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Steely
At its three plants at Durgapur, Bengaluru and Nashik, Graphite India (GIL) makes products which are used by ferrous, non-ferrous and process industries. It also happens to be India’s largest manufacturer of electrodes. Graphite India is also producing calcined petroleum coke and carbon electrode paste (CEP) for ferro-alloys and carbide industry and large diameter glass-fibre reinforced plastic pipes. In its impervious graphite equipment division, it produces chemical equipment, graphite heat exchangers, thermometer pockets, etc.

GIL is a globally competitive company. About 70% of its graphite electrode production is exported. Graphite electrodes are used mainly in the electric-arc furnaces (EAF) of steel companies. Major steel producers in India and abroad have announced big plans to expand their capacity and, as a percentage of total steel production, steel manufacture through the EAF route is rising. With growing global and local steel production and high consumption levels, the demand for graphite electrodes is expected to be good – unless there is a prolonged economic slowdown.

As for the domestic sales, since steel output is expected to continue to grow (by about 4.9% a year up to 2010), and the National Steel Policy has set a target of 124 million tonnes of steel by 2011 from 53 million tonnes, GIL is expecting a steady growth. Sensing the opportunity, GIL has decided to expand its graphite electrodes capacity by 10,500 tonnes at a cost of Rs187.50 crore at its Durgapur plant which is expected to be completed within the next 18-24 months, funded mainly by internal accruals and short-term debt. Currently, it has a total electrode capacity of 78,000 tonnes of which 60,000 tonnes is in the country and 18,000 tonnes in Germany. With a pipeline of orders, higher margin and depreciating rupee, the expansion makes sense. Conscious of the rising cost of energy, GIL has tried to reduce this cost by investing in a hydel power plant of 18MW capacity in Karnataka and a 25,000MT petroleum coke calcining facility.

Financially, GIL has had a superb March quarter. Operating profit rocketed by 118% and sales jumped by 42% compared with the same period of the previous year. Annual growth of operating profit and sales was a superb 44% and 29%, respectively, over 2006-07. At the current stock price of Rs68.75, the market-cap is 3.49 times its operating profit and 0.80 times its sales, based on the March quarter results. It represents excellent growth at low value. But, of course, the assumption here is that global economic growth does not slow down significantly. If that happens, GIL, as a supplier of industrial intermediates and a mid-cap stock, will be badly hit.

Weak Pricing
Shree Cement’s expansion came at the wrong time

Shree Cement has four cement plants located at Beawar and Ras in Rajasthan besides grinding and clinker units. It would have a fifth unit (clinker) by June 2008. Its current installed capacity of about 8.3 million tonnes per annum would reach 10 million tonnes with the addition of the fifth unit. This is certainly not the best time to add capacity because cement companies are hit by controls and higher costs. More importantly, those in north India are in a particularly tight spot because of over-capacity and, therefore, a pressure on prices. Shree Cement’s market is spread across the northern states – Rajasthan, Delhi, Punjab, Haryana, western UP, Uttaranchal, Gujarat and MP. A few months ago, the company talked about hiking the capacity to about 20 million tonnes per annum by 2012, with a six million tonnes cement plant in Katni, Madhya Pradesh. But this must surely be postponed for now.

Shree Cement’s new capacity will also come at a time when other cement companies are on a capacity-addition spree and the government has banned cement exports – although this has been lifted now.

All this dulls Shree Cement’s terrific financial performance, which happens to be among the best in the industry. Its sales have increased in every quarter of 2007-08; this was topped by a 68% rise in sales and 72% jump in operating profit and sales over the March quarter of 2006-07. For the year as a whole, operating profit and sales were up by 46% and 51%, respectively. The stock has come down 52% from its peak of Rs1695 in January this year to Rs813 now. At that market price, the market-cap is 2.95 times the operating profit and 1.15 times its sales of the March quarter. The stock is exceptionally cheap but only if the demand and pricing power hold up. There is no clarity about this just now. The stock is not showing any kind of price strength at all either. But, since the sector is shunned right now, a price uptrend would be the first buy signal.

Strength in Diversity
Nava Bharat has three growth businesses

Nava Bharat Ventures is a diversified company, which is fortunate to find all its businesses doing extremely well. These are power generation, metals, sugar (and downstream products) and infrastructure projects. Merchant sales of power, sugar and ferro-alloys each contributes a third of revenues. Its ferro-alloy plant in Andhra Pradesh produces ferro-manganese and silico-manganese. A lot of it is exported through the Vishakapatnam port. Its second ferro-alloy plant in Orissa, produces ferro-chrome which is sold to stainless steel manufacturers. For both these products, Nava Bharat has a strong clientele such as Tata Steel, Essar Steel, Mukand, JSW Steel, SAIL, Nippon Steel Corporation and Glencore International.

The other business is a 3,500 tcd (tonnes of cane per day) sugar plant located at Samalkot in the sugarcane rich belt of coastal Andhra Pradesh. The distillery attached to the sugar plant produces six million bulk litres of rectified spirit per annum, which is processed into ethanol and extra neutral alcohol.

For the metals business, power is a key input and for the sugar business, it is a by-product. Nava Bharat has exploited these linkages fully. It has set up coal-based thermal power plants in Andhra Pradesh (114MW) and Orissa (94MW), which supply the power required by its ferro-alloy smelters and also sell surplus power to utilities. For its sugar plants, 9MW power is generated using bagasse, a waste generated from sugar crushing. Future plans include a 1050MW coal-fired power plant in Orissa under Nava Bharat Power. The group is also planning to set up a special economic zone (SEZ) near Hyderabad. But these plans depend on the interest cost, inflation and a host of other macro-economic factors which are now threatening to go out of hand. It is also bidding to acquire Zambia’s largest coal producer, the State-run Maamba Collieries Ltd.

Thanks to merchant sales of power at lucrative rates and shooting prices of ferro-alloys (average price up by 80%), Nava Bharat’s financial performance has been fantastic. Operating profit rose by 150% and sales by 64% for the year 2007-08. For the March quarter, operating profit was up by an eye-popping 235% and sales by 96%. At the current market price of Rs280, the market-cap is just 3.51 times and 1.63 times March quarter’s operating profit and sales, respectively. It is cheap, but it all depends on whether we are headed for an economic slowdown or not.

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