Disclaimer: I am not a SEBI registered adviser. All the information provided by me are for educational/informational purposes only.
In this article, I will be giving my analysis on Graphite India Ltd (GIL) through whatever learning I have learned by reading on value investing.
About the company:
Graphite India Ltd was started in 1967 and is currently largest electrodes manufacturer in India.
Management:
- M.B.Gadgil: He is company’s executive director and a qualified engineer with his studies completed in business management. Mr.Gadgil has been with the Company since 1978 and has a rich experience in the graphite electrode industry and was also “President” of the Company prior to his elevation as Executive Director from 1st July 2009.
- K.K Bangur: Descendant of the storied Bangur clan of Kolkata, Krishna Kumar Bangur chairs graphite electrodes-maker Graphite India. Mr. Bangur is the chairman of Graphite India Ltd.
Business Model:
- 98% of their revenue comes from company’s Graphite and Carbon Segment.
- Graphite electrode segment: A steel company uses two ways to make steel. Blast Furnace(BF) which creates a lot of pollution and Electric Arc Furnace(EAF) this way is more Eco-friendly. For producing Steel through EAF method companies need graphite electrode.
- Carbon segment: It contains mainly of Calcined Petroleum Coke(CPC) & Carbon Paste. The company sells two types of CPC, aluminum and graphite, which is derived from crude oil. These are primarily used in manufacture of anodes for use in aluminum smelters, manufacture of graphite electrodes and also used as carburizer in steel.
MOAT:
- India’s largest electrodes manufacturer
- Ranked 3rd Largest Graphite Electrode Manufacturer in the World
- Very strong balance sheet
- GIL is in a consolidated industry with significant entry barriers due to technology intensive nature of operations
- Comapny’s Powmex Steels Division (PSD) is engaged in the business of manufacturing high speed steel and alloy steel. PSD is the single largest manufacturer of High Speed Steel (HSS) in the country. HSS is used in the manufacture of cutting tools such as drills, taps, milling cutters, reamers, hobs, broaches and special form tools and these cutting tools are essentially used in – (a) automotive; (b) machine tools; (c) aviation; and (d) retail market.
- Operating margins remain one of the highest amongst the leading electrode manufacturers
Threats:
- Company’s PSD faces competition from small domestic producers and cheap imports from overseas manufacturers.
- The withdrawal of Anti-Dumping Duty by Government of India on graphite electrodes from China is expected to increase cheap imports in India which may have negative impact on volume and price of electrodes in the domestic market.
- Soon China will complete its process of shifting to EAF method and they will be well equipped to produce very large quantity of graphite electrodes.
- In 2019 USA issued the alert saying, parties who transfer or export graphite electrodes and needle coke to Iran run the risk of having blocking sanctions imposed on U.S.-based property and assets. Iran used to account for 5 per cent of its global turnover.
- GIL has built a strong balance recently and the main reason behind it was China’s Blue Sky Policy, before that company used to struggle with its margins.
Opportunities:
- China-USA trade war
- Drop in crude oil
- World steel companies adapting to EAF method: As China has start their Blue Sky policy which demands use of Eco-friendly products
- India ranks as second largest steel producer of crude steel
My Opinion
GIL is not an attractive option for me as I am a long term investor. Currently, I do not see a long term gain for myself as China has started to enter EAF making method for steel with many producers present in china producing graphite electrodes. With no anti dumping duty, it will be very difficult for GIL to maintain its margins. I believe that whatever growth they saw was short term and in the long run the company would return to its original level as the competition from china would force it to reduce its product prices.