HEG

HEG

HEG

HEG

HEG

Investments can be considered in the stock of graphite electrode producer HEG. With a clear sign of bounce back in steel production, besides expansion plans in the sector, increased demand from the steel industry for graphite electrodes can only follow.

Among the two graphite electrode players in India, HEG's superior profit margins and timely expansion plans are likely to ensure that it is a key beneficiary of the demand revival.

At the current market price of Rs 354, the stock trades at seven times its estimated per share earnings for the financial year 2012. Any significant fund raising through issue of equity can weigh on the stock in the near term until the expanded capacities come on stream by mid-2012. Investors with a two-year perspective can consider limited exposure to the stock.

Demand driver

Graphite electrodes are consumed while producing steel through the electric arc furnace route (EAF). According to industry data, steel produced through the EAF route accounts for 31 per cent of the total production globally.

Steel produced through this route has been growing globally, especially in North and South America and West Asia, as a result of higher availability of steel scrap (key input in EAF process), higher productivity and flexible product mix.

Demand for steel, availability and price of key raw material needle coke, managing cost efficiencies and price contracts with customers are the key factors that determine the fortunes of the seven or eight graphite players globally. Among these factors, India players score on the manpower and power cost front.

Steel production

HEG's improving prospects are visible from its capacity utilisation over the three quarters ending December 2009. From a 57 per cent utilisation level in the June quarter, the company operated at a 75 per cent rate by December. It can be expected to reach its pre-downturn operating levels of over 80-90 per cent as steel producers bring their idled capacities back on stream.

Besides, the World Steel Association has forecast an 11 per cent increase in steel production in 2010 (world crude steel production was 1.22 billion tonnes in 2009).

HEG plans to increase its capacity from the current 66,000 million tonnes (mt) to 80,000 mt to cater to anticipated demand. While HEG had put on hold these plans last year, the current surge in activity in steel has revived the expansion.

Secure supplies

Needle coke, a key and scarce raw material used to produce graphite electrode, plays a significant role in determining profit margins for graphite players.

HEG has stated that it has booked its needle coke requirement for the current year at prices similar to the financial year 2010. The prices of needle coke rose by 35-40 per cent last year and are currently at $1,650-$1,800 a tonne.

The freezing of supply and price of the raw material is expected to provide stability to margins.

Besides, given an anticipated supply-demand mismatch on the back of graphite production not keeping up with increase in steel produced, the company is likely to ensure that the electrode realisations make up for input cost hikes.

Realisation of electrodes increased by 11 per cent year-on-year for the quarter ended December, reinforce the above.

HEG scores over its Indian peer Graphite India on account of managing its power needs captively with 77MW of generation capability.

The company has also managed to sell its surplus power at Rs 2.95 a unit in the December quarter. This has led to the company enjoying operating profit margins of 32 per cent compared with its peer which on an average operates at 20-25 per cent.

Superior profitability has ensured better return on equity of about 32 per cent (FY-09) compared with about 22 per cent for Graphite India.

Sales for the nine-months ending the financial year 2010 stood at Rs 811 crore and net profits at Rs 131 crore. Exports accounted for 75 per cent of revenues.

Earnings for the last three years grew annually at 40 per cent. HEG's superior operating metrics has traditionally helped it command a premium over Graphite India.

Risks

The graphite electrode industry is fraught with risk due to volatility in demand (as a result of cyclicality of user industry- steel) and raw material cost and energy costs.

While Indian players have done well on the cost front, limited pricing power with steel majors such as Arcelor Mittal and POSCO and the availability of needle coke supplies, remains a sector risk.

It is for this reason that the Indian players in the graphite sector trade at a discount to global peers.

via BL

HEG

We recommend a buy in the stock of HEG from a short-term horizon. It is apparent from the charts that the stock has been on a steady long-term uptrend from its March 2009 low of Rs 94, forming higher peaks and troughs. However, in early January 2010, the stock experienced selling interest, encountering resistance at Rs 410. Since then, the stock was on a short-term correction till its recent low of Rs 328. The stock has halted after approximately 50 per cent retracement level of its prior medium-term uptrend that commenced from the November 2009 low of Rs 238. On February 3, the stock bounced up breaching the 21-day moving average by gaining 6 per cent, with above average volume. A minor positive divergence displayed in the daily relative strength index backs this bounce. The daily RSI has entered into the neutral region from the negative territory and weekly RSI is still hovering in the bullish zone. We are bullish on the stock from a short-term perspective. We anticipate it to rally further until it hits our price target Rs 390 in the upcoming trading sessions. Traders with short-term perspective can consider buying the stock while maintaining stop-loss at Rs 336.

via BL

HEG

HEG

HEG

We recommend a buy in the stock of HEG from a short-term trading perspective. It is apparent from the charts of HEG that after encountering resistance at around Rs 293 in August 2008, it resumed its downtrend. Since then, the stock was on an intermediate-term downtrend till it found support at Rs 102 in late January 2009. A significant long-term support is present at Rs 100 for the stock. We observe the formation of a falling wedge pattern, spanning the period from late October. The stock is currently testing the upper resistance level of the pattern. The daily moving average convergence and divergence indicator is displaying positive divergence. The weekly relative strength index also is displaying a prolonged positive divergence. Moreover, the price rate of change indicator is rising in the positive territory indicating buying interest. We are bullish on the stock from a short-term horizon. We anticipate it to penetrate the upper resistance level and move up until it hits our price target of Rs 119. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 101.

via BL

HEG, Garware Offshore

HEG, Garware Offshore

Today's Pick - HEG

We recommend a buy in HEG from a short-term perspective. Referring to the chart of HEG, we see that the stock had been on a medium-term downtrend from its January 2008 high of Rs 609 to its March low of Rs 216.

However, the stock found support at around Rs 240 level in late March (coincides July 2007 peak) and commenced to move up. Subsequently, the stock breached the medium-term down trendline and then the 21-day moving average.

We notice that there is an increase in volume in the last three trading days. Moreover, the long-term uptrend of the stock, which began in June 2006, is still in place. The stock appears to have resumed the long-term uptrend. The daily momentum indicator is on the verge of entering the bullish zone from the neutral region. The moving average convergence and divergence is also likely to enter into the positive territory. We are bullish on the stock from a short-term point of view. We expect the stock to move up to our price target of Rs 335 in the short-term. Investors with short-term perspective can buy the stock, while keeping the stop-loss at Rs 275

HEG, Morning Report

HEG, Morning Report

HEG, Jaiprakash Associates, NIIT Technologies

HEG, Jaiprakash Associates, NIIT Technologies

HEG, Tata Tea Trading Calls

Buy HEG above Rs 465-Rs 411. Stop Loss at Rs 400, target at Rs 537 and Rs 659.


Buy Tata Tea long term delivery at Rs 926-Rs 817. Stop Loss at Rs 740. Add further above Rs 1047, target Rs 1622 and Rs 2552.

HEG

HEG

HEG: Buy

Investors with a two to three-year perspective can consider buying the stock of HEG (Rs 213), a leading manufacturer of graphite electrodes. Our recommendation is underscored by the management’s decision to hive-off its steel business and increase focus on the graphite and power businesses, which enjoy higher profitability. The decision appears positive, given that the steel business was incurring a loss and was a drag on the company’s profitability.

With an increased focus on its core operations, HEG is likely to benefit from expansion in its margins. In this context, the healthy demand outlook for graphite electrodes lends confidence.

At the current market price, the stock trades at about nine times its likely FY-09 per share earnings on a fully diluted basis. Investors can, however, consider buying the stock in lots given the volatility in the broad markets.

Revenue growth will hinge on the performance of the graphite division. In this context, a healthy order-book position, with about 80 per cent of the graphite electrode capacity pre-booked at 20-22 per cent higher realisation lend visibility to the division’s revenue growth. Moreover, with additional capacities expected to be operational by the last quarter of FY-08, revenues could get a further fillip.

HEG is also likely to benefit from the proposed setting up of a 33 MW captive thermal power plant, given its energy-intensive operations. Notably, the project cost for this plant, pegged at about Rs 80 crore, is at a significant discount to the industry benchmark. HEG could credit this discount to the setting up of sufficient infrastructure support when it had commissioned its previous plant.

The hive-off is also likely to benefit HEG by way of improvement in overall margins and profitability. The steel unit had, for the year ended FY-07, incurred a loss of about Rs 4 crore at the PBIT level (profit before interest and tax). Also, given that traditionally the unit has only enjoyed margins of about 6-8 per cent, as against the graphite and power divisions, which operate at about 23-28 per cent and 45-48 per cent margins respectively, overall margin expansion appears likely. This apart, with sale proceeds from the steel unit intended for retiring debt (about Rs 100 crore); the company could also gain from the strengthening of its balance sheet. This move, apart from getting the debt-to-equity at optimum levels, will also lead to a significant dip in interest cost.

Another notable advantage of the divestment is the lower susceptibility of HEG towards volatility in steel prices. While the volume growth in steel production through the EAF route (electric arc furnace) will continue to drive demand for graphite electrodes, steel price volatility is less likely to influence the overall earnings.
Robust performance

The company has reported strong numbers for the quarter ended June 2007. While sales grew by about 22 per cent on a year-on-year basis, earnings, helped by ‘other income’, grew more than two-fold to about Rs 28 crore.

While there was a 1.5 percentage point expansion in margins, there was a six-fold increase in ‘other income’ contribution due to forex fluctuations.

In the light of a volatile rupee outlook and given that the ballooning of ‘other income’ was mainly due to rupee appreciation, contributions from this segment could remain uneven. Earnings, however, could get a lift from a better business mix, a stable input cost scenario and the likely reduction in interest cost.

Bank of India, Canara Bank, Global Telesystems, HEG, Hindustan Zinc, Jindal Stainless, Oriental Paper, Panacea

Bank of India, Canara Bank, Global Telesystems, HEG, Hindustan Zinc, Jindal Stainless, Oriental Paper, Panacea Biotec, Shree Cement, Punjab National Bank, SAIL

SKP Securities - HEG

SKP Securities report on HEG:

Company Profile:

HEG, a premier company of the LNJ Bhilwara Group, is India's leading graphite electrodes manufacturer. HEGL has its graphite manufacturing plant located in Mandideep (Madhya Pradesh) with a capacity of around 52,000 MT per annum. The Company also operates a sponge iron plant, a steel billets plant, and captive power genaration units totaling 56.3 MW.

Investment Rationale:

Unalleviated demand from the steel industry:

Steel manufacturing companies with electric arc furnace are the only consumers of graphite electrodes. With the increase in the adoption of electric arc furnace method to produce steel and limited number of graphite manufacturing companies, the demand for graphites is expected to rise in future, thereby ensuring constant growth in revenues and profitability for the company.

Escalating Margins:

HEGL's Operating Profit Margins (OPMs) has improved significantly since FY04 after it spinned-off its textile unit. HEGL has been able to maintain the OPMs over 21% for the last two years due to higher realizations from the graphite electrodes and we expect the company to continue to do so in the future.

Continuous expansion to meet the growing demand:

HEG Ltd. had increased its graphite manufacturing capacity from 33,600 mtpa in FY05 to 52,000 mtpa in FY06. This will be further increased to 57,000 mtpa in the current financial year by de-bottlenecking the production process.

Captive power plant to lower the overall production cost:

HEGL has its captive power generation facilities with a total capacity of 51.3 MW and it plans to set up another power plant with a capacity of 30MW. This will save a considerable amount of power cost thereby improving the overall margins.

Management's stewardship to drive the company to growth path:

HEGL is a part of LNJ Bhilwara group of companies, which has its interest in diverse fields i.e, Textiles, Graphite & Steel and Power Generation & Consultancy. Being a part of such a management, which has an experience in managing the businesses over several decades, assures the best of operations for HEGL.

Outlook & Recommendation:

Visualizing the demand for graphite in the steel industry, HEGL had increased its manufacturing capacity over the period. HEGL being the leading graphite manufacturer in India will be able to realize the benefits of the rising demand and increasing prices. At the current level of Rs 164.40 HEGL is trading at 6.90 x FY08E earnings and 5.77 x FY09E earnings of Rs 23.83 and Rs 28.48 respectively. We rate the stock a BUY with a 1-year target price of Rs 225 at 8x FY09E earnings, giving it an upside potential of 35.14%.

HEG: Buy

Investors with a one- to two-year perspective can consider taking an exposure to the stock of HEG, a leading graphite electrodes manufacturer. At current market price, the stock trades at about eight times its likely FY08 per share earnings. A healthy demand outlook, newly commissioned capacities and improving operating margins point to strong earnings growth for HEG.

This apart, a strong order book with about 90 per cent production for FY08 pre-sold and the possibility of higher utilisation of its expanded capacities lend visibility to earnings over the next year.

The graphite segment of the company, which exports more than 60 per cent of its production, is likely to be the key revenue driver. HEG has a strong client base, which includes companies such as POSCO, Arcelor Mittal Group and Thyssen Krupp.

For the year ended March 2007, the graphite segment witnessed a growth in revenues of about 54 per cent in comparison to the corresponding period last year. During the same period, while the segment profit grew by about 68 per cent, contribution from exports increased by about 69 per cent.

The capacity expansion completed in the middle of last year, has just begun to contribute and will make a full contribution to revenues and earnings from FY08. With improving utilisations, margins are likely to get an additional boost from the proposed de-bottlenecking of the graphite electrodes plant with a capex of Rs 35 crore. HEG has also lined up a capex of Rs 80 crore for the setting up of a 30-MW thermal power plant. Since most of its power needs are met by its captive power plants, the setting up of this plant is likely to help it contain cost.

HEG's earnings are vulnerable to any unexpected change in the value of rupee vis-à-vis other currencies, given that the company relies significantly on exports. This apart, intensifying competition and any slowdown in the production of steel remain the primary risks.

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