On the 4th of May 2021, Tirupati Graphite (LSE: TGR) reported that it had developed an innovative graphene-aluminium (Al-Gr) composite. The share price did pop from 95p to 110p, but it started to tick downwards after a few days, eventually hitting 89p. Then, on the 9th of June 2021, an article in the Telegraph, a newspaper, advised taking a punt on the Tirupati Graphite shares because that Al-Gr composite “could change the world”. The Tirupati Graphite share price moved from 89p all the way to 160p on the back of that Telegraph article, which was a gain of 54% in just over a week: it has now fallen back to 137p at the time of writing.
The power of the press
Tirupati announced its Al-Gr composite through a regulatory news service (RNS) release. That created little buzz. A national newspaper recommending backing the stock because its invention was potentially game-changing really got the stock moving. The lesson here is that investors often buy a stock with some event in mind, some catalyst that will drive the stock price higher. Now, this might be something they predict will happen, like a potentially revolutionary new material being developed. It could also be something that has happened, such as solid growth and profitability in an otherwise unlived industry.
Whatever the catalyst is, it has to be noticed by the market for it to matter. A major announcement counted next to nothing for the Tirupati Graphite share price when disseminated through the RNS. The readers were likely to be existing investors, and regulatory constraints check the language used in the release. The release reads as expected; technical and fact-based. However, spread the same news beyond the existing share base, and in an aspirationally appealing manner and, boom, a share price can soar.
Which response was more appropriate? The one following the RNS release or the one following the Telegraph article? As with most things in life, when given two extreme points, somewhere in between is probably where I would want to be.
Graphene-alluminium composite
The main application that the Al-Gr material is being touted for is electrical wiring. Copper is what is commonly used here. The Al-Gr composite is almost as good as conducting electricity as copper but around 3.2 times less dense. Things like aeroplanes and cars are stuffed full of copper wiring. Imagine replacing all that copper with Al-Gr. The weight savings would allow cars and planes to travel further on the same energy, or, as will probably be the case with aeroplanes, stuffed full of more passengers for the same mass of fuel.
About 200 grams of the Al-Gr composite have been produced. That’s all there is so far and the basis of all the results seen. The next steps will be manufacturing more of this stuff to test its properties and potential applications further. Now, Rolls-Royce, a FTSE 100 aerospace giant, has been reported to have held preliminary talks about the material’s potential. But the stress needs to be preliminary. There is not a great deal of information beyond the RNS release available to investors. I would want to know if the material can easily be mechanically formed into wires? Are there any constraints on the thickness or length of wires formed? Although much is said about the cost of copper for use in wires, there is no information on the potential cost of an Al-Gr wire.
A graphene-based material with real-world applications is obviously exciting. Graphene was discovered in 2004, but very few applications have been found for what has been called a wonder material. But before we start tolling the end of copper for use in electrical wiring, there are as yet plenty of questions to ask about the feasibility and economics of replacing it with Al-Gr.
Tirupati Graphite does more than research
I will lean on the side of no if asked if the Tirupati Graphite share price surge is justified. A bump in the share price is warranted, given the potential for this development. But any potential value addition has to be weighted by the probability of failure. At this stage, the risk of failure is quite high.
Not all of Tirupati Graohit’s share price is bound to AL-Gr, of course. It mines flake graphite at two sites in Madagascar. High purity and specialised flake graphite processing facilities are being developed in India. The Tirupati Graphene and Mintech Research Centre (TGMRC), again located in India, is responsible for the Al-Gr composite discovery.
Tirupati Graphite shipped 1,206 tons of flake graphite from Madagascar for £793,577 of revenue in 2020. With a cost of sales of £411,899, graphite mining returned a gross profit of £381,678 and a gross margin of 48% in 2020. Revenues have grown at an annual rate of 432% since 2018. Administrative expenses have grown at 46%. Assuming margins remain steady and sales continue to ramp up faster than administrative expenses, Tirupati should start turning an operating profit in the medium term.
The graphite and related products market is expected to grow significantly through this decade, both in volume and price. Tirupati Graphite plans to ramp up to 81,000 and 24,000 tpa of graphite flake and processed graphite, respectively, in the medium term. This sounds achievable, but getting there will require money. Tirupati raised £10m of equity in April 2021 and has tapped the debt markets. But, it’s burning through something like £1m to £3m of cash every year. So, unless it can generate some operational cash flows, further equity and debt raises will be required to fulfil its medium-term plans.
I have some concerns about related party transactions with Tirupati Graphite. From what I can tell, most of the graphite shipped from Madagascar went to an Indian company in the process of being bought by Tirupati Graphite. This soon to be acquired company will form part of the high purity and specialised flake graphite processing business in India. Once completed, the revenue from graphite sales between business will disappear. Tirupati Graphite will extend its cash conversion cycle, and it’s already burning through cash.
Is the Tirupati Graphite share price surge justified
Does Tirupati have an existing graphite flake mining business if most of the mined material is shipped to a company soon to be part of the Tirupati empire? I have seen this approach of racing up the value chain before, which sometimes does not end well. A lot of the money in mining is in the ground. Selling the mined but refined product to others is often the most profitable part of the value chain. I would prefer to see a flake graphite mining business flourishing before the race up the value chain starts. At present, I do not see any revenue or margin information for high purity and specialised flake graphite product sales. But that sort of information will come through once the acquisition has gone through.
But, in summary, Tirupati has a high margin flake graphite business, albeit at low volume and without meaningful revenue. The graphite market is growing, so scaling up sales, hopefully to other customers, should be possible but might require cash injections. Whether or not the margins hold if sales go to unrelated parties is another issue. I am waiting to see if value-added activities are profitable or not. There is, of course, the Al-Gr composite and other research going on at Tirupati Graphite that could be real game-changers. Still, it’s a very early day, and any potential profits have to be heavily weighted by the chance of failure. I would be interested in owning Tirupati Graphic Shares somewhere between the price before the Al-Gr news and the peak after the Telegraph article, and I would plump for the lower half of the range. And at any price, Tirupati Graphite shares remain highly speculative.
DISCLAIMER: James J. McCombie does not own shares in Tirupati Graphite. The Storied Investor has no beneficial ownership interests in Tirupati Graphite.
The Storied Investor 