Graphite electrodes are utilized in metal manufacturing by way of EAF, and thus have a excessive correlation with metal demand. Indian metallic shares have entered an improve cycle after ~2 weak years. Steel demand and pricing have improved sharply
q-o-q. Also, needle coke costs (key enter value for electrodes) have softened in Q2FY21. We increase FY22-23e EPS for GRIL and HEG by 16-40%. Despite a 25-60% rally in a month, valuations keep undemanding (~2x EV/Ebitda on FY23e). B/S stays sturdy. BUY
Global Industry: The world commodity outlook and costs appear to be enhancing, aided by Chinese macro information and constructive vaccine information. Steel demand has improved sequentially. Over July-Sept, in keeping with the World Steel Association, most international locations elevated metal manufacturing on a q-o-q foundation, though the tempo of recovery trusted the severity of the pandemic.
Domestic Industry: The Indian metal business noticed a robust sequential rebound, with Q2FY21 metal manufacturing up +73% q-o-q to 27.1mn Mt (flattish y-o-y), pushed by enchancment in industrial exercise and better exports. Spot costs for Indian HRC flat (metal) at the moment are 28-29% above Q2 common. Better metal demand sometimes augurs effectively for electrodes. GRIL mgmt stays cautiously hopeful that the downcycle of the electrode business appears to be bottoming out. With an uptick in financial exercise, GRIL expects progress within the medium time period.
Upgrade Cycle: Indian metals witnessed ~2 yrs of earnings downgrades over mid 2018 to 2020. However, the earnings cycle appears to have bottomed out. Graphite electrodes are used to make metal; thus improved metal demand (each home and world) augurs effectively for electrode ASPs.
Estimates: Factoring in present business dynamics and company commentary, we revise our key assumptions: (i) FY22-23e electrode ASPs up +4-8%; FY22e: $6.5k/MT; FY23e: $7.3k/MT; ASPs nonetheless 40-50% under upcycle peak of FY19. Also, firms are indicating softening needle coke costs (key RM) in Q2FY21. We lower our NC costs for FY22-23e by 8% to $2.3k/MT. These revisions result in 16-40% enhance in FY22/23e EPS. However, we anticipate FY21e EPS to say no, on account of (COVID) demand disruption, stock losses in H1FY21 and higher-cost needle coke stock, which might take a couple of extra quarters to liquidate.
Balance sheet, capex: GRIL and HEG proceed to exhibit sturdy B/S. As of Sept’20, GRIL’s internet money+investments stand at Rs 24 bn, HEG’s at Rs 7.6 bn. While GRIL has no capex plans on the anvil (capability at 98K MT), HEG is increasing capability by 20K MT (80K MT now); anticipated to fee in subsequent 2 years.
Reiterate Buy: Despite the sharp uptick (25-60%) in GRIL & HEG over the previous month, they nonetheless commerce at undemanding valuations (EV/Ebitda of ~3x/2x on FY22/23e). Retain Buy with revised DCF-based PT for GRIL at Rs 340, for HEG at Rs 1,400. Key dangers: Slowdown in EAF manufacturing, decrease utilisation/ASPs, increased NC value.