Graphite Electrode : Graphite India/HEG

madhavikkutti · May 8, 2018, 1:50pm

Hi @adityajp, The HEG Q4 results are exactly as per my expectations. I am not sure about the exact utilization. However, assuming it to be as 90% and Rs. 66 per USD, the Graphite Electrode price realization was around USD 10,884 per MT and the raw material (bulk of it would be needle coke) around USD 1,684 per MT.

Current LTM PE works out to be 13.5 and if HEG just repeats this quarter’s performance over the next 4 quarters, the forward P/E after Mar-2019 results would be just 4.6.

Using the same assumptions (GI sales price, raw materials cost as in HEG) and a capacity utilization of 90%, I calculate that, Graphite India will come up with sales of Rs. 1,616 crores and net profit of Rs. 695 crores (including the subsidiary), which should translate to an EPS of Rs. 35.6.

naishadh · May 9, 2018, 11:55am

According to the MD of HEG - They will do 6500 Crores in Rev. and that translates to 3500 Cr in PAT for FY 19. Those are jaw dropping numbers - Thoughts?

bsivas · May 9, 2018, 12:10pm

For 85% utilization (80000x0.85=68000 MT), if they realize 12000 USD/MT (on average) the revenue will be 5304 crore (65rs/usd). But the needle coke availability and price is the concern and it will reduce the profit margin. To me, 6500 cr revenue seems little exaggeration.

madhavikkutti · May 9, 2018, 12:23pm

Yes, extremely rosy picture is being painted by Ravi Jhunjhunwala. Rs 6,500 crores looks like achievable, as the Graphite Electrode price must be upwards of USD 14,000 per MT in FY19.

Following are a few other highlights:

FY18 Q4 utilization was 84%; By Q3 or Q4 of FY19, the utilization will be in the high 80s
Current spot prices are from 17,000 USD to 23,000 USD
100% contracts already sold for the next 2 quarters
Any increase in needle coke price can be passed onto the market
Expect the FY19 H2 prices to be higher than H1 prices
At least 6,500 crores revenue in FY19

Q4 utilization was 84% and the raw materials cost was approximately 15.5% of the revenue, Based on the above utilization figure, I now recalculate the Graphite Electrode revenue as approximately USD 11,700 per MT and the raw material cost around USD 1,800 per MT. Correspondingly, my revised estimate for Graphite India for Q4 is a sales of Rs. 1,737 crores and net profit of Rs. 811 crores (including the subsidiary and 90% utilization), which should translate to an EPS of Rs. 41.5 for Q4.

pandi.rao · May 9, 2018, 1:15pm

Hi @madhavikkutti From the story that we get from HEG and keeping that as a reference point for Graphite India do you see the Electrode story still intact atleast till FY19 and the earning reported for FY18 is still not the peak.

Your inputs would be helpful.

Disclaimer : Invested in Graphite India

madhavikkutti · May 9, 2018, 3:03pm

Hi @pandi.rao, As I am not an expert in this industry (graphite electrode), I have to base my judgment on the various news articles and the opinions of the industry veterans. After reading many news articles and listening to experts like Ravi Jhunjhunwala, my best judgement is that, electrode story will be intact for FY19. Following are the key reasons:

Steel production over EAF route is expected to increase worldwide, driving GE consumption
China does not have the technology to produce UHP grade electrodes, as per Ravi Jhunjhunwala and the lower grades of electrodes that they produce impacts only about 25÷ of the production of the Indian GE manufacturers.
Needle coke shortage will restrict addition of new capacities
If at all any new capacities are coming up, it will take quite a long time to setup
Steel producing companies would not mind a lot, even if the Graphite Electrode price rises to USD 25,000 per MT, as the overall production cost for steel still will not be significantly high, as 1 MT of steel production requires only 3 kilos of GE

pandi.rao · May 9, 2018, 4:36pm

Thanks @madhavikkutti for your inputs, greatly appreciated.

sukhlani1 · May 9, 2018, 5:38pm

I think there are two gaps :

Utilisation should be assumed at 90%
Realisation at 14000 usd
Dollar exchange at 65

With this the revenue do come at 6500 crs

Additionally, the rationale for the confidence can be gauged from the following :

There capacity is sold for next six months completely
The realisation price that was hinted was northwards of 14000 , infact it can be in the range of 17000+ looking at the confidence
The Tone sounded minimum of 6500 cr in the interview

Disc : Already invested in GI and views may be biased

madhavikkutti · May 10, 2018, 1:17pm

If the graphite story stays intact during FY19, we can expect really jaw-dropping numbers from both HEG and Graphite India during FY19.

Based on HEG Q4 results, raw materials cost in Q4 was just 15.5% of the sales and the fixed cost was around Rs. 200 crores. While the fixed cost is relatively very small and would more or less remain same over the 4 quarters of FY19, let us for now assume that, the raw materials cost is always 15.5% of the revenue (in fact, for HEG, the raw material cost as a % of revenue reduced from Q3 to Q4).

If we go by what Vardhman Special Steels said during early March of this year, and considering Ravi Jhunjhunwala’s recent inputs, I feel, it is reasonable to assume a weighteed average price of USD 16,000 for Graphite Electrodes during FY19.

For Graphite India, Q3 Capacity utilization was 95%. For HEG, Q4 Capacity utilization was 84%. Let us assume that, during FY19, Graphite India will continue to enjoy the 95% capacity utilization (which is 95,000 MT, including the subsidiary). For HEG, let us assume it as 87% (69,600 MT).

Based on the above assumptions, I calculate the following figures for FY19:

Graphite India: Revenue: Rs. 10,184 crores; PAT: Rs. 5,167 crores; Consolidated EPS: Rs. 264.5
HEG: Revenue: Rs. 7,461 crores; PAT: Rs. 3,585 crores; Consolidated EPS: Rs. 897.1

manoopatil · May 11, 2018, 1:09pm

Graphite has came out with results. Not as impressive at HEG’s result was for Q4. PAT margins are about 30% vs the PAT margin of 46% in case of HEG.

Views invited.

Graphite Q4.pdf (225.3 KB)

vivekchoraria · May 11, 2018, 4:38pm

Please go through the presentation just released and it will be clear the numbers seem a bit subdued because the german operations were not as profitable as of now but the management is now guiding for significant margin expansion.

From the presentation, one can deduce that the german subsidiary did sales of about 308 crores and ebitda of only 92 crores which translates to a margin of 30 % against the standalone average of 49%.

As and when this tends to the industry average as guided by the management in the commentary, the apparent differential between HEG and Graphite India’s numbers will come down.

Shrihari · May 13, 2018, 5:24pm

Here is some analysis on HEG vs Graphite India on current quarter’s performance as well as what can be expected going forward.

a) Standalone Revenue performance: HEG posted 1293 crores in revenues in Q4. Going by the company specified utilization of 85%, the company has sold 17000 tons of graphite electrodes at a sizable $11700 per ton, which is more than 4 times the price in early-2017.

GI: GI posted revenues of 1152 crores in revenues as pertaining to graphite electrodes. Given the company specified utilization of 100%, it has sold 20000 tons at $8860 a ton. This is what GI was referring to when they said that they have legacy contracts and therefore the lower rates.

HEG has played the graphite electrode upcycle well. They stopped low priced long-time range contracts much earlier than GI. But starting next quarter, we will see some similarity between HEG and GI

b) Cost of Needle coke: HEG again played this well. They stocked up on needle coke when it was at a low price, identifying the upcycle really well. At a cost base of 150 crores, the price of materials consumed works out to only $ 1320 per ton, which is primarily driven by needle coke
GI: GI, with a cost base of 300 crores, has paid approximately $2300 per ton for the price of materials consumed

c) GI has the same employee benefits as HEG and both are debt free as of today. The depreciation costs are negligible. GI has approx. 20 crores higher fuel and supply costs and an additional 30 crores in other expenses and consumption of spare parts, but this could be driven by the incremental sales of 3000 tons relative to HEG. GI’s subsidiary performance was not upto the mark this quarter but this will change starting next quarter according to the CEO

d) Here is where things will change quite a bit: The cost of graphite electrodes has shot up to $17000 per ton. The spot rates are even higher. This is as per HEG’s CEO. For HEG, even if cost of materials consumed goes up 5 times more than the current quarter, the incremental costs will be taken care of by the incremental revenue, and HEG can still post the same profit and EPS as it posted today.

e) Graphite India’s revenue will increase even more and approximately double as the legacy contracts expire, based on above numbers. The subsidiary will further add 20% to the topline, but will have additional manufacturing costs as it is located in a developed country (Germany). Since the needle coke manufacturers have moved to quarterly contracts due to increased demand, the cost structures of both GI and HEG will remain the same. GI might make more profits due to higher capacity starting next quarter

f) All the above is contingent on graphite electrodes prices being high and this needs to be closely watched.

g) GI has an edge with respect to the following parameters: 1) It has cash and financial assets worth approx. 1275 crores while HEG has 250 crores (Book value of GI is 850 crores higher). 2) It is better vertically integrated and has inhouse Calcined Petroleum Coke manufacturing that is used in electrode manufacturing and 3) It has already invested in value added carbon products used in auto, aerospace, chemical and other industries while HEG has now started doing so.

Disclosure: Hold both HEG and GI in a ratio of 2:1

Mahendra243 · May 15, 2018, 2:15am

Sorry for my ignorance…can somone tell me…why only jefferies cover GE scrips? and not to mention HEG MD coming often on business news TV? IMO i think he should concentrate more on his business

madhavikkutti · May 16, 2018, 2:12am

Graphite electrodes ‘no longer a commodity but a strategic material’:

https://www.metalbulletin.com/Article/3807175/IREPAS-78-WARSAW-Graphite-electrodes-no-longer-a-commodity-but-a-strategic-material.html

Shrihari · May 17, 2018, 5:50pm

This is some simple analysis below of HEG and Graphite India versus its international competitors, Tokai Carbon and Graftech. All numbers in crores

There are many simplistic assumptions but gives a snapshot of a few key numbers. This analysis ignores capacity utilisation, capacity expansion plans and needle coke specific vertical integration (E.g. Graftech) and product portfolio (graphite electrodes versus other carbon products). It also assumes that the numbers shown in Jan-March 2018 are representative of what can be done annually. (This is of course not true for Graphite India as it might show higher consolidated numbers than HEG going forward due to expiration of legacy contracts. So GI’s ratios can be same or better than HEG’s).

The targets given by analysts for Graftech are in the range $23-25 per share which is more than 20% higher than current levels. (see below links).

https://weeklyhub.com/graftech-international-eaf-reaching-an-inflection-point-rbc-capital-initiates-shares-at-outperform-with-23-0-target/

Further, in the link below, you can access Tokai Carbon’s investor presentation for Jan-Mar 2018 quarter. While Tokai Carbon posted profits of 565 crores in Jan-March 2018, it is now forecasting profits of 2854 crores for calendar year 2018. That means quarterly profits will go up from 565 crores last quarter to an average of 763 crores every quarter going forward. This is a 35% jump from last quarter to future quarters. This is mostly due to increase in price of electrodes and less due to volume expansion.

madhavikkutti · May 20, 2018, 7:50pm

Please find below, my estimates for FY’19 (Apr’18 to Mar’19) for Graphite india and HEG. I have used my best judgement, based on the Q4’18 results and the forward-looking statements in the recent interviews of the CEO’s of these two companies. I feel that, weighted average price of a minimum of USD 16,000 for Graphite Electrodes is very much a possibility for FY’19. Also, rupee appreciation is going to help these companies significantly, as 60-70% of their products are being exported.

Please let me know, if any of the assumptions made by me in the following calculation sheet is way off the mark:

vivekchoraria · May 21, 2018, 5:58am

assume needle cost at 3500 usd / tonne. ASP at 14500 a tonne. ebitda of 5200 crores and pat of 3500 crores.

Shrihari · May 21, 2018, 10:17am

We can use a back of the envelope calculation. Since the best forecasts are those provided by Tokai Carbon for all of 2018 (screenshot below), we can use their assumptions.
The Japanese firm is forecasting revenues of 76.12 Billion Yen for the remaining 3 quarters in calendar year 2018 through their graphite electrode business. The EBIT forecast is around 40 Billion Yen.

EBIT margin for the rest of the year is forecasted to be 52.5%.
Assuming a little higher EBIT margins for HEG and GI as they are debt free and have lower costs and tax rate of 30%, net profit margins should be around 40% for the rest of the year.

If sale price per ton for graphite electrodes is $15000 USD for both HEG and GI for the rest of 2018 and if they each sold 20000 and 24000 tons every quarter, the net profit works out to be 804 crores and 965 crores, or a quarterly EPS of approx. 200 and 49 respectively.

Needle coke shortage is a risk and the screenshot below (from Tokai Carbon) summarizes the risk and as well as the global suppliers.

Gaurav_Agarwal · May 21, 2018, 1:25pm

@Shrihari
Capacity of Tokai Carbon is 96k ton/annum.
Assuming 90% capacity utilization, production/quarter = 22k ton

q1fy18 revenue/ton = $7,000/ton
q2fy18 revenue/ton = $8,890/ton
h2fy18 revenue/ton = $11,280/ton

Assuming dollar at 110 yen.

How can rate of $15k/ton be justified for Graphite/HEG based on these calculations?

madhavikkutti · May 21, 2018, 1:37pm