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.