The Hindu Business Line : Graphite India: Buy

Exposure can be considered in the stock of Graphite India. At Rs 289, the stock trades at eight times its 2006-07 expected per share earnings. Robust demand and pricing outlook for its primary product graphite electrodes, strong demand for other products such as fibre reinforced pipes and tanks and graphite equipment and the turnaround of its acquired facilities in Germany lends strength to this recommendation.

Graphite India makes graphite electrodes that are consumed in electric arc furnace (EAF)-based steel plants. World over, the proportion of steel produced through the EAF route has consistently increased. Steel produced through the EAF process is expected to be about 38 per cent by 2010 compared to 33 per cent now. This is likely to ensure steady business for graphite electrodes. As there is a strong supply-demand mismatch for graphite electrodes at present, the prices are expected to remain firm in the near to medium term. Graphite India will benefit from the substantially higher realisations in 2006-07.

The company has expanded its capacities, the full impact of which will be reflected by way of higher volumes in 2006-07. This, combined with better realisations, can lead to a substantial growth in revenues and earnings.

The company is also planning to expand capacities at its German unit to increase its foothold in the European market. At present, the European Commission imposes a countervailing duty on electrodes originating from India. With higher capacities in Europe, Graphite India will be able to tap into the European market competitively.

Increase in raw material costs remains a principal risk. Prices of needle coke, a primary input for making electrodes is expected to remain firm, as it is a derivative of crude. However, price increase for electrodes is expected to offset the rise in raw material costs.

Among Graphite's other businesses, fibre reinforced pipes and tanks and graphite equipment is on a high growth trajectory. Graphite's current order book in this product-line at over Rs 75 crore, is more than three times the division's 2005-06 sales.

Given the strong growth prospects and improving realisations, we believe, the stock has potential for upside.

Sowmya Sundar

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