Massive shut down of steel units using induction furnace, shut down of graphite and electrode manufacturing facilities for not complying with pollution control norms in China has benefited Indian manufacturers of electrodes and graphite.
Graphite electrodes are used in the electric arc furnaces that turn scrap into steel. Global shortage of electrodes have resulted in their prices rising at an unprecedented level. Prices of graphite electrodes rose from $3000 a tonne to $16,000 a tonne before falling back to $10,000 levels.
Despite the volatility in prices of graphite electrodes, all players in the industry stand to gain as reduction in production capacity in China continues to have an impact on global demand for the product. Graphite electrodes are preferred due to its high conductivity and tolerance to extremely high levels of heat during steel.
Amidst the bullish trend in graphite electrode prices, here is an outlook on the major players in the industry.
#Graphite India Ltd (BSE: 509488, NSE: Graphite) Category: Large Cap
Graphite India Ltd established in 1967 in collaboration with Great Lakes Carbon Corporation (GLCC) is a pioneer in the manufacture of graphite electrodes, carbon and graphite speciality products. It has 3 manufacturing plants with a capacity of 80,000 tons per annum. It also has a subsidiary company in Nuremberg, Germany with a capacity of 18,000 tons per annum. The company accounts for 12.6% of global electrode capacity having clients in 50 countries. Average capacity utilisation has risen to 74% in FY 2017 compared to 62% in FY2016.
The management team is led by KK Bangur, Chairman and MBGadgil, Executive Director with long standing experience in the industry. The company has a consistent profit-making record over the years.
In September quarter, net profit has risen sharply to Rs 89.93 cr while sales rose 46.84% to Rs 461.90 cr. On a returns perspective, it has performed well on par with industry with montly returns of 45.17%, quarterly 112.02% and half yearly 369.83%.
It scores well on financial ratios with return on equity of 3.79%, on assets of 3.68%, net profit margin of 4.80%, sufficient liquidity and cash flows.
A Price Earnings Ratio (PE) of 82.71 indicates high valuation by market. On technical charts, Relative Strength Index (RSI) of 82 indicates bullish, overbought position while MACD has witnessed a bullish crossover and Average Directional Index (ADX) of 20 denotes range bound trading. Stochastic indicators are also bullsh.
Target: 920 Duration : 2 months Strategy: Buy/Hold
#Rasi Electrodes Ltd (BSE: 531233 NSE: ) Category: Small Cap
Rasi Electrodes headquartered in Chennai was established in 1994 and is known for its quality welding consumables. It also produces welding electrodes for the electric arc furnace (EAF) in steel making. The management team is led by Popatlal Kothari.
In 2016-17, turnover rose 16.31% to RS 26.84 cr while net profit fell 16.02% to Rs 84.56 lakh.
In September quarter, net profits fell 42.64% to Rs 0.30 cr while sales rose 6.22% to Rs 7.71 cr. On a returns perspective, it is underperforming the market with monthly returns of 17.48%, quarterly -8.31, and 3.18% half yearly.
On technical charts, RSI of 68.61 denotes bullishness, MACD is bearish, ADX of 14 denotes range bound trading while stochastic indicators are bulish.
Target: 9 Duration : 4 weeks Strategy: Buy/Hold
#HEG Ltd (BSE:509631, NSE: HEG) Category: Mid Cap
HEG Ltd, a leading manufacturer and exporter of Graphite Electrodes in India was established in 1977 with technical and financial collaboration with SocieteDes Electrodes Et RefractairesSavoie of France. It has the world’s largest single site plant of Graphite Electrodes with a production capacity of 80,000 MT per annum.
The company had suffered a loss of Rs 8 crore in 2015-16 and losses rose to Rs 49 cr in 2016-17. In the September quarter, the company earned a net profit of Rs 113.66 cr while sales rose 116.95% to Rs 409.54 cr.
On a returns perspective, 53% monthly, 173.16% quarterly and 591.35% half yearly is commendable while on financial parameters, it doesn’t score well on return on equity at -4.63%, on assets of -2.72% and net profit margin of -5.13%. it also doesn’t fare well on liquidity and cash flow ratios. Promoters hold 31.46% stake. It is trading at a PE of 107% indicating higher valuation by market.
On technical charts, RSI of 81.59 indicates bullish over bought position while MACD has witnessed a bullish crossover and ADX of 34 indicates uptrend. Stochastic indicators are also bullish.
Target: 2650 Duration : 3 weeks Strategy: Hold/Sell
#Panasonic Carbon India Co Ltd (508941, NSE: ) Category: Small Cap
Panasonic Carbon India was established in 1982 as Matsushita Carbon Co Ltd. It had technical assistanve from Matsushita Group and is now the sole manufacturer of high standard carbon rods (midget electrodes) in India. The company is headed by R Senthil Kumar, Managing Director and Kazuo Tadanobu (Promoter Director).
The company has reported net profit of Rs 15.78 cr in 2016-17 as against Rs 13.46 cr in 2015-16. It has maintained steady sales in its main product categories in the past two years and has increased the production capacity of smaller size carbon rods in line with the market trend by in house modification of the bigger size Carbo rods machineries to meet the increased demand in the domestic and international markets.
In September quarter, net profits fell 33.82% to Rs 3.35 cr while sales fell 6.67% to Rs 12.12 cr.On a returns perspective, 54.36% monthly, 53.14% quarterly and 79.19% half yearly trails behind competition.
On financial parameters, it gives good return on equity of 17.60%, return on assets of 16.27% and net profit margin of 32.31%. It also scores well on liquidity and cash flow ratios. Foreign promoters hold 63.27% stake. It is trading at a PE of 9.26 which means there is room for upward price movements.
On technical charts, RSI of 55 indicates neutral to bullish trend, while MACD line has witnessed a bearish crossover and ADX of 22 denotes range bound trading with stochastic momentum indicators bearish.
Target : Nil
Stock prices of graphite electrode manufacturers have rallied from the beginning of 2017 and was up 400-500 % towards year end and continues to consolidate at higher levels thanks to China clamp down on polluting electrode manufacturers and induction furnace type steel units. The industry was able to beat a 5 year slump to record better sales and profits. The bullish momentum is likely to continue to for some more time as global shortage of graphite electrodes for electric arc furnance (EAF) based steel making units are expected to continue. There is also a shortage of needle coke, the raw material used to make electrodes. With steel dumping from China also curbed in many countries, domestic demand for steel would be rising thereby creating a favourable situation for electrode makers.