Add HEG ltd For Target Rs. 750 By Emkay Global Financial Services Ltd
HEG reported a weak Q4. Revenue declined 8% QoQ due to ~1,000 tonnes lower Middle-East shipments despite higher utilization (95% vs 85% QoQ). EBITDA turned negative (Rs1.5bn loss) due to a Rs1.9bn fair-value hit on GrafTech. While GrafTech has announced a USD600-1,200/t price hike, a similar move by HEG appears imminent, albeit with uncertainty around quantum. However, benefits are likely to be back-ended given the 3-6M order cycle. In the near term, we expect the ongoing West Asia conflict and elevated costs to weigh on 1HFY27E performance, prompting us to cut FY27/FY28E EBITDA by 21%/5%. Nevertheless, we remain constructive on the structural recovery of the graphite electrode (GE) industry, and retain BUY with an unchanged TP of Rs750.
Loss on FV loss of investment drags Q4 earnings
HEG reported a weak Q4, missing estimates due to an 8% QoQ revenue decline. This was primarily driven by 1,000 tonnes lower shipments to the Middle East amid ongoing disruptions, despite higher utilization of 95% (vs 85% in Q3). EBITDA came in below expectations, with HEG reporting a loss of Rs1.5bn (vs profit of Rs1.4bn in Q3), hurt by a Rs1.9bn fair-value loss on its investment in GrafTech. Adjusting for this, EBITDA stood at Rs458mn (7.6% margin vs 13.8% in Q3), reflecting sharp increases in freight and fuel costs. PAT declined to a loss of Rs1.2bn (vs profit in Q3), weighed down by lower operating performance, a decline in other income (Rs399mn vs Rs1,019mn in Q3), and reduced associate income from the hydel portfolio.
Price hikes gaining traction; earnings upside back-ended
GrafTech has announced a price increase of USD600-1,200/t for GE, effective 26-Mar, aimed at offsetting unsustainably high input costs. We believe the push for higher realizations is supported by sustained industry-wide losses over the past 2-3 years, along with rising input costs driven by energy, freight, and crude-linked raw materials. In tandem, a price hike for HEG appears imminent, although the final quantum remains uncertain and will depend on regional demand conditions, customer acceptance, and peer pricing discipline. Assuming a relatively conservative price increase of USD300-600/t for HEG, we believe EBITDA/t could expand by USD200-400. However, given the 3-6M order cycle, the benefits of these hikes are likely to fructify from 2HFY27 onward.
Near-term headwinds, structural positives intact; retain BUY
The escalation of the West Asia conflict since late-Feb-26 has posed meaningful challenges for HEG, driven by a sharp increase in freight and fuel costs along with continued disruption to shipments to the Middle East (accounting for 20-25% of volumes), which weighed on Q4 results. We expect these to put further pressure on EBITDA in 1HFY27E. Accordingly, we cut FY27/FY28E EBITDA by 21%/5%, respectively. However, despite these near-term headwinds, we remain positive on the structural turnaround of the GE industry, and maintain BUY with an unchanged TP of Rs750.
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