ICICI Direct Gives A Buy On This Graphite Electrode Manufacturer

On June 30, the brokerage firm ICICI Direct has placed a buy call on Graphite India for a first target of Rs. 740 and final target of Rs. 800. The company has recommended the buy price to be Rs. 635 and the stop loss suggested for the trade is at Rs. 565. Considering the buy recommendation price, the targeted upside, means a potential gain of over 16 percent.

Q4 performance has been remarkable

The graphite manufacturer turned profitable for the quarter ended March 2021 and posted net profit of Rs. 64 crore as against a loss of Rs. 7 crore in the year ago period. Largely the profitability has been on account of a decrease in material or input cost which enabled the realization of higher EBITDA margins in the current quarter.

Optimistic management outlook

The management is optimistic on the outlook for the company given the current recovery in the demand for electrodes as well as price stability. "During Q4 FY21, electrode prices started to recover from the lows. Furthermore, with increased steel production around the world, demand for electrodes has started to pick up and prices have started to stabilise. This augurs well for Graphite India, which is the largest Indian producer of graphite electrode," said the brokerage firm.

Other positives seen for the stock are:

• Increase in net profit with growth in margins quarter on quarter
• Graphite India is a low debt company with debt to equity basis on a consolidated basis at 0.05 for 2021
• Revenue has been increasing for the past 3 quarters
• Profits have been increasing for the past 3 quarters
• Graphite India has zero promoter pledge
• FII or FPIs have also been increasing their stake in the company to 14.78% in March 2021. Also, the number of FII/ FPIs have also increased in the March quarter to 185.

Valuation

"We value the stock at 6.5x FY23E EV/EBITDA and arrive at a target price of Rs 800 and maintain our buy recommendation on the stock," the brokerage firm added.
ICICI Direct further said that the gradual pick-up in demand from steel consuming sectors in H2 FY21 has led to increase in demand for steel and electrode. "The lower exports from China may bode well for other EAF steel producing nations, thereby likely to have a positive rub-off on graphite electrode demand," it said.

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