The current earnings season has thrown many positive surprises with firms posting record earnings, which helped Sensex and Nifty touch fresh all time highs during the last one month. The rally has been driven by large cap stocks with midcaps and smallcap succumbing to correction after a record rise last year.
Carbon and graphite manufacturing firm Graphite India too reported Q1 earnings which outperformed expectations.
The firm reported nearly 32 times rise in its Q1 net profit to Rs 957 crore compared to Rs 30 crore profit in the corresponding quarter of previous fiscal.
Its revenue from operations too rose 4.73 times to Rs 1,965 crore in the last quarter compared to Rs 415 crore in the corresponding quarter of previous fiscal.
The strong earnings took the Graphite India stock to its all time high of 1,093 level in trade yesterday. The large cap stock gained 7.38% during the last one month outperforming the Sensex which gained 5.78% during the same period.
Since the beginning of this year, the stock rose nearly 43% compared to the 10.75% rise in Sensex in the same period.
However, when we compare the yearly returns of Graphite India stock and Sensex, the stock leaves the benchmark far behind with a 321% rise compared to just 17% rise in the index.
The stock which stood at 238 on August 7 2017 was trading at 1009 today. It hit an intra day high of 1085 level on the BSE.
Hence, the stock gained over four times in the last one year. So, what led to the meteoric rise in the price of the stock during this period?
The firm which is among the largest suppliers of graphite electrodes in the world is reaping the benefits of a record surge in demand for the product in 2017.
Its revenue from graphite and carbon segment rose to Rs 1,912 crore in Q1, 4.91 times the revenue of Rs 389 crore earned in the corresponding quarter of previous fiscal.
Revenue from other business rose nearly two time to Rs 53 crore in the last quarter compared to Rs 26 crore in the corresponding quarter of the previous fiscal.
Graphite electrode is used in making steel through the electric arc furnace route.
There are two types of furnaces to make steel: Electric arc furnace (EAF) and blast furnace. In the blast furnace method, iron ore is combined with varying amounts of coke (less than 30%) and small amounts of flux. Making steel via blast furnace leads to a lot of pollution.
The electric arc furnace process does not involve iron-making. It reuses existing steel scrap, avoiding the need for iron ore and their processing. Graphite electrodes placed in the furnace supply power raising the temperature to 1600C, melting the scrap. The method does not use coal as a raw material.
Steel production via electric arc furnaces leads to lesser pollution compared to the blast furnace method.
In 2017, world's largest steel producer China closed highly polluting unaccounted blast furnace capacity totalling 155 million tonnes. It also committed to close down an additional 150 million tonnes of blast furnace capacity over the period of 5 years at the rate of 30 million tonnes/per annum between 2019-23. The share of steel manufacturing capacity using EAF has already risen to 9 percent in 2017 from 6 percent earlier.
The Chinese government has set a target of achieving 20 percent steel production through the EAF route by 2020. Additionally, recent closure of 2,00,000 -3,00,000 tonnes of electrode capacity led to shortage of electrodes. These factors have resulted in an increased demand of graphite electrodes.
Most of these are being replaced by electric arc furnaces. China installed or commenced construction of 105 new EAFs with capacity of 66 million tonnes in 2017. China steel exports in 2017 fell about 30% to 75 million tonnes from 108 mt y-o-y. In the first quarter of 2018, Chinese steel exports fell further to a level of annualized 60 million tonnes. China net steel exports were down by 15.5% in first half of 2018 to 28.7 million tonne. This has allowed increased steel production and higher utilization in the other EAF steel producing nations
Currently, EAF accounts for 45% of steel production in the world (without China).
Steel production via EAFs is seen growing at a faster pace in China as compared to basic oxygen furnaces (BOF) which is good news for Graphite India.
In fact, during the Q1 earnings statement, KK Bangur, chairman at Graphite India said, "The strong sector momentum continues in the new fiscal year with steel production registering a robust growth of 5.6% in Q1 FY2019. Chinese steel production increased by 7.3% during the quarter. New electric arc furnaces (EAF) are becoming operational as they replace certain archaic blast furnace capacities in order to curb environmental pollution."
"With these dynamics, there is increased demand for graphite electrodes within china. Chinese net steel exports in first half of CY2018 were down by 15.5% y-o-y to 28.7 million mt leading to increased steel production and capacity utilizations in all other major EAF steel producing nations. Favourable consolidation of these metrics continues to prime the price and demand profile of graphite electrodes to greater heights, hitherto unseen," Bangur added.
Edited by Aseem Thapliyal