on 1.8 Kgs reqd./tonne of EAF steel produced

Source: Worldsteel.org, Industry, ICICIdirect.com Research
Significant EAF capacity additions planned in Asia and Middle East.
The advent of the global recession has led to significant demand
destruction and production cutbacks in the developed world. However,
Asia and Middle East have shown strong resilience. They have continued
on their strong growth path with steel production growing over 13% in
China and ~3% in India and the Middle East in 2009. EAF capacity to the
tune of 110 MT is planned to be on stream in the next five to six years
resulting in additional graphite electrode (UHP grade) demand of ~2 lakh
tonne.

Exhibit 9: EAF capacity pipeline in the next five or six years
Location
New EAF
Capacity
(MT)
Additional UHP
Graphite electrode
demand ('000 tonne)
Rationale for New EAF capacity
build-up
China 45 81
Higher demand for special steel.
Flexibility in production
India 10 18
Better availability of captive power
to run EAF plants
Middle-east 20 36
Higher availability of cheap gas as a
source of power
Sub-Total 75 135
Other locations 35 63
Total 110 198

Source: Industry, ICICIdirect.com Research
The majority of the new EAF capacity (75 MT, which is ~68% of the total) is
expected to be in the Asian and Middle East region. This will create
demand for graphite electrode, which can be catered to easily by Indian
producers due to close proximity. This is due to the fact that captive power
availability remains strong in these regions and the requirement for special
steel is on the rise. It is produced through the EAF route. We estimate an
additional demand of ~1.35 lakh tonne of graphite electrode demand from
these regions in the next five or six years.
The expected rise in steel production to the tune of
9% is expected to result in EAF production growth
and ~17% YoY rise in UHP electrode demand
EAF capacities planned to be on stream in the
next five to six years are ~110 MT. This could
result in additional UHP electrode demand of ~ 2
lakh tonne


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 7
.and graphite electrodes capacity expansions in India already underway
Keeping in mind the bounce-back in steel production and subsequent
graphite electrode demand, Indian graphite electrode manufacturers have
announced capacity expansions ranging from 13-21% recently. This
reflects their intention of achieving growth and a larger footprint in the
global graphite electrodes market. A strong balance sheet and robust
operational cash flows provide ample comfort towards meeting capital
requirements for the same.

Exhibit 10: Graphite electrode capacity build-up (Indian players)
25000
20000
53000
46000
78000
66000
10500
14000
88500
80000
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
(
I
n

t
o
n
n
e
)
Mid 1990s Addition Current Expansion 2012E
HEG Ltd. Graphite India Ltd.

Source: Company, ICICIdirect.com Research
Both Indian manufacturers have almost tripled their installed graphite
electrode capacities during the last 15 years on the back of brownfield
expansions and focus on cost competitiveness with backward integration.
HEG is slated to increase its capacity by ~21% to 80,000 tonne whereas
Graphite India Ltd has announced plans to augment its existing capacity by
~13% to 88,500 tonne. The increased capacities are expected to be on
stream by 2012 and help increase the volumes and sales growth for both
companies.
Indian producers have announced capacity expansion
plans to cater to increased demand in the next few
years and increase their share in the graphite electrode
industry further
While HEG is increasing its capacity by ~21%, GIL
is implementing a capacity increase of ~13%. The
capacity expansions are slated to be completed by
2012E


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 8
Indian players operating at higher capacity utilisation

Exhibit 11: Plant capacity utilisation - Indian players stay ahead
38%
42%
40%
36%
56%
41%
65%
63%
47%
43%
75%
69%
56%
63%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Q1CY09 Q2CY09 Q3CY09 Q4CY09
Graftech SGL GIL HEG

Source: Company, ICICIdirect.com Research

The plant capacity utilisation factor for Indian players has remained well
above their global counterparts during the recessionary phase in 2009. This
reflects the cost competitive production ability of Indian players and their
inherent strength in snatching share from big global producers during
tough times.
and further improvements expected, going forward

Exhibit 12: Indian players capacity utilisation trend
80%
85%
80%
70%
84%
100%
83%
71%
60%
85% 82%
94%
40%
50%
60%
70%
80%
90%
100%
110%
FY07 FY08 FY09 FY10E FY11E FY12E
HEG GIL

Source: Company, ICICIdirect.com Research
Indias graphite electrode manufacturers have been able to operate at
capacity utilisation levels above 80% during FY07-09 on account of robust
global steel production. After operating at lower utilisation rates for FY10
due to drop in steel production and graphite electrode demand, Indian
players are expected to increase production during FY11-12E and operate
closer to pre-crisis utilisation levels.
Indian producers have been able to operate at a
higher plant utilisation factor as compared to their
global peers during the tough times of slump in steel
production
The capacity utilisation trend is expected to
improve, going forward, due to bounce-back in steel
production and improvement in graphite electrode
demand


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 9
Graphite prices remain strong despite volatile steel prices
Although benchmark steel (HRC) prices have suffered huge volatility over
the last few years due to the fluctuating steel cycle globally, graphite
electrode prices have remained in an uptrend due to i) production cuts by
global graphite players, ii) small share of graphite cost in overall production
cost metrics of EAF producers, iii) high cost of its key raw material needle
coke and iv) oligopolistic nature of the graphite industry.

Exhibit 13: HRC prices vs. graphite electrode prices

*Prices Indexed to 100 at 2005
Source: HEG presentation, ICICIdirect.com Research

Blended realisations/tonne of Indian manufacturers has remained strong
during FY07-09. Though the realisations are expected to remain subdued in
2010, overall volatility remains low as compared to steel prices and the
trend remains positive.

Exhibit 14: Blended realisation/tonne of Indian manufacturers
140000
160000
180000
200000
220000
240000
260000
FY07 FY08 FY09
(
I
n

R
s
/
t
o
n
n
e
)
HEG GIL

Source: Company, ICICIdirect.com Research

Graphite prices are not cyclical in nature like steel
and have remained firm
Blended realisations/tonne for Indian players has
increased steadily but is expected to remain
subdued, going forward
0
50
100
150
200
250
2005 2006 2007 2008 2009
HRC GE Prices


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 10
Scarce availability of raw material remains a concern
In the production of various types of graphite electrodes, production of
ultra high power (UHP) electrodes (that is used extensively in steel EAFs)
requires a special type of coke named needle coke. The availability of
needle coke remains scarce in global market and is in the hands of just four
producers globally, in US and Japan. ConocoPhillips of US controls ~60%
of the needle coke market. The current capacity of needle coke globally is
~8 lakh tonne. As approximately 1 tonne of needle coke is required to
manufacture an equivalent amount of UHP electrode, we estimate that
needle coke supplies could remain tight, going forward, with increase in
EAF production and subsequent increase in UHP electrode demand. We
believe that without a further build-up in needle coke capacity there could
be a potential shortage of needle coke in CY11E. This, in turn, could lead to
substantial contract price escalation and increase the costs for graphite
electrode manufacturers globally.

Exhibit 15: Needle coke requirement
Steel
Production
(MT) EAF Share
EAF
Production
(MT)
Implied UHP Graphite
Electrode Demand
('000 tonne)
Needle coke
Requirement
(tonne)
2007 1346 32% 427 769 769
2008 1323 31% 405 729 729
2009 1219 28% 341 614 614
2010E 1329 30% 399 718 718
2011E 1395 32% 446 804 804

Source: Industry, ICICIdirect.com Research

Needle coke prices are set on a yearly contract basis. Prices in 2010 were
booked at approximately the same levels as that of 2009. This, in turn, was
settled at ~40% higher over 2008 prices. Current needle coke prices are in
the range of US$1700-1800/tonne. The industry as a whole keeps the cost
of needle coke a closely guarded secret. Indian companies specify the total
coke cost in terms of CP coke in their annual filings. Coke cost accounts for
~22-23% of blended realisations/tonne of graphite electrodes for Indian
producers.

Exhibit 16: Coke cost comparison
FY08 FY09
Coke cost/tonne (Rs) 42883 48290
As % to costs 34.1 29.6
As % to sales 23.7 22.2
Coke cost/tonne (Rs) 44683 56959
As % to costs 29.7 29.3
As % to sales 23.5 23.3
HEG
GIL

Source: Company, ICICIdirect.com Research

Needle coke availability remains tight and could be a
cause for concern for graphite electrode
manufacturers, going forward
Coke cost comprises 30-35% of the total cost of
producing graphite electrode


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 11
Exhibit 17: Raw material cost as percentage of sales
29.2
33.5
27.3
29.2
32.9
41.2
39.0
34.8
32.6
37.3
33.4
31.4
38.0
30.7
20
30
40
50
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10
(
%
)
HEG GIL

Source: Company, ICICIdirect.com Research

Power a major cost component, Indian players enjoy captive advantage
Apart from the need for coke supplies, graphite electrode manufacturing
requires a huge amount of power (~6,000 units of power are required to
produce one tonne of graphite electrode). Power cost constitutes between
13-23% of total costs for Indian producers. It is sourced through captive
power plants and state grids. Indian players enjoy the advantage of
sourcing relatively cheap power through their captive power plants as
compared to other global producers.

Exhibit 18: Power cost metrics (as % to total cost)
FY08 FY09 Power sourcing % Captive
HEG 27% 23% 77 MW CPP 100%
GIL 13% 13% 33 MW CPP 20%

CPP-Captive power plant
Source: Company, ICICIdirect.com Research

Indian players enjoy captive power plant advantage to
meet power requirements in graphite electrode
production


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 12
Indian producers operating at higher margin compared to global peers
Indian graphite electrode producers have operated at comparatively
higher operating margins as compared to global peers and have been
able to achieve much higher margins in CY09 as compared to global
graphite manufacturers due to better realisations, efficient product mix
and reduction in costs.

Exhibit 19: EBIT margin trend - Indian producers stay ahead
23
18
26
20
28
17
21
19
15
9
6
29
32
19
19
0
5
10
15
20
25
30
35
Graftec SGL Tokai Carbon HEG GIL
CY07/FY08 CY08/FY09 CY09/9MFY10

Source: Company, ICICIdirect.com Research

The total cost as a percentage of sales has come down for both Indian
producers in the last few quarters due to the combined effect of robust
realisations, better product mix and reduction in costs.

Exhibit 20: Indian players total cost as percentage of sales
74.6 74.9
67.9
63.2
83.7
77.5
50
60
70
80
90
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10
(
%
)
HEG GIL

Source: Company, ICICIdirect.com Research

Indian producers are operating at higher operating
margins as compared to global producers due to
lower cost structure and better product mix


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 13
Risks and concerns

Decrease in product prices due to competition
The global graphite industry had to resort to massive production cuts
with a drop in steel production and graphite electrode demand in 2009.
This, in turn, ensured that prices remained firm. Going forward, global
players are expected to increase production with a bounce back in
demand and product prices could dip more than expected due to
competition among players and higher production levels.

Sudden spurt in raw material prices
As discussed earlier, the supply of needle coke required to manufacture
graphite electrodes remains scarce and in the hands of a few producers
globally. This increases the risk of a sudden spurt in raw material costs for
graphite manufacturers and negatively affects the profitability.

Lower-than-expected EAF steel production and graphite demand
We expect global steel production to increase by ~9% in 2010 resulting
in increased production even through the EAF route. However, lower-
than-expected EAF steel production could potentially result in lower
graphite electrode demand and affect the sales volume and profit of the
graphite producers negatively.

Adverse currency movements
Indian graphite producers have a major dependence on exports of
graphite electrodes to various steel players across the globe. This
exposes them to adverse currency risk. Any major fluctuations in the
currency would negatively impact the earnings of graphite producing
companies.


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 14
Financials

Revenue growth to remain moderate
Both Indian graphite companies are expected to show moderate revenue
growth in the next two years due to steady build-up in sales volume but
subdued realisations. While HEG is expected to increase sales volume in
FY11E due to additional capacity of 6000 tonne created through
debottlenecking, GIL is expected to increase volumes and sales on account
of higher capacity utilisation.
We expect HEG to clock revenue CAGR of 9.5% over FY09-12E on the back
of ~6% volume CAGR over FY09-12E to 56,100 tonne in FY12E. GIL is
expected to exhibit revenue CAGR of 5.6% during FY09-12E.

Exhibit 21: Revenue growth to remain moderate
946
1029 1070
1156
1352
1332
1501
1295
1443
1767
0
500
1000
1500
2000
2500
3000
3500
FY08 FY09 FY10E FY11E FY12E
(
R
s

C
r
o
r
e
)
)
HEG GIL-Cons
CAGR (FY09-12E)
HEG - 9.5%
GIL-Cons - 5.6%

Source: Company, ICICIdirect.com Research

EBITDA margin to remain robust, going forward
Both Indian graphite players have seen margin expansion in 9MFY10 on
account of product price increase and reduction in costs. Though we
expect lower graphite electrode prices in FY11E, margins are expected to
remain firm as needle coke supplies for 2010 have been secured and other
costs are under control. We expect HEG to achieve EBITDA margin of
~32% in FY11 and FY12E and GIL to have a consolidated EBITDA margin
of ~21% in FY12E.
We expect HEG to clock revenue CAGR of 9.5% over
FY09-12E on the back of ~6% volume CAGR over
FY09-12E to 56,100 tonne in FY12E. GIL is expected to
exhibit revenue CAGR of 5.6% during FY09-12E


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 15

Exhibit 22: EBITDA margin trend
31.9%
35.6%
26.7%
32.1% 31.9%
20.8% 20.5%
27.8%
20.5%
20.8%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
FY08 FY09 FY10E FY11E FY12E
HEG GIL-Cons

Source: Company, ICICIdirect.com Research

PAT margins to exhibit similar trend
PAT margins in FY10E are expected to be higher due to excellent
performance by both Indian graphite players in 9MFY10. We expect the
PAT margin to show a dip in FY11E in conjunction with the EBITDA
margins but improve in FY12E and stay at a robust level considering the
industry dynamics.

Exhibit 23: PAT margin trend
15.5%
10.4%
17.0%
13.5%
14.2%
11.8% 11.5%
15.9%
15.7%
10.7%
4.0%
8.0%
12.0%
16.0%
20.0%
FY08 FY09 FY10E FY11E FY12E
HEG GIL-Cons

Source: Company, ICICIdirect.com Research


We expect HEG to achieve EBITDA margin of ~32%
in FY11 and FY12E and GIL to have a consolidated
EBITDA margin of ~21% in FY12E
We expect HEG and GIL to achieve PAT margins of
14.2% and 11.8% in FY12E, respectively


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 16
Valuations & recommendation

With the fortunes of the global steel industry taking a sharp turn for the
better during the last few months, the global graphite industry has seen a
smart pick-up in capacity utilisation levels and is gearing for double-digit
volume growth, going forward. Indian players have remained at the
forefront of the recovery and apart from operating at higher capacity
utilisation levels and better profit margins as compared to global peers
have also announced capacity expansion plans.

Though the product prices are expected to remain subdued and raw
material price fluctuation remains a concern, Indian graphite producers
have a competitive advantage on a global basis due to their low cost
structure. We expect the domestic graphite players to keep up their
outperformance over global players, going forward.

We are initiating coverage on the Indian graphite sector with a positive
view. HEG Ltd is our top pick in the sector with highest margin in the
industry and additional value from its stake in Bhilwara Energy Ltd. We
are initiating coverage on HEG Ltd with a STRONG BUY rating and GIL
with an ADD rating.

Valuation Indian players trading at sharp discounts
We have valued the Indian graphite companies on P/E and EV/EBITDA
basis in comparison to global graphite players like Graftec, SGL Carbon,
Tokai Carbon and Showa Denko, who together account for ~70% of global
graphite market. Despite having strong fundamentals, robust business
models and better margins, domestic players are trading at steep discount
as compared to global peers on both P/E and EV/EBITDA basis. Currently
for domestic players, the average P/E is at a discount range of 45-56%
based on 1-2 years forward earnings. Average EV/EBITDA is at a discount
range of 23-32% based on 1-2 years forward earnings and enterprise value.
We also note that forward estimates of EBIT margins and return ratios for
Indian players are higher as compared to global peers. This, in turn
suggests that current valuation of domestic players leaves room for upside.

While we are impressed by the low cost structure of Indian players
resulting in higher margins, we remain cautious of the fact that bigger size
and reach of global majors gives them the advantage of being price and
industry setters and leave Indian players as just followers. Considering the
industry dynamics and domestic players solid business profiles, we value
the Indian graphite companies at a discount of 30% on P/E basis and 15%
on EV/EBITDA basis, respectively, as compared to global peers.

Based on the above reasoning, we are ascribing a P/E multiple of 10x and
EV/EBITDA multiple of 6x to domestic players and taking the average of
FY11E and FY12E earnings to arrive at our target price of Rs 466 for HEG
Ltd and Rs 95 for GIL. We are initiating coverage on the Indian graphite
sector with a STRONG BUY rating on HEG Ltd and ADD rating on GIL.
Despite having strong fundamentals, robust business
models and better margins, domestic players are trading at
steep discount as compared to global peers on both P/E
and EV/EBITDA basis. Currently for domestic players, the
average P/E is at a discount range of 45-56% based on 1-2
years forward earnings. Average EV/EBITDA is at a
discount range of 23-32% based on 1-2 years forward
earnings and enterprise value.


Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 17

Exhibit 24: Global peer comparison
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
EBIT (%)
HEG 22.3 31.3 27.1 27.1
GIL 19.2 26.3 19.0 19.2
Graftec 27.2 13.1 15.5 19.0
SGL 19.7 3.0 8.7 12.6
Tokai Carbon 16.4 5.1 11.3 14.0
Showa Denko 2.3 -1.3 4.4 5.1
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
RONW (%)
HEG 18.8 27.8 20.2 21.3
GIL 25.2 17.3 12.0 13.0
Graftec 41.7 16.0 18.9 20.2
SGL 24.0 16.1 5.4 11.4
Tokai Carbon 10.8 1.6 5.6 7.7
Showa Denko 3.2 -16.5 6.0 8.4
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
P/E (x)
HEG 13.4 7.6 8.9 7.2
GIL 6.4 7.3 10.5 8.4
Graftec 6.8 24.8 12.0 9.0
SGL 7.1 30.1 29.6 15.0
Tokai Carbon 9.0 72.7 22.0 16.7
Showa Denko 30.1 NA 20.8 14.4
Average for domestic players 9.9 7.5 9.7 7.8
Average for global players 13.3 42.5 21.1 13.8
Discount (%) 25.2 82.5 54.2 43.4
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
EV/EBITDA (x)
HEG 8.1 5.4 5.5 4.8
GIL 6.0 4.3 5.5 5.0
Graftec 4.2 12.6 7.2 5.7
SGL 4.6 11.4 9.6 6.8
Tokai Carbon 4.5 10.1 6.9 5.5
Showa Denko 8.2 14.4 7.5 6.7
Average for domestic players 7.1 4.9 5.5 4.9
Average for global players 5.4 12.1 7.8 6.2
Discount (%) -31.3 59.7 29.7 20.8
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
P/BV (x)
HEG 2.4 1.9 1.7 1.4
GIL 1.3 1.2 1.1 1.0
Graftec NA 2.7 2.2 1.9
SGL 1.6 1.7 1.6 1.5
Tokai Carbon 1.0 1.1 1.0 1.0
Showa Denko 0.9 1.3 1.2 1.1
Average for domestic players 1.9 1.6 1.4 1.2
Average for global players 1.2 1.7 1.5 1.4
Discount (%) -61.6 7.8 6.5 10.5

Source: Bloomberg, ICICIdirect.com Research





Indian Graphite Industry
ICICIdirect.com | Equity Research
Page 18
Exhibit 25: One year forward P/E chart
0
3
6
9
12
15
18
A
p
r
-
0
6
A
u
g
-
0
6
D
e
c
-
0
6
A
p
r
-
0
7
A
u
g
-
0
7
D
e
c
-
0
7
A
p
r
-
0
8
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
HEG GIL

Source: Company, ICICIdirect.com Research

Exhibit 26: One year forward EV/EBITDA chart
0
2
4
6
8
10
12
A
p
r
-
0
6
A
u
g
-
0
6
D
e
c
-
0
6
A
p
r
-
0
7
A
u
g
-
0
7
D
e
c
-
0
7
A
p
r
-
0
8
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
HEG GIL

Source: Company, ICICIdirect.com Research




March 24, 2010
ICICIdirect.com | Equity Research

Initiating Coverage




Ahead of the competition
HEG is the worlds largest single location graphite electrode producer
with an installed capacity of 66,000 MT of UHP grade graphite electrode
and captive power plants of 77 MW. Organic growth through brownfield
expansion and better capacity utilisation is expected to drive sales
volume. Also, with captive power providing the competitive edge and
low cost of operations ensuring higher margins as compared to global
peers, HEG finds itself a stretch ahead of the competition. We expect
HEG to register an FY09-12E CAGR of 9.5% and 21.4% in net sales and
net profit, respectively. We are initiating coverage on the stock with a
STRONG BUY rating.
Capacity build-up spree continues
HEG has achieved organic growth through a smart build-up in capacity in
graphite electrode and captive power during the last decade by
leveraging its technological expertise and single-location advantage. After
adding 6,000 tonne of capacity through de-bottlenecking recently, the
company is expected to increase its graphite electrode capacity through
the brownfield route by ~21% (14,000 tonne) to 80,000 tonne by FY12E.
Strong captive power base provides competitive edge
HEG holds a competitive edge over its peers on account of its strong
captive power base with 77 MW of installed capacity. Apart from being
self-sufficient in terms of its captive requirement of power even at
expanded capacity, the company is currently also enjoying the benefits of
surplus power sales, which is an added advantage.
Low cost structure ensures high margin
The companys low-cost structure on account of cost efficiencies, lowest
manpower costs globally and economies of scale ensure high operating
margins. This places it well ahead of its global peers in terms of
profitability and capacity utilisation levels.

Valuations
At the CMP of Rs 338, the stock is currently trading at cheap valuations of
7.2x FY12E EPS of Rs 46.9 and FY12E EV/EBITDA of 4.8x. We expect an
upward re-rating of the stock on the back of a strong operational
performance, going forward. We value the stock using P/E and
EV/EBITDA in comparison with global peers and assign a target price of
Rs 466 to the stock with a STRONG BUY rating.

Exhibit 27: Key Financials
FY08 FY09 FY10E FY11E FY12E
Net Sales (Rs cr) 946.0 1029.0 1069.7 1155.9 1352.4
EBITDA (Rs cr) 303.9 274.7 380.9 369.3 431.6
Net Profit (Rs cr) 146.4 107.0 181.6 155.6 191.6
EPS (Rs) 33.0 25.1 44.5 38.1 46.9
P/E (x) 10.2 13.4 7.6 8.9 7.2
P/BV (x) 2.7 2.4 1.9 1.7 1.4
EV/EBITDA (x) 7.0 8.1 5.4 5.5 4.8
RoE (%) 32.4 18.8 27.8 20.2 21.3
RoCE (%) 19.5 15.9 21.1 19.3 21.0

Source: Company, ICICIdirect.com Research


HEG Ltd (HEG)
Rs 338
Rating Matrix
Rating : Strong Buy
Target : Rs 466
Target Period : 12 months
Potential Upside : 38%

YoY Growth (%)

FY09 FY10E FY11E FY12E
Net Sales 8.8 4.0 8.1 17.0
EBITDA -9.6 38.6 -3.0 16.9
Net Profit -26.9 69.6 -14.3 23.1
EPS (Rs) -23.9 76.9 -14.3 23.1

Stock Metrics
Bloomberg/Reuters Code HEG.IN/HEGL.BO
Sensex 17451
Average volumes 35000
Market cap (Rs Cr) 1380.1
52 week H/L 412/94
Equity capital (Rs Cr) 40.8
Promoter's stake (%) 54.7
FII holding (%) 2.6
DII holding (%) 13.5


Price movement (Stock vs. Nifty)
0
50
100
150
200
250
300
350
400
450
Mar-09 Jul-09 Nov-09 Mar-10
(
I
n

r
s
)
0
1000
2000
3000
4000
5000
6000
(
I
n

u
n
i
t
s
)
HEG NIFTY


Current & target multiple
FY09 FY10E FY11E FY12E
PE (x) 13.4 7.6 8.9 7.2
Target PE (x) 18.5 10.5 12.2 9.9
EV/EBITDA (x) 8.1 5.4 5.5 4.8
Target EV/EBITDA (x) 10.1 6.8 6.9 6.0

Analysts name
Pankaj Pandey
pankaj.pandey@icicisecurities.com

Goutam Chakraborty
goutam.chakraborty@icicisecurities.com

Abhisar Jain
abhisar.jain@icicisecurities.com






HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 20


Company Background
HEG Ltd, a flagship of the LNJ Bhilwara group, is Asias leading graphite
electrode manufacturer and exporter. The company was set up in 1977
and had graphite manufacturing technology, which was originally sourced
from SERS a subsidiary of Pechiney, France. Currently the company
has interests in graphite electrode and power with an installed capacity of
66,000 MT of UHP graphite electrodes and 77 MW of power.
HEG operated as a JV partner with Pechiney till early 1990s with a
capacity of 10,000 tonne of mainly lower grade electrodes. After the exit
of its French partner Pechiney, the company started to grow and expand
its capacity rapidly. Since 1990s HEG has invested ~Rs 825 crore in capex
and has increased its graphite electrode capacity from 10,000 tonne to
66,000 tonne.
The company exports ~80% of its production outside India to more than
100 customers across 30 countries around the globe. HEG has an
established global customer base comprising steel majors like Arcelor
Mittal, Nucor, Posco and Tata Steel.

Exhibit 28: Sales break-up (By region-FY09)
3%
8%
India , 20%
North
America,
15%
Middle-
east, 26%
Asia, 14%
Europe ,
14%

Source: Company, ICICIdirect.com Research








Well distributed sales mix by geography with focus
on Middle East and India markets

Promoter and institutional holding trend (%)
51.5
52.7
53.7
54.7
17.2
16.4
15.9 16.1
0
10
20
30
40
50
60
Q4FY09 Q1FY10 Q2FY10 Q3FY10
(
%
)
Promoter holding Institutional holding
Source: Company, ICICIdirect.com Research














HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 21
Investment Rationale

HEG owns the worlds largest capacity of manufacturing graphite
electrodes (UHP Capacity: 66000 MT) at a single location creating cost
efficiencies and economies of scale. This is impressive when considered
along with the fact that it has fully owned captive power plants
providing self-sufficiency and diversification through merchant power
sales and access to cheap manpower resulting in lowest employee costs
globally. With a bounce-back in steel production across the globe
already underway and subsequent increase in graphite electrode
demand looking inevitable, we expect the company to achieve higher
sales volume, going forward. This will be through better capacity
utilisation resulting in revenue and net profit of Rs 1352.4 crore and Rs
191.6 crore in FY12E, respectively and a CAGR of 9.5% and 22%,
respectively, during FY09-12E. We are initiating coverage on the stock
with a STRONG BUY rating and a target price of Rs 466.
Capacity build-up spree continues
HEG has achieved a smart build-up in capacity in graphite electrode and
captive power during the last decade by leveraging its technological
expertise and single-location advantage. Continuous brownfield
expansion has resulted in the graphite electrode capacity increasing from
just 14,000 tonne in 1990 to 30,000 tonne in 2002 and 66,000 tonne in
2009 (up by 120% in seven years). The company has also set up three
captive power plants with a total capacity of 77 MW during this period
and spent ~Rs 825 crore on its expansion activities.

Exhibit 29: Capacity build-up spree continues
14
30
52
66
77
80
77
0
10
20
30
40
50
60
70
80
90
Graphite Electrode Power(MW)
(
I
n

'
0
0
0

t
o
n
n
e
)
1990 2002 2006 2009 2012E

Source: Company, ICICIdirect.com Research

Capacity expansion is in progress continuously at HEG. After adding
6,000 tonne of capacity through de-bottlenecking recently, the company
is expected to increase its graphite electrode capacity through the
brownfield route at its existing location in Mandideep, Bhopal by ~21%
(14,000 tonne) to 80,000 tonne by FY12E at a competitive cost of Rs 225
crore. The additional capacity is expected to be on stream by H2FY12E
and would result in YoY topline growth of ~17% in FY12E.
HEG has achieved a smart build-up in capacity in
graphite electrode and captive power during the last
decade by leveraging its technological expertise and
single-location advantage
The company is expected to increase its graphite
electrode capacity through the brownfield route at its
existing location in Mandideep, Bhopal by ~21%
(14,000 tonne) to 80,000 tonne by FY12E at a
competitive cost of Rs 225 crore.


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 22
Strong captive power base provides the competitive edge
HEG enjoys a strategic advantage and holds a competitive edge over its
peers on account of its strong captive power base comprising two
thermal power plants with rated capacity of 63 MW and a hydro-electrical
power plant of 13.5 MW. While the thermal power plants are located
adjacent to its graphite electrode manufacturing facility, the hydro-electric
power plant is situated at just about 80 km from the graphite plant. Taking
into account the fact that graphite manufacturing process is power
intensive and requires ~6,000 units of power for producing one tonne of
graphite electrode, the current capacity of 77 MW is enough to meet all
captive power requirements even at HEGs expanded capacity of 80,000
tonne.

Exhibit 30: Power revenue metrics
106.9
97.0
75.4
107.5
135.1
144.2
5.9
3.8
53.8
67.1
54.5
63.1
0.0
50.0
100.0
150.0
200.0
250.0
FY08 FY09 9MFY10 FY10E FY11E FY12E
(
R
s

C
r
o
r
e
)
)
Captive Sales Outside Sales

Source: Company, ICICIdirect.com Research

Currently, HEG has surplus power that is sold to third parties at attractive
rates. We believe the company would have surplus power for selling on a
merchant basis before commissioning its additional capacity. We expect
the company to clock net revenues of ~Rs 54 crore and ~Rs 63 crore in
FY10E and FY11E, respectively, through sales of surplus power.

Cost of production to remain under control
Apart from enjoying the benefits of economical captive power, HEG has
the distinction of having the lowest manpower costs in the industry
globally on account of its single site location of graphite electrode
manufacturing and efficient production processes. HEGs manpower
costs have remained at an industry low of ~5.5% of overall production
costs during the last few years. We expect the manpower cost to account
for ~6% of overall costs in FY11E and FY12E.

HEGs current power capacity of 77 MW is enough
to meet all the captive power requirements even at
expanded capacity base of 80,000 tonne
We believe the company would have surplus power
for selling on a merchant basis before
commissioning its additional capacity and expect
the company to clock net revenues of ~Rs 54 crore
and ~Rs 63 crore in FY10E and FY11E, respectively,
through sales of surplus power
HEGs manpower costs have remained at an
industry low of ~5.5% of overall production costs
during the last few years. We expect the manpower
cost to account for ~6% of overall costs in FY11E
and FY12E


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 23
We expect the overall cost of production to remain under control for HEG,
going forward, despite the increase in cost of its key raw material needle
coke. This will be due to reduction in costs on account of power, lower
manpower costs and operational efficiencies reducing other costs.

Exhibit 31: Cost of production break-up
0
20
40
60
80
100
120
140
160
180
FY07 FY08 FY09 FY10E FY11E FY12E
(
'
0
0
0

R
s
/
t
o
n
n
e
)
Coke Pitch Other RM Power Labour Others

Source: Company, ICICIdirect.com Research

We expect the overall cost as percentage of sales to remain at ~68% in
both FY11E and FY12E, thus ensuring robust operating margins for the
company.

Exhibit 32: Cost metrics
0
200
400
600
800
1000
1200
1400
1600
FY07 FY08 FY09 FY10E FY11E FY12E
(
R
s

C
r
o
r
e
)
)
30
40
50
60
70
80
90
(
%
)
Net Sales Cost Cost as % to sales

Source: Company, ICICIdirect.com Research

We expect the overall cost as percentage of sales to
remain at ~68% in both FY11E and FY12E, thus
ensuring robust operating margins for the company


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 24
Low cost structure ensures better margins as compared to global peers
Due to its low cost structure, HEG has enjoyed better EBIT margins as
compared to global peers in the last few years. We expect it to stay well
ahead of the competition in terms of profitability, going forward. We
expect HEG to achieve EBIT margins of ~27% in both FY11E and FY12E,
whereas consensus estimates for global peers indicate EBIT margins well
below 20% in the next few years.

Exhibit 33: EBIT margin comparison
0
5
10
15
20
25
30
35
Graftec SGL Tokai Carbon HEG GIL
(
%
)
CY07/FY08 CY08/FY09 CY09/FY10E CY10/FY11E CY11/FY12E
HEG's EBIT margins
well ahead of global
peers

Source: Company, ICICIdirect.com Research


Exhibit 34: Key Assumptions - Sales volume
52366
47246
44220
52800
56100
30000
35000
40000
45000
50000
55000
60000
FY08 FY09 FY10E FY11E FY12E
(
T
o
n
n
e
)
Graphite Electrode Sales Qty

Source: Company, ICICIdirect.com Research
We expect HEG to achieve EBIT margins of ~27% in
both FY11E and FY12E, whereas consensus
estimates for global peers indicate EBIT margins of
well below 20% in the next few years


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 25
Financials
Steady revenue growth
The company reported a topline of Rs 946.0 crore and Rs 1029.0 crore in
FY08 and FY09, respectively. The topline has grown at a CAGR (FY07-
FY09) of 10.1%, on account of 6.1% CAGR (FY07-09) in sales volume. We
expect the topline to grow at a healthy CAGR (FY09-FY12E) of 9.5% to Rs
1352.4 crore, backed by sales volume CAGR (FY09-12E) of 5.8%.

Exhibit 35: Steady revenue growth
946.0
1029.0
1069.7
1155.9
1352.4
17.0%
8.1%
4.0%
8.8%
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
1400.0
1600.0
FY08 FY09 FY10E FY11E FY12E
(
R
s

c
r
o
r
e
)
)
2.0%
6.0%
10.0%
14.0%
18.0%
22.0%
Net Sales YoY Growth
Sales CAGR (FY09-12E) - 9.5%

Source: Company, ICICIdirect.com Research
Healthy EBITDA margin, going forward
HEG reported a strong EBITDA of Rs 303.9 crore in FY08 with EBITDA
margin of 32.1%. After a slight drop in profitability in FY09, the company
has shown a very strong performance in 9MFY10 and reported EBITDA
margin of 34%. Going forward, we expect the company to maintain
healthy EBITDA margins on account of its low-cost structure and robust
demand. We expect the company to clock EBITDA and PAT margin of
31.9% and 14.2%, respectively, in FY12E.

Exhibit 36: Margins to sustain at higher levels
31.9%
31.9%
35.6%
26.7%
32.1%
14.2%
13.5%
17.0%
10.4%
15.5%
0.0%
10.0%
20.0%
30.0%
40.0%
FY08 FY09 FY10E FY11E FY12E
EBITDA % PAT %

Source: Company, ICICIdirect.com Research

We expect the topline to grow at a healthy CAGR
(FY09-FY12E) of 9.5% to Rs 1352.4 crore, backed by
sales volume CAGR (FY09-12E) of 5.8%
We expect the company to maintain healthy EBITDA
margins on account of its low-cost structure and
robust demand. We expect the company to clock
EBITDA and PAT margin of 31.9% and 14.2%,
respectively, in FY12E


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 26
Strong return ratios
HEG reported strong return ratios in FY08 on account of higher
profitability. However, it suffered a drop in FY09 due to a drop in demand
on account of recession. We expect the company to maintain strong
return ratios, going forward, and achieve RoNW and RoIC of 21.3% and
22.5%, respectively, in FY12E on the back of strong operational
performance overall.

Exhibit 37: Strong return ratios
32.4
22.8
21.3
20.2
27.8
18.8
21.0
19.3
21.1
15.9
19.5
21.3
20.8
22.5
16.9
5.0
10.0
15.0
20.0
25.0
30.0
35.0
FY08 FY09 FY10E FY11E FY12E
(
%
)
RoNW RoCE RoIC

Source: Company, ICICIdirect.com Research

Balance sheet strength provides comfort
The company boasts of a strong balance sheet with debt-equity ratio of
1.2 and net worth of ~Rs 700 crore. The company expects to complete its
expansion largely through internal accruals accumulated from strong cash
flow generation. We expect the net worth of the company to increase to
~Rs 973 crore and debt-equity ratio to drop to 0.8 by FY12E.

Exhibit 38: Strong balance sheet
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
FY08 FY09 FY10E FY11E FY12E
(
R
s

c
r
o
r
e
)
)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
(
R
a
t
i
o
)
Net Worth Debt D/E

Source: Company, ICICIdirect.com Research


We expect the company to maintain strong return
ratios, going forward, and achieve RoNW and RoIC of
21.5% and 22.5%, respectively, in FY12E on the back of
an overall strong operational performance


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 27
Valuations

HEG is the better of the two graphite players in India and has the best
margins on a global basis currently due to its low-cost business model.
We have valued HEGs graphite business using P/E and EV/EBITDA
methodology to arrive at a target price of Rs 466. We are initiating
coverage on the stock with a STRONG BUY rating.

P/E based valuation of Rs 462/share
At the CMP of Rs 338, the stock is trading at 8.9x FY11E EPS of Rs 38.1
and 7.2x FY12E EPS of Rs 46.9. The stock is trading at a discount of
~47% as compared to global average on CY11/FY12 earnings. We value
the stock at 10x (30% discount to global average) the average of FY11E
and FY12E EPS and arrive at a fair value of Rs 425.1/share for its core
graphite business. HEGs other investment value comes out to Rs
36.9/share. The total fair value based on P/E methodology works out to Rs
462/share.

Exhibit 39: P/E based valuation
(Rs) FY11E FY12E
EPS 38.11 46.91
Weightage 0.5 0.5
Adj. EPS 42.51
Average global P/E (x) 13.8
Discount given 30%
P/E (x) 10
Core business value/share 425.1
Other investment
value/share 36.9
Total Value/Share 462.0

Source: Company, ICICIdirect.com Research

Exhibit 40: Global P/E valuation comparison
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
P/E
HEG 13.5 7.6 8.9 7.2
Graftec 6.8 24.8 12.0 9.0
SGL 7.1 30.1 29.6 15.0
Tokai Carbon 9.0 72.7 22.0 16.7
Showa Denko 30.1 NA 20.8 14.4
Average for global players 13.3 42.5 21.1 13.8
Discount (%) -2.1 82.0 57.7 47.4

Source: Company, ICICIdirect.com Research

We value the stock at 10x (30% discount to global
average) the average of FY11E and FY12E EPS


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 28
EV/EBITDA based valuation of Rs 470/share
The stock is trading at a discount of ~20-30% as compared to the global
average on CY10-11 earnings. We value the stock at 6x (15% discount to
global average) the average of FY11E and FY12E EBITDA and arrive at a
fair value of Rs 1768.4 crore for its core graphite business. HEGs other
investment gives an additional value of Rs 150.8 crore. The total fair value
based on EV/EBITDA methodology works out to Rs 470/share.

Exhibit 41: EV/EBITDA based valuation
(Rs Cr) FY11E FY12E
EBITDA 369.3 431.6
Weightage 0.5 0.5
Adj. EBITDA 400.4
Average global EV/EBITDA (x) 7.0
Discount given 15%
EV/EBITDA (x) 6
EV 2402.7
Less: Net debt 634.3
Core business value 1768.4
Other investment value 150.8
Total market cap 1919.2
No. of shares (Cr) 4.1
Total value/share (Rs) 470.0

Source: Company, ICICIdirect.com Research

Exhibit 42: Global EV/EBITDA valuation comparison
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
EV/EBITDA
HEG 8.2 5.5 5.5 4.8
Graftec 4.2 12.6 7.2 5.7
SGL 4.6 11.4 9.6 6.8
Tokai Carbon 4.5 10.1 6.9 5.5
Showa Denko 8.2 14.4 7.5 6.7
Average for domestic players 5.4 12.1 7.8 6.2
Discount (%) -51.7 55.0 29.8 22.6

Source: Company, ICICIdirect.com Research

Based on the average of the above two valuation methodologies, we have
arrived at a target price of Rs 466 for the stock. We are initiating coverage
on the stock with a STRONG BUY rating.
We value the stock at 6x (15% discount to global
average) the average of FY11E and FY12E EBITDA


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 29
Table and Ratios

Exhibit 43: Profit & Loss account (Rs Crore)
FY08 FY09 FY10E FY11E FY12E
Net sales 946.0 1029.0 1069.7 1155.9 1352.4
Growth (%) 8.8 4.0 8.1 17.0
Op. Expenditure 672.6 771.2 688.8 786.6 920.8
EBITDA 303.9 274.7 380.9 369.3 431.6
Growth (%) -9.6 38.6 -3.0 16.9
Other Income 0.0 0.0 5.1 0.0 0.0
Depreciation 45.1 45.6 51.2 55.9 64.7
EBIT 258.8 229.2 334.8 313.4 366.9
Interest 50.6 66.7 70.0 77.7 76.7
PBT 207.2 161.4 264.7 235.7 290.2
Growth (%) -22.1 64.0 -10.9 23.1
Tax 60.8 54.4 83.2 80.2 98.7
Extraordinary Item 0.0 0.0 0.0 0.0 0.0
Rep. PAT before MI 146.4 107.0 181.6 155.6 191.6
Minority interest (MI) 0.0 0.0 0.0 0.0 0.0
Rep. PAT after MI 146.4 107.0 181.6 155.6 191.6
Adjustments 0.0 0.0 0.0 0.0 0.0
Adj. Net Profit 146.4 107.0 181.6 155.6 191.6
Growth (%) -26.9 69.6 -14.3 23.1

Source: Company, ICICIdirect.com Research

Exhibit 44: Balance sheet (Rs Crore)
FY08 FY09 FY10E FY11E FY12E
Equity Capital 44.3 42.6 40.8 40.8 40.8
Preference capital 17.4 17.3 17.3 17.3 17.3
Reserves & Surplus 483.5 533.7 702.8 819.5 963.2
Shareholder's Fund 545.2 593.6 712.4 829.1 972.7
Minority Interest 0.0 0.0 0.0 0.0 0.0
Secured Loans 617.5 664.1 639.1 539.1 619.1
Unsecured Loans 94.3 218.0 188.0 188.0 188.0
Deferred Tax Liability 73.6 75.0 76.1 76.1 76.1
Source of Funds 1330.6 1550.6 1615.5 1632.2 1855.9
Gross Block 795.0 853.5 935.5 1095.5 1255.5
Less: Acc. Depreciation 246.3 289.4 340.6 396.5 461.1
Net Block 548.8 564.0 594.9 699.0 794.4
Capital WIP 56.5 134.2 124.2 84.2 44.2
Net Fixed Assets 605.2 698.3 719.1 783.2 838.6
Investments 30.3 83.5 83.5 83.5 83.5
Cash 43.2 6.4 53.0 9.2 49.0
Trade Receivables 288.4 328.5 330.5 348.4 407.6
Loans & Advances 212.1 162.7 180.2 190.0 222.3
Inventory 273.4 409.7 413.0 416.3 487.4
Total Current Asset 817.0 907.3 976.7 963.9 1166.3
Current Liab. & Prov. 124.4 140.0 165.2 199.8 234.0
Net Current Asset 692.6 767.4 811.5 764.0 932.4
Application of funds 1330.6 1550.6 1615.5 1632.2 1855.9

Source: Company, ICICIdirect.com Research


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 30

Exhibit 45: Cash flow statement (Rs Crore)
FY08 FY09 FY10E FY11E FY12E
Profit before Tax 207.2 161.4 264.7 235.7 290.2
Depreciation 45.1 45.6 51.2 55.9 64.7
CF before change in WC 252.3 207.0 315.9 291.6 354.9
Inc./Dec. in Current Liab. -26.2 -34.8 25.2 34.6 34.1
Inc./Dec. in Advances 87.6 -49.4 17.6 9.8 32.3
Inc./Dec. in Current Assets 77.7 176.5 5.2 21.2 130.3
CF from operations 54.5 59.7 306.4 292.8 204.4
Purchase of Fixed Assets 89.0 -136.2 -72.0 -120.0 -120.0
(Inc.)/Dec. in Investment 26.1 -53.2 0.0 0.0 0.0
CF from Investing 115.1 -189.4 -72.0 -120.0 -120.0
Inc./(Dec.) in Debt -176.1 170.3 -55.0 -100.0 80.0
Inc./(Dec.) in Net worth 21.4 -1.9 -50.3 0.0 0.0
CF from Financing -256.4 69.5 -187.8 -216.6 -44.6
Opening Cash balance 103.3 43.2 6.4 53.0 9.2
Closing Cash balance 43.2 6.4 53.0 9.2 49.0

Source: Company, ICICIdirect.com Research

Exhibit 46: Key Ratios (%)
Return ratios FY08 FY09 FY10E FY11E FY12E
RONW 32.4 18.8 27.8 20.2 21.3
ROCE 19.5 15.9 21.1 19.3 21.0
ROIC 21.3 16.9 22.8 20.8 22.5
DuPont ratio analysis
PAT/PBT 70.6 66.3 68.6 66.0 66.0
PBT/EBIT 80.1 70.4 79.1 75.2 79.1
EBIT/Net sales 27.4 22.3 31.3 27.1 27.1
Net Sales/ Total Asset 71.1 66.4 66.2 70.8 72.9
Total Asset/ Networth 244.1 261.2 226.8 196.9 190.8
Spread of RoIC over WACC
RoIC 21.3 16.9 22.8 20.8 22.5
WACC 12.0 12.0 12.0 12.0 12.0
EVA (Rs Crore) 117.3 71.1 159.4 135.0 180.8
RoIC-WACC 9.3 4.9 10.8 8.8 10.5
Turnover ratios (days)
Inventory turnover 148.3 193.9 218.8 193.2 193.2
Debtor turnover 111.3 116.5 112.8 110.0 110.0
Creditor turnover 67.5 66.2 87.5 92.7 92.7
Current Ratio 6.6 6.5 5.9 4.8 5.0
Quick ratio 0.3 0.0 0.3 0.0 0.2

Source: Company, ICICIdirect.com Research


HEG Ltd (HEG)
ICICIdirect.com | Equity Research
Page 31

Exhibit 47: Profitability and per share data
Profitability ratios (%) FY08 FY09 FY10E FY11E FY12E
EBITDA Margin 32.1 26.7 35.6 31.9 31.9
PAT Margin 15.5 10.4 17.0 13.5 14.2
Per share data (Rs)
Revenue per share 213.5 241.7 262.0 283.1 331.2
EV per share 482.0 524.1 507.1 493.3 503.2
Book Value 123.0 139.4 174.5 203.0 238.2
Cash per share (Incl. Invst.) 16.6 21.1 33.4 22.7 32.5
Attributable EPS 33.0 25.1 44.5 38.1 46.9
Dividend per share 11.6 7.5 3.0 9.5 11.7

Source: Company, ICICIdirect.com Research

Exhibit 48: Valuation ratios
Valuation (x) FY08 FY09 FY10E FY11E FY12E
P/E 10.2 13.4 7.6 8.9 7.2
P/BV 2.7 2.4 1.9 1.7 1.4
EV/EBITDA 7.0 8.1 5.4 5.5 4.8
FCF Yield (%) 9.6 -5.3 17.0 12.5 6.1
EV/Sales 2.3 2.2 1.9 1.7 1.5
Div Yield (%) 3.4 2.2 0.9 2.8 3.5

Source: Company, ICICIdirect.com Research





March 24, 2010
ICICIdirect.com | Equity Research

Initiating Coverage




Niche capabilities
Graphite India Ltd (GIL) is Indias largest graphite electrode producer
with an installed capacity of 78000 MT of graphite electrode and captive
power plants of 33 MW. Organic growth through brownfield expansion
and better capacity utilisation is expected to drive sales volume. Also,
with backward integration insulating margins and diversification
benefits from other businesses of GRP tanks & pipes and high speed
steel, GIL has the distinction of possessing niche capabilities in a
technology intensive global graphite industry. We expect GIL to register
an FY09-12E CAGR of 5.6% and 6.0% in net sales and operating profit,
respectively. We initiate coverage on the stock with an ADD rating.
Capacity expansion under way
GIL has achieved a smart build-up in capacity during the last five years
through a mix of organic and inorganic route by leveraging its strong
balance sheet. The company is expected to increase its graphite electrode
capacity through the brownfield route by ~13% (10500 tonne) to 88,500
tonne and set up a captive power plant of 50 MW at Durgapur by FY12E.
Diversification benefits through other businesses
The company has a small exposure to other business segments like
impervious graphite equipment business, GRP pipes & tanks business and
speciality steel business that provides it with diversification benefits. The
company has been making good progress in these segments. We expect
the total revenue from its other businesses to more than double from Rs
102 crore in FY09 to Rs 228.6 crore in FY12E.
On competitive footing with global peers
Due to its low cost structure on account of India advantage, GIL has
remained on a competitive footing as compared to global peers in the last
few years. We expect it to stay slightly ahead of the competition in terms
of profitability, going forward, with EBIT margins of ~19% in both FY11E
and FY12E.

Valuations
At the CMP of Rs 88, the stock is currently trading at cheap valuations of
8.4x FY12E EPS of Rs 10.5 and FY12E EV/EBITDA of 5.0x. We have valued
the stock using P/E and EV/EBITDA in comparison with global peers and
assigned a target price of Rs 95 to the stock with an ADD rating.

Exhibit 48: Key Financials
FY08 FY09 FY10E FY11E FY12E
Net Sales (Rs cr) 1331.5 1501.0 1294.9 1443.4 1766.8
EBITDA (Rs cr) 277.6 307.6 359.3 295.3 366.7
Net Profit (Rs cr) 142.4 235.5 205.6 166.4 207.6
EPS (Rs) 9.4 13.8 12.0 8.4 10.5
P/E (x) 9.3 6.4 7.3 10.5 8.4
P/BV (x) 1.8 1.3 1.2 1.1 1.0
EV/EBITDA (x) 6.4 6.0 4.3 5.5 5.0
RoE (%) 20.4 25.2 17.3 12.0 13.0
RoCE (%) 18.6 18.3 19.3 14.5 16.4

Source: Company, ICICIdirect.com Research




Graphite India Ltd (CAREVE)
Rs 88
Rating Matrix
Rating : Add
Target : Rs 95
Target Period : 12 months
Potential Upside : 8%

YoY Growth (%)
FY09 FY10E FY11E FY12E
Net Sales 12.7 -13.7 11.5 22.4
EBITDA 10.8 16.8 -17.8 24.2
Net Profit 65.4 -12.7 -19.0 24.8
EPS (Rs) 46.2 -12.7 -30.0 24.8

Stock Metrics
Bloomberg/Reuters Code GRIL.IN/GRPH.BO
Sensex 17451
Average volumes (BSE) 165000
Market cap (Rs Cr) 1740.2
52 week H/L 95/23
Equity capital (Rs Cr) 34.2
Promoter's stake (%) 56.7
FII holding (%) 6.3
DII holding (%) 6.5


Price movement (Stock vs. Nifty)
0
10
20
30
40
50
60
70
80
90
100
Mar-09 Jul-09 Nov-09 Mar-10
(
I
n

r
s
)
0
1000
2000
3000
4000
5000
6000
(
I
n

u
n
i
t
s
)
GIL NIFTY


Current & target multiple
FY09 FY10E FY11E FY12E
PE (x) 6.4 7.3 10.5 8.4
Target PE (x) 6.9 7.9 11.3 9.0
EV/EBITDA (x) 6.0 4.3 5.5 5.0
Target EV/EBITDA (x) 6.4 4.7 6.0 5.4

Analysts name
Pankaj Pandey
pankaj.pandey@icicisecurities.com

Goutam Chakraborty
goutam.chakraborty@icicisecurities.com

Abhisar Jain
abhisar.jain@icicisecurities.com






Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 33
Company Background
Graphite India Ltd is Indias largest graphite electrode manufacturer by
capacity. The company was set up in 1963 in collaboration with The
Great Lakes Carbon Corporation of US. Currently, the company has three
graphite manufacturing plants in India with a total capacity of 60,000
tonne and one in Nuremberg, Germany with a capacity of 18,000 tonne.
GIL has core expertise in manufacturing value-added ultra-high power
(UHP) electrodes and 85% of its capacity is in UHP electrodes.

Exhibit 49: Plant wise capacity
Plant location Capacity (MT/year)
Durgapur 34000
Bangalore 13000
Nasik 13000
Nuremberg, Germany 18000
Total 78000

Source: Company, ICICIdirect.com Research

GIL boasts of backward integration. Apart from manufacturing calcined
petroleum (CP) coke (capacity: 30,000 tonne) for use in graphite electrode
manufacturing, it also has installed power generation capacity of 33 MW
through hydel and multi-fuel routes.
The company has diversification benefits through exposure and sales
through its graphite equipment business, GRP pipes and tanks business
and special steel business.
The company exports ~60% of its electrode production outside India to
more than 150 customers across 50 countries around the globe. The
company has an established global customer base comprising steel
majors like Arcelor Mittal, Nucor, Posco and JSW Steel.

Exhibit 50: FY09 revenue share
Graphite &
Carbon, 90%
Steel &
Others, 6%
Power, 4%

Source: Company, ICICIdirect.com Research





Promoter and institutional holding trend (%)
53.2
54.7
56.8 56.8
12.9 12.8 13.7
15.1
0
10
20
30
40
50
60
Q4FY09 Q1FY10 Q2FY10 Q3FY10
(
%
)
Promoter holding Institutional holding

Source: Company, ICICIdirect.com Research















Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 34
Investment Rationale

GIL is the largest producer of graphite electrodes in India. The company
is in the midst of a brownfield expansion with planned capacity
expansion of 10,500 tonne of graphite electrodes and setting up of 50
MW thermal captive power plant at Durgapur. The company possesses
niche capabilities with backward integration and diversification benefits
in place. With a bounce-back in steel production across the globe
already under way and subsequent increase in graphite electrode
demand looking inevitable, we expect GIL to achieve higher sales
volume, going forward. This will be through better capacity utilisation
resulting in revenue and EBITDA of Rs 1766.8 crore and Rs 366.7 crore in
FY12E, respectively, and a CAGR of 5.6% and 6%, respectively, during
FY09-12E on a consolidated basis. We are initiating coverage on the
stock with an ADD rating and a target price of Rs 95.
Capacity expansion underway again
GIL has achieved a smart build-up in capacity in graphite electrode
manufacturing during the last five years through brownfield expansion at
its manufacturing facility in Durgapur and investment in its overseas
subsidiary in Germany. Brownfield expansion has resulted in the graphite
electrode capacity increasing from just 14,000 tonne at Durgapur in FY04
to 34,000 tonne currently. The company also acquired an 18,000 tonne
manufacturing facility in Nuremberg, Germany during FY05 in order to
increase its reach in the European markets.

Exhibit 51: Capacity build-up
14
34
44.5
13
13
13
13
13
13
18
18
18
20
10.5
0
10
20
30
40
50
60
70
80
90
100
FY04 FY05 FY07 FY09 FY12E
(
'
0
0
0

t
o
n
n
e
)
Durgapur Nasik Bangalore Germany Durgapur addition Durgapur expansion
60
78
88.5

Source: Company, ICICIdirect.com Research

In view of the improved graphite demand in the medium term, capacity
expansion is underway again at GIL. The company is expected to increase
its graphite electrode capacity through the brownfield route at its existing
location in Durgapur by ~31% (10,500 tonne) to 44,500 tonne by FY12E at
a competitive cost of Rs 187.5 crore. The focus of the expansion plan is to
provide the existing facility with advanced technology and greater energy
efficiency. The additional capacity is expected to be on stream by
H2FY12E and would result in YoY topline growth of ~22% in FY12E on a
consolidated basis for the company.
GIL has achieved a smart build-up in capacity in
graphite electrode manufacturing during the last five
years through brownfield expansion at Durgapur and
investment in its overseas subsidiary in Germany
The company is expected to increase its graphite
electrode capacity through the brownfield route at its
existing location in Durgapur by ~31% (10,500 tonne)
to 44,500 tonne by FY12E at a competitive cost of Rs
187.5 crore


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 35
Partial backward integration and power capacity build-up an added advantage
GIL enjoys an added advantage over its peers on account of its CP coke
manufacturing capacity of 30,000 tonne and captive power plants of 33
MW through hydel and multi-fuel routes, which provides backward
integration benefits. The captive power capacity is being expanded by 50
MW at the companys Durgapur plant at a capex of Rs 214 crore. Graphite
manufacturing process is power intensive and requires ~6000 units of
power for producing one tonne of graphite electrode. Taking this into
account, the new capacity of 50 MW is enough to meet all the captive
power requirements of the companys Durgapur plant even at its
expanded capacity of 44,500 tonne.

Exhibit 52: Power sourcing metrics
Plant
Capacity
(tonne)
Power
reqd./tonne
(units)
Total power
reqd.(mn
units) Current sourcing FY12 sourcing
Durgapur 34000 6000 204 Supply from DVC CPP of 50 MW
Nasik 13000 6000 78 Supply from MSEB
Supply from KSK
energy at lower cost
Bangalore 13000 6000 78
18 MW Hydel power
plant, supply from
grid

Source: Company, ICICIdirect.com Research

Diversification benefits through other businesses
The company has small exposure to other business segments like
impervious graphite equipment business (IGE), GRP pipes & tanks
business and speciality steel business, which provides it with
diversification benefits. The company has been making good progress in
these segments. We expect the total revenue from its other businesses to
more than double from Rs 102 crore in FY09 to Rs 228.6 crore in FY12E.

Exhibit 53: Revenue from other business segments
47.5
60.8
50.0 49.0
61.6
72.0
44.0
59.1
42.2 45.0
59.4
76.2
9.8
45.9
68.9
80.3
0.0
50.0
100.0
150.0
200.0
250.0
FY07 FY08 FY09 FY10E FY11E FY12E
(
R
s

C
r
o
r
e
)
)
IGE GRP pipes & tanks Special steel

Source: Company, ICICIdirect.com Research


The company is expanding its captive power
capacity by 50 MW at Durgapur to reduce its power
costs and achieve better backward integration
The company has been making good progress in these
segments. We expect the total revenue from its other
businesses to more than double from Rs 102 crore in
FY09 to Rs 228.6 crore in FY12E


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 36
Realisation and cost of production to trend upwards
Graphite electrode prices have risen gradually during the last few years
due to robust demand, increase in raw material prices and oligopolistic
nature of the industry. We expect graphite electrode prices to remain
subdued in FY11E before rising again in FY12E on the back of strong
demand.

Exhibit 54: Blended realisation movement
80
100
120
140
160
180
200
220
240
FY07 FY08 FY09 FY10E FY11E FY12E
(
'
0
0
0

R
s
/
t
o
n
n
e
)
Blended Realisation

Source: Company, ICICIdirect.com Research

We expect the overall cost of production to keep trending upwards but
remain largely under control for GIL, going forward. This is despite the
increase in cost of its key raw material, needle coke, due to reduction in
costs on account of power, lower manpower costs and operational
efficiencies reducing other costs.

Exhibit 55: Cost of production break-up
-20
0
20
40
60
80
100
120
140
160
FY07 FY08 FY09 FY10E FY11E FY12E
(
'
0
0
0

R
s
/
t
o
n
n
e
)
Coke Pitch Other RM Power Labour Others

Source: Company, ICICIdirect.com Research



Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 37
We expect overall cost as percentage of sales to remain at ~80% in both
FY11E and FY12E, thus ensuring ~20% operating margin for the
company.

Exhibit 56: Cost metrics
0
200
400
600
800
1000
1200
1400
1600
1800
2000
FY07 FY08 FY09 FY10E FY11E FY12E
(
R
s

C
r
o
r
e
)
)
30
40
50
60
70
80
90
(
%
)
Net Sales Cost Cost as % to sales

Source: Company, ICICIdirect.com Research

On competitive footing with global peers
Due to its low cost structure on account of India advantage, GIL has
remained on a competitive footing as compared to global peers in the last
few years. We expect it to stay slightly ahead of the competition in terms
of profitability, going forward. We expect GIL to achieve EBIT margin of
~19% in both FY11E and FY12E. In contrast, consensus estimates for
global peers indicate EBIT margins well below 15% in the next few years
for players like SGL and Tokai Carbon.

Exhibit 57: EBIT margin comparison
0
5
10
15
20
25
30
35
Graftec SGL Tokai Carbon GIL HEG
(
%
)
CY07/FY08 CY08/FY09 CY09/FY10E CY10/FY11E CY11/FY12E
GIL's EBIT margins
slightly ahead of
global peers

Source: Company, ICICIdirect.com Research

We expect the overall cost as percentage of sales to
remain at ~80% in both FY11E and FY12E, thus
ensuring ~20% operating margins for the company


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 38
Financials
Steady revenue growth
The company reported a consolidated topline of Rs 1331.5 crore and Rs
1501.0 crore in FY08 and FY09, respectively. The topline has grown at a
CAGR (FY07-FY09) of 10.1%. We expect the topline to grow at a CAGR
(FY09-FY12E) of 5.6% to Rs 1766.8 crore, backed by sales volume CAGR
(FY09-12E) of 11%.

Exhibit 58: Steady revenue growth (Consolidated)
1331.5
1501.0
1294.9
1443.4
1766.8
22.4%
11.5%
-13.7%
12.7%
400.0
600.0
800.0
1000.0
1200.0
1400.0
1600.0
1800.0
2000.0
FY08 FY09 FY10E FY11E FY12E
(
R
s

c
r
o
r
e
)
)
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Net Sales YoY Growth
Sales CAGR (FY09-12E) - 5.6%

Source: Company, ICICIdirect.com Research

Healthy EBITDA margin, going forward
GIL reported strong EBITDA of Rs 307.6 crore in FY09 with EBITDA
margin of 20.5% on a consolidated basis. The company has shown a very
strong standalone performance in 9MFY10 and has reported standalone
EBITDA margins of 35.4%. However, the subdued performance of its
overseas subsidiary is expected to keep the consolidated margin at a
lower level. Going forward, we expect the company to maintain healthy
EBITDA margins on account of its low cost structure and robust demand.
We expect the company to clock EBITDA and PAT margin of 20.8% and
11.8%, respectively, in FY12E.
Exhibit 59: Margins to sustain at higher levels
20.8%
20.5%
27.8%
20.5%
20.8%
11.8% 11.5%
15.9%
15.7%
10.7%
0.0%
10.0%
20.0%
30.0%
FY08 FY09 FY10E FY11E FY12E
EBITDA % PAT %

Source: Company, ICICIdirect.com Research

We expect the topline to grow at CAGR (FY09-
FY12E) of 5.6% to Rs 1766.8 crore, backed by sales
volume CAGR (FY09-12E) of 11%
We expect the company to clock EBITDA and PAT
margin of 20.8% and 11.8%, respectively, in FY12E


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 39
Good return ratios
HEG reported strong return ratios in FY09 on account of higher
profitability. We expect the company to maintain good return ratios,
going forward, and achieve RoCE and RoIC of 16.4% and 20.3%,
respectively, in FY12E on the back of strong operational performance
overall and completion of its expansion and capex programme.

Exhibit 60: Strong return ratios
23.4
20.4
13.0
12.0
17.3
25.2
16.4
14.5
19.3
18.3 18.6
21.4
19.1
20.3
20.7
5.0
10.0
15.0
20.0
25.0
30.0
FY08 FY09 FY10E FY11E FY12E
(
%
)
RoNW RoCE RoIC

Source: Company, ICICIdirect.com Research

Balance sheet remains extremely strong
The company boasts of an extremely strong balance sheet with debt-
equity ratio of 0.5, net worth of ~Rs 1,100 crore and cash of more than Rs
250 crore. The company expects to complete its expansion largely
through internal accruals accumulated from strong cash flow generation.
We expect the net worth of the company to increase to ~Rs 1,671 crore
and debt-equity ratio to drop to 0.3 by FY12E.

Exhibit 61: Strong balance sheet
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
1400.0
1600.0
1800.0
FY08 FY09 FY10E FY11E FY12E
(
R
s

c
r
o
r
e
)
)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
(
R
a
t
i
o
)
Net Worth Debt D/E

Source: Company, ICICIdirect.com Research


We expect the company to maintain good return ratios
going forward, and achieve RoCE and RoIC of 16.4%
and 20.3%, respectively, in FY12E on the back of a
strong operational performance overall and completion
of its expansion and capex programme


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 40
Valuations

GIL is the larger of the two graphite players in India. It enjoys a
production presence in Europe and has diversification benefits through
GRP pipes/tanks and special steel businesses. We have valued GIL
using P/E and EV/EBITDA methodology to arrive at a target price of Rs
95. We are initiating coverage on the stock with an ADD rating.

P/E based valuation of Rs 94.6/share
At the CMP of Rs 88, the stock is trading at 10.5x FY11E EPS of Rs 8.4 and
8.4x FY12E EPS of Rs 10.5. The stock is trading at a discount of ~39% as
compared to global average on CY11/FY12 earnings. We value the stock
at 10x (30% discount to global average) the average of FY11E and FY12E
consolidated EPS and arrive at a fair value of Rs 94.6/share.

Exhibit 62: P/E based valuation
(Rs) FY11E FY12E
EPS (Cons.) 8.4 10.5
Weightage 0.5 0.5
Adj. EPS 9.5
Average global P/E (x) 13.8
Discount given 30%
P/E (x) 10
Total Value/Share 94.6

Source: Company, ICICIdirect.com Research

Exhibit 63: Global P/E valuation comparison
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
P/E
GIL 6.4 7.3 10.5 8.4
Graftec 6.8 24.8 12.0 9.0
SGL 7.1 30.1 29.6 15.0
Tokai Carbon 9.0 72.7 22.0 16.7
Showa Denko 30.1 NA 20.8 14.4
Average for global players 13.3 42.5 21.1 13.8
Discount (%) 51.8 82.8 50.4 39.2

Source: Company, ICICIdirect.com Research

We value the stock at 10x (30% discount to global
average) the average of FY11E and FY12E
consolidated EPS and arrive at a fair value of Rs
94.6/share


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 41
EV/EBITDA based valuation of Rs 95.4/share
The stock is trading at a discount of ~18-30% as compared to global
average on CY10-11 earnings. We value the stock at 6x (15% discount to
global average) the average of FY11E and FY12E consolidated EBITDA
and arrive at a fair value of Rs 1768.4 crore for its graphite business,
which translates to a value of Rs 95.4/share.

Exhibit 64: EV/EBITDA based valuation
(Rs Cr) FY11E FY12E
EBITDA (Cons.) 295.3 366.7
Weightage 0.5 0.5
Adj. EBITDA 331.0
Average global EV/EBITDA (x) 7.0
Discount given 15%
EV/EBITDA (x) 6
EV 1986.0
Less: Net debt 99.7
Total market cap 1886.3
No. of shares (Cr) 19.8
Total value/share (Rs) 95.4

Source: Company, ICICIdirect.com Research

Exhibit 65: Global EV/EBITDA valuation comparison
CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12
EV/EBITDA
GIL 6.0 4.3 5.5 5.0
Graftec 4.2 12.6 7.2 5.7
SGL 4.6 11.4 9.6 6.8
Tokai Carbon 4.5 10.1 6.9 5.5
Showa Denko 8.2 14.4 7.5 6.7
Average for domestic players 5.4 12.1 7.8 6.2
Discount (%) -11.6 64.3 29.4 18.7

Source: Company, ICICIdirect.com Research

Based on the average of the above two valuation methodologies, we have
arrived at a target price of Rs 95 for the stock and initiate coverage on the
stock with an ADD rating.
We value the stock at 6x (15% discount to global
average) the average of FY11E and FY12E
consolidated EBITDA and arrive at a fair value of Rs
1768.4 crore for its graphite business which
translates to a value of Rs 95.4/share



Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 42
Table and Ratios

Exhibit 66: Profit & loss account (Rs Crore)
FY08 FY09 FY10E FY11E FY12E
Net sales 1331.5 1501.0 1294.9 1443.4 1766.8
Growth (%) 12.7 -13.7 11.5 22.4
Oerating Expenditure 1054.0 1193.4 935.6 1148.1 1400.1
EBITDA 277.6 307.6 359.3 295.3 366.7
Growth (%) 10.8 16.8 -17.8 24.2
Other Income 29.4 25.3 27.8 30.6 33.7
Depreciation 41.0 44.0 47.0 51.5 60.5
EBIT 266.0 288.9 340.2 274.4 339.9
Interest 42.9 35.1 28.7 22.3 25.3
PBT 223.1 253.8 311.5 252.1 314.6
Growth (%) 13.8 22.7 -19.0 24.8
Tax 80.7 18.3 105.9 85.7 107.0
Extraordinary Item 0.0 0.0 0.0 0.0 0.0
Rep. PAT before MI 142.4 235.5 205.6 166.4 207.6
Minority interest (MI) 0.0 0.0 0.0 0.0 0.0
Rep. PAT after MI 142.4 235.5 205.6 166.4 207.6
Adjustments 0.0 0.0 0.0 0.0 0.0
Adj. Net Profit 142.4 235.5 205.6 166.4 207.6
Growth (%) 65.4 -12.7 -19.0 24.8

Source: Company, ICICIdirect.com Research

Exhibit 67: Balance sheet (Rs Crore)
FY08 FY09 FY10E FY11E FY12E
Equity Capital 30.2 34.2 34.2 39.6 39.6
Preference capital 0.0 0.0 0.0 0.0 0.0
Reserves & Surplus 724.8 1083.2 1221.6 1487.6 1631.5
Shareholder's Fund 755.0 1117.4 1255.8 1527.2 1671.1
Minority Interest 0.0 0.0 0.0 0.0 0.0
Secured Loans 396.4 345.6 295.6 295.6 295.6
Unsecured Loans 222.7 182.9 182.9 75.9 125.9
Deferred Tax Liability 70.0 62.8 79.5 79.5 79.5
Source of Funds 1444.1 1708.6 1813.7 1978.2 2172.1
Gross Block 834.5 994.6 1044.6 1144.6 1344.6
Less: Acc. Depreciation 303.0 347.0 394.0 445.5 506.0
Net Block 531.5 647.6 650.6 699.1 838.6
Capital WIP 9.5 14.0 34.0 74.0 164.0
Net Fixed Assets 541.0 661.6 684.6 773.1 1002.6
Investments 105.7 101.0 101.0 101.0 101.0
Cash 65.9 87.8 324.8 384.4 220.8
Trade Receivables 411.8 318.2 354.8 355.9 435.7
Loans & Advances 108.3 131.9 129.7 129.7 129.7
Inventory 533.8 694.9 487.0 566.2 690.5
Total Current Asset 1132.6 1246.6 1310.1 1450.2 1490.5
Current Liab. & Prov. 335.2 300.6 281.9 346.0 422.0
Net Current Asset 797.4 946.1 1028.2 1104.1 1068.6
Application of funds 1444.1 1708.6 1813.7 1978.2 2172.1

Source: Company, ICICIdirect.com Research



Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 43

Exhibit 68: Cash flow statement (Rs Crore)
FY08 FY09 FY10E FY11E FY12E
Profit after Tax 142.4 235.5 205.6 166.4 207.6
Dividend 53.0 60.0 67.2 51.9 63.7
Depreciation 41.0 44.0 47.0 51.5 60.5
Cash Profit 136.6 212.3 202.1 166.0 204.4
Inc./Dec. in Current Liab. 83.5 -34.6 -18.6 64.1 75.9
Inc./Dec. in Current Assets 165.6 92.2 -173.5 80.4 204.0
CF from operations 54.5 85.5 357.0 149.7 76.4
Purchase of Fixed Assets 20.8 164.7 70.0 140.0 290.0
Inc./Dec. in Investment -4.9 -4.8 0.0 0.0 0.0
CF from Investing -16.9 23.0 -70.0 -140.0 -290.0
Inc./Dec. in Debt -86.5 -90.7 -50.0 -106.9 50.0
Inc./Dec. in Equity capital 23.1 4.0 0.0 156.9 0.0
CF from Financing -63.4 -86.7 -50.0 50.0 50.0
Opening Cash balance 91.7 65.9 87.8 324.8 384.4
Closing Cash balance 65.9 87.8 324.8 384.4 220.8

Source: Company, ICICIdirect.com Research

Exhibit 69: Key ratios (%)
Return ratios FY08 FY09 FY10E FY11E FY12E
RONW 20.4 25.2 17.3 12.0 13.0
ROCE 18.6 18.3 19.3 14.5 16.4
ROIC 21.4 20.7 23.4 19.1 20.3
DuPont ratio analysis
PAT/PBT 63.8 92.8 66.0 66.0 66.0
PBT/EBIT 83.9 87.8 91.6 91.9 92.6
EBIT/Net sales 20.0 19.2 26.3 19.0 19.2
Net Sales/ Total Asset 92.2 87.8 71.4 73.0 81.3
Total Asset/ Networth 191.3 152.9 144.4 129.5 130.0
Spread of RoIC over WACC
RoIC 21.4 20.7 23.4 19.1 20.3
WACC 12.0 12.0 12.0 12.0 12.0
EVA (Rs Crore) 119.9 132.1 158.2 105.3 154.2
RoIC-WACC 9.4 8.7 11.4 7.1 8.3
Turnover ratios (days)
Inventory turnover 184.9 212.5 190.0 180.0 180.0
Debtor turnover 112.9 77.4 100.0 90.0 90.0
Creditor turnover 116.1 91.9 110.0 110.0 110.0
Current Ratio 3.4 4.1 4.6 4.2 3.5
Quick ratio 0.2 0.3 1.2 1.1 0.5

Source: Company, ICICIdirect.com Research




Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 44

Exhibit 70: Profitability and per share data
Profitability ratios (%) FY08 FY09 FY10E FY11E FY12E
EBITDA Margin 20.8 20.5 27.8 20.5 20.8
PAT Margin 10.7 15.7 15.9 11.5 11.8
Per share data (Rs)
Revenue per share 88.1 87.8 75.7 73.0 89.3
EV per share 117.6 107.9 91.1 82.2 93.0
Book Value 50.0 65.3 73.4 77.2 84.5
Cash per share (Incl. Invst.) 11.4 11.0 24.9 24.5 16.3
Attributable EPS 9.4 13.8 12.0 8.4 10.5
Dividend per share 3.6 3.9 3.9 2.6 3.2

Source: Company, ICICIdirect.com Research

Exhibit 71: Valuation ratios
Valuation (x) FY08 FY09 FY10E FY11E FY12E
P/E 9.3 6.4 7.3 10.5 8.4
P/BV 1.8 1.3 1.2 1.1 1.0
EV/EBITDA 6.4 6.0 4.3 5.5 5.0
FCF Yield (%) 2.5 -5.3 19.1 0.6 -12.3
EV/Sales 1.3 1.2 1.2 1.1 1.0
Div Yield (%) 4.1 4.4 4.5 3.0 3.7

Source: Company, ICICIdirect.com Research


Graphite India Ltd (CAREVE)
ICICIdirect.com | Equity Research
Page 45

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,
ICICI Securities Limited,
7
th
Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai 400 093


research@icicidirect.com

ANALYST CERTIFICATION
We /I, Pankaj Pandey MBA; Goutam Chakraborty, Msc; Abhisar Jain, MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views
expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or
indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
Disclosures:
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generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts
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meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without
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