Despite Q4 loss, this electrode maker is Jefferies' multibagger bet for FY22

The EconomicTimes - 7 June 2021   After falling for seven straight sessions, shares of graphite electrode maker HEG are on the recovery mode, climbing about 7 per cent in two sessions to Friday.

The company reported losses for March quarter and for FY21, but foreign brokerage Jefferies felt commodity stocks, like HEG, have entered an upgrade cycle after 2-3 weak years. It expects shares of HEG to hit Rs 3,065 in its base case scenario and Rs 4,200, almost double the prevailing price, in its upside scenario.

On Monday, the scrip traded 1 per cent higher at Rs 2,269. This was in addition to a 6.5 per cent rise seen in the counter in the previous session.

"We retain our electrode average selling price estimate at $6,500 per million tonnes for FY22 , $7,300 for FY23 and $7,500 for FY24. Our ASP estimates are still 40-50 per cent below the upcycle peak of FY19. While we broadly retain FY23 and FY24 capacity utilisation estimates at 85 per cent, we slightly raise FY22 estimates to 77 per cent from 75 per cent," Jefferies said.

Jeffries' upside scenario is, however, based on graphite electrodes realisation of $10,000 per million tonne, utilsation rate of above 85 per cent and needle coke prices at $2,000 per tonne over FY22-FY24.

Graphite electrodes are used in steel production via the electric arc furnace (EAF) process. Graphite electrode, as a conductor releasing electric energy, is used to melt steel scraps in an electric arc furnace. Nearly 1.7-1.8 kg of electrodes are needed to produce 1 tonne of steel.

For HEG, exports to steel companies account for 65-70 per cent of the total sales. Excluding China, steel production is rising across the world since October 2020. Steel prices also have risen, resulting in increased profitability of steel companies.

HEG's capacity utilisation stood sturdy at 85 per cent in April and May. The management is expecting electrode prices to start firming up from the next quarter amid rising steel production and normalised inventory levels.

For 2021 so far, electrode prices are already up 20 per cent so far. "Excluding China, global steel production via EAF is estimated at around 47 per cent. China is also embarking on multiple initiatives towards decarbonisation now, which could thrust EAF production," Jefferies said.

Covid disruption in India may not materially impact June quarter results, Jefferies said, adding that the management is hopeful of achieving utilisation levels over the next 2-3 quarters.

For FY21, the company reported a net loss of Rs 25 crore, as revenues fell to Rs 1,256 crore from Rs 2,149 crore. Losses for March quarter stood at Rs 16 crore.

Meanwhile, HEG is looking to commission its 20,000 mt electrode capacity by FY23. Its prevailing capacity stands at 80,000 mt. The company spent Rs 450 crore in FY21, it will spend another Rs 650 crore in FY22 and Rs 100 crore thereafter.

A favorable industry outlook and improving operational performance at HEG made Jefferies assign an EV/Ebitda of 7 times to the graphite electrode maker, which is at a 10 per cent premium to the stock's historical 10-year average multiple of 6.5 times).

 

Link:  https://economictimes.indiatimes.com/markets/stocks/news/despite-q4-loss-this-electrode-maker-is-jefferies-multibagger-bet-for-fy22/articleshow/83300438.cms