Published on 29/10/2020 11:10:24 AM | Source: ICICI Direct

Hold HEG Ltd For Target Rs.750 - ICICI Direct

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Muted performance; outlook remains challenging…

HEG reported a subdued set of Q1FY21 numbers on account of a muted operational performance wherein it reported a loss at the EBITDA level. For standalone operations, topline came in at | 233.3 crore (down 71% YoY) & reported EBITDA loss came in at | 11.3 crore (vs. EBITDA profit of | 347.8 crore in Q1FY20). For the quarter, it reported a negative EBITDA margin of 4.8% compared to positive margin of 42.6% in Q1FY20. During the quarter, as the lockdown was in force for a significant period, the company's operations and financial results were impacted. On account of Covid-19 related lockdowns, the company reported subdued volumes, leading to negative operating leverage. For Q1FY21, other expenses as a percentage of sales were at 33.5% compared to 16.9% in Q1FY20 and 30% in Q4FY20. Other income for the quarter aided the company to report a profit at the net level. Other income for the quarter was at | 46 crore in comparison to | 39.2 crore in Q1FY20. Hence, for standalone operations, HEG reported a profit of | 10.8 crore in Q1FY21 (net profit of | 234.4 crore in Q1FY20).


Graphite electrodes demand to remain muted…

Global and domestic demand for graphite electrode has been impacted by the partial closure of steel capacity and lower steel production. Furthermore, on account of the Covid-19 crisis, destocking of graphite electrode inventory at the customer end has been delayed and is happening at a slower pace than anticipated, thereby impacting demand prospects.


Model capacity utilisation of 50% in FY21E, 60% for FY22E…

On account of muted demand from the steel sector, we expect HEG’s capacity utilisation levels to remain subdued. Going forward, we model capacity utilisation of 50% for FY21E and 60% for FY22E.


Valuation & Outlook

HEG reported a muted performance in Q1FY21 on the back of weak demand from the steel sector. Going forward, over the near term, demand for graphite electrodes is expected to remain subdued due to partial closure of steel capacities globally, lower steel production and de-stocking of electrode inventory at the customer end at a slower pace than anticipated, thereby adversely impacting demand prospects. FY21 is expected to remain a challenging year for the company as graphite electrode demand and realisation is expected to remain under pressure. We value the stock at 4x FY22E EV/EBITDA and arrive at a target price of | 750. We have a HOLD recommendation on the stock.


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