by Sandhya Krishnan

Graphite India, a manufacturer in carbon and graphite products in India witnessed stock price volatility and active trading recently. In addition to bearing the brunt of the plunge in the steel industry, Graphite India is grappling with declining graphite electrode prices and increasing needle coke prices, an essential raw material.  Q1FY20 was a tough period for the company, with disappointing numbers. 

Commenting on the muted performance, KK Bangur, the Chairman of Graphite India said, ‘’There is a relative decline in our Q1 FY2020 performance. Prices came under severe pressure with the global economy weakening...which have impacted the overall demand and supply dynamics, putting further downward pressure on our performance.” He added, “The steel industry continues to face these headwinds, resulting in lower steel production in the EAF producing nations. From a cost perspective needle coke prices have remained at higher levels placing further pressure on margins.”

Quick takes:

• Fortunes of graphite electrodes closely tied to steel industry growth.
• Topline declined to Rs 967 cr, a 51% YoY drop from Rs 1,965 cr in Q1FY19 due to reduced volume sales and reduced pricing power resulting in lower realization.
• Exports comprise around 50% of production. Global economic slowdown expected to adversely hit growth.
• Operating profit stood at Rs 352 cr, a huge drop from Rs 1,466 cr in Q1FY19. Even the EBITDA margins saw a sharp decline to 36% in Q1FY20 from 75% in Q1FY19 owing to jump in raw material i.e. needle coke prices. Margins strain expected to continue if steel industry deceleration continues.
• PAT stood at Rs 220 cr, a drastic 77% yoy decline from Rs 957 cr in Q1FY19
• For the group as a whole, capacity utilization was 75% as of Q1FY20 (88% in Q1FY19)
• Cash rich company with Rs 2,734 cr as of Q1FY20. The company has indicated its openness towards embracing inorganic growth opportunities.
• Focused on the manufacture of Ultra high power (UHP) electrodes, which see better profitability margins than low grade High power(HP) electrodes

Q1FY20: Margins expected to take a further beating if downturn continues

Graphite India is amongst the largest Indian producers of graphite electrodes,  with a manufacturing capacity of 98,000 tonnes per annum, globally.

Graphite electrodes are utilized in EAF steelmaking. The fortunes of the company are closely linked to the growth of the steel industry. World Steel Association (WSA) forecasts global steel demand to touch 1752 MT in CY20, a modest 1.0% growth over 2019. Steel production fell 4% in 1HCY19.

Reduced steel production in Electric arc furnace(EAF- producing countries, alongside slowing global growth has resulted in muted  prospects for the graphite electrode industry.

Additionally, steel prices have suffered a decline both globally as well as domestically. Graphite India is not immune to these factors. The exports of cheap priced Chinese electrodes have also resulted in reduced prices for domestic companies, as they have been forced to cut prices to retain market share. India removed antidumping duties on imported graphite electrodes from China in September 2018 which has aggravated the situation with increased Chinese imports.

To add to the mounting woes, the prices of needle coke, a scarce raw material, has witnessed a continuous price upswing, due to increased demand from the electric vehicle industry for use in lithium ion batteries. Thus, margins are being squeezed on both fronts.

All the above factors have snowballed into a crisis for the industry, with graphite electrode prices seeing intense downward pressures. In the wake of falling electrode prices, Graphite India is exploring cost optimization measures to derive a competitive advantage, with foray into newer geographies and expansion of customer base on the cards.

The silver lining remains the company’s long duration of industry experience spanning over 40 years, vast scale of operations and low-cost production, could help the firm weather a challenging business environment. It’s focus at becoming a further vertically integrated player would help realise cost efficiencies and stem margin erosion in the graphite electrodes vertical.

The Rs 70,000 crore revival package by the Indian Government for the housing and exports sector might boost the domestic steel industry. How the future growth trajectory spans out for the industry overall however, time will tell!