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Strategic fit, better times lies ahead…

About the stock:  HEG is one of the leading graphite electrode manufacturers in India and is a key exporter of the same in global markets.

* HEG has world’s largest single site graphite electrode manufacturing plant of 80,000 tonne capacity at Mandideep in Madhya Pradesh

* HEG also has a captive power generation capacity of ~80 MW (two thermal power plants and one hydro power plant).

Key Investment thesis:

* Global decarbonization trend augurs well for HEG: Globally, Steel manufacturers are shifting towards EAF route of steelmaking, which is expected to drive sustainable demand for graphite electrodes in the longterm horizon. A point in case is US wherein over the last couple of years, there has been several announcements by large steel companies for new steel capacity addition through the EAF route. In US, of the ~25 million tonnes (MT) of EAF route of steelmaking capacity have been announced of which some capacities are already operational while balance is expected to be operational in the medium term. Of the 25 MT announced EAF capacity in US, ~7 MT has already come on stream and balance 18 MT would be operational in next 2 years, thereby auguring well for Graphite Electrode demand, thereby benefitting HEG.

* Capacity Expansion augurs well: HEG has world’s largest single site Graphite Electrode plant under one roof with a capacity of 80000 tonnes per annum for a long time. Few years back, HEG had announced capacity expansion plans and is currently on the verge of completing expansion from 80,000 tonnes per annum to 1,00,000 tonnes per annum by June 2023 (wherein major part of the new capacity is already commissioned). Going forward on the expanded capacity of 1,00,000 tonnes, we have assumed capacity utilisation of ~65% for FY24E and ~70% for FY25E.

Rating and Target Price

* We have assigned BUY rating on HEG, on the back of trend in shift globally towards EAF route of steelmaking which augurs well for graphite electrode demand. Also, HEG is on the verge of commissioning its capacity expansion plans which will aid volume growth going forward.

* We have valued HEG at 6.5x FY25E EV/EBITDA and arrive at a target price of | 2025.

* HEG’s double digit return ratios & Cash positive B/S provide margin of safety

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