What is Gopal Kavalireddi's opinion on Rain Industries, Graphite India, Phillips carbon stocks at current situation?

Written on Nov 22

For a guy like me, who relies mostly on fundamental analysis, which is normally used to forecast price targets for the longer term, I get asked for a lot of opinions. By asking for opinion, the reader basically wants to know about the current downtrend or the day-to-day volatility in the stocks - as they have bought at a higher price and are confused with the current state of the stock movement.

This is the result of chasing momentum stocks. Once momentum is built, either on the upside or downside, it is highly ‘inappropriate’ to run after them, till they atleast start slowing down, because they are surely going to burn a hole in your pocket.

But anyway, since there are so many readers asking for ‘opinion’ on these stocks, I am giving the same.

This is the current state of the stocks mentioned, as I write the answer.

All the above stocks are concentrated product portfolio stocks, operating in the carbon related product space, which have seen a huge demand-supply gap leading to good price realizations, excellent EPS improvement, resulting in huge stock price movements in the recent quarter.

Ofcourse, any stock which has risen by more than 5X and with quarterly results declared, will be subjected to profit booking and can see retracement of up to 30% - 33%.

In one year,

• Goa Carbon has moved from Rs. 90 to Rs. 1030.
• HEG moved from Rs. 144 to Rs. 2098.
• Phillips Carbon moved from Rs. 202 to Rs. 1097.
• Graphite India moved from Rs. 70 to Rs. 658.
• Rain Industries moved from Rs. 42 to Rs. 402.

Of all the above stocks, Rain Industries is the better diversified company, from a fundamental point of view and also from revenue source.

I had done a segment revenue classification for Rain (The source of which is the company’s recent press release - http://rain-industries.com/PDF/RIL-PressRelease-Q3CY17.pdf) and this is how it looks.

Though the cement and chemical segments contribute about 22.7%, it would help the company if the specialty chemical business does well and moves closer to 25% and the cement business to a better proportion of 15% .

Leaving the fundamentals aside, how do they look for now?

The market was very volatile since a couple of weeks and after hitting 10,450 on the Nifty, it trended lower to as much as 10,100 and has bounced back to 10,350. During this time, all the 5 stocks did a nose dive as evident from the chart below.

• Rain Industries - Rs. 295 seems to be a good bottom and has been tested twice in less than a month’s time - first time it moved back to Rs. 295, was on the results day, before bouncing back to Rs. 349 and the second time it hit Rs. 295.30 was today, and has moved back to Rs. 319.30, to close at the upper circuit. Seems like the stock is stabilizing now, hopefully, we can see it move back to higher levels.
• Rs. 400 was my expectation as per the calculations given earlier, which was met and then it drifted lower. Till the next quarter results come, it might continue to stay below the all time highs.
• But with stocks like this, when the tide turns and momentum is favorable, they throw caution to the wind and can run away to new highs.
• One of the readers has mentioned that the management has informed, that there is not much effect due to ban on petcoke. I haven’t seen that news bulletin yet, so cannot comment on the same.
• Graphite India, HEG - Similar stocks, economic scenario remains the same, though there have been rumors that the prices have crashed etc, there is no such information available from any news sources.
• Out of these two, I am of the opinion that HEG is a better option that Graphite and also, on a Face Value comparison - Graphite - Rs. 2 FV - is at Rs. 580, which means HEG at a comparable valuation should be Rs. 2900.

• The analyst ‘sell’ calls which have been given due to graphite price rise & restarting of production in China is related to Iso Static Graphite, which is used in the manufacturing of lithium ion batteries and not related to graphite electrodes. I have already shared enough content on the same in the comments sections of earlier answers.
• S&P Global -Platts article on the rising prices of Graphite electrodes on a weekly basis - (https://www.platts.com/latest-news/metals/london/graphite-electrode-shortage-could-impact-steelmaking-21582232) and the next 2 years would see good business.

• Goa Carbon, Phillips Carbon - Again, Similar names, but Goa Carbon manufactures CPC, whereas Phillips Carbon is the supplier of Carbon Black used in various industries.
• Out of the two, Phillips Carbon is the more stable stock and has not really broken down even in the downturn. If you see the price chart given above, Goa Carbon has hit UC whereas Phillips is still around the 2% upside mark, more consistent and less volatility.

Hopefully, all the 5 stocks have seen their bottom and will move up soon, recovering atleast half of their recent losses.

The main concern remains on the SC ban on Pet Coke and the reaction of the various Industries to this ban. We will have to wait for a couple of weeks to know the future course of action.

Disclaimer: No personal holdings in Philips Carbon, Goa Carbon, HEG and Graphite India.

Stock graph credits: Fyers - Your Next-Generation Online Stockbroker