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Steady operational performance…

About the stock: HEG is one of the leading graphite electrode manufacturers and exporters globally.

* HEG has a graphite electrode manufacturing plant of 80000 tonnes per annum at Mandideep in Madhya Pradesh

* HEG has a captive power generation capacity of ~76.5 MW (two thermal power plants and one hydro power plant)

Q1FY23 Results: HEG reported a steady operational performance in Q1FY23.

* For Q1FY23, standalone operations capacity utilisation was at 92%. For Q1FY23, total operating income was at | 722 crore, up 75% YoY, 7% QoQ

* Reported EBITDA for the quarter was at | 184 crore, up 154% YoY, 17% QoQ. EBITDA margin for the quarter was at 25.5%, up 800 bps YoY, 220 bps QoQ 

* Ensuing standalone net profit for the quarter was at | 134 crore, up 139% YoY, 18% QoQ

What should investors do? HEG’s share price has given a return of ~66% over the last two years (from ~| 798 in August 2020 to | 1325 in August 2022)

* Rising energy costs and inflationary pressure on economic growth due to Russia-Ukraine conflict have adversely impacted demand prospects, particularly in the European Union. Hence, we downgrade the stock from BUY to HOLD

Target Price and Valuation: We value HEG at | 1400, 6x FY24E EV/EBITDA

Key triggers for future price performance:

* Going forward, demand for graphite electrode and realisation is expected to remain volatile in the near term while cost inflation may continue to add pressure on margins

* HEG’s capacity expansion from 80000 tonnes to 100000 tonnes per annum is going on in full swing and is expected to be completed by end December 2022 with commercial production set to start in January-March 2023 quarter (i.e. Q4FY23E)

* Over FY22-24E, we expect topline to grow at 24% CAGR while EBITDA and PAT are expected to register a CAGR of 18.3% and 17.8%, respectively

Alternate Stock Idea: In our metal coverage, we like Jindal Stainless

* Jindal Stainless (JSL) has a 1.1 million tonnes per annum (MTPA) integrated facility with backward integration

* BUY with a target price of | 13

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