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Better times ahead…

For Q4FY21, HEG’s standalone topline came in at | 380 crore, up 2% YoY, 19% QoQ. However, at the EBITDA level, the company reported a loss of | 5 crore. Other income for the quarter was at | 25 crore. Ensuing net loss for the quarter was at | 7 crore. The Q4FY21 performance was impacted by a sharp rise in other expenses. Other expenses for Q4FY21 were at | 120 crore compared to | 71 crore in Q3FY21 and | 78 crore in Q4FY20.

During Q4FY21, other expenses as a percentage of sales were at 32% in Q4FY21 compared to 21% in Q4FY20 and 22% in Q3FY21. During the quarter, other expenses included | 35 crore spent on CSR activities, which led to higher total other expense. However, adjusting for CSR expense, HEG’s adjusted EBITDA would have been ~| 30 crore.

Global steel production uptrend augurs well for graphite electrode demand…

Over the last few months, there has been a healthy uptick in global steel prices as well as global steel production levels. Graphite electrode players are likely to be one of the key beneficiaries of the current upcycle in steel. During the first four months of CY21, global crude steel production witnessed healthy growth, auguring well for graphite electrode majors. During January-April 2021, global steel production was at 663 million tonnes (MT), up 13.7% YoY. In addition to higher global steel output, steel prices witnessed healthy strength. Both above-mentioned factors, higher global steel output and strength in global steel prices, have put graphite electrode players such as HEG in a sweet spot

Graphite electrode prices start moving northwards…

The uptick in steel production has augured well for graphite electrode demand. Going forward also, the growth trend in global steel production is likely to continue with a healthy demand recovery in major steel consuming industries. Furthermore, the domestic steel industry is also poised to grow with increased government spending on infrastructure. The combination of these factors is expected to drive demand for graphite electrodes and also have a positive rub-off effect on graphite electrode prices. Graphite electrode prices have already started to move northwards, auguring well for graphite electrode companies.

Valuation & Outlook

HEG’s capacity utilisation has sequentially improved from ~45% in Q1FY21 to ~85% in Q4FY21. Going forward, we assume capacity utilisation of 80% for FY22E and 82.5% for FY23E. We value the stock at 6.5x FY23E EV/EBITDA and arrive at a target price of | 2800. On the back of an improved industry outlook, we upgrade the stock from HOLD to BUY.

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