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July 2, 2017 | PM Securities
Our Take:
Steel industry has been witnessing good growth in recent years with global steel production growing at 5.2% and India at 8.5% y-o-y (FY16-17). After 7 Years of downturn, the industry is in middle of a turn around. Out of global steel production of 1628 Mn. Metric Tonnes (FY16), 808 Mn. Metric Tonnes (49.6%) is produced by China. Majorly two processes are used for production of steel namely BOF (Basic oxygen furnace) & EAF (Electric Arc Furnace) and BOF is identified as a pollutant by Chinese govt. & hence 150 Mn. Metric Tonnes production using BOF route is expected to be cut by China. Besides prices of coke & limestone used in BOF process are also increasing making EAF more viable. HEG ltd being one of the 3 top producers globally of Graphite Electrodes an inevitable material required for the production of Steel through EAF (Electric Arc Furnace) route, shall benefit from the changing industry dynamics.
With increase in material cost of BOF Steel Process coupled with Chinese government interventions in traditional steel making process, and healthy growth in the global & Indian steel industry we expect demand expansion of HEG’s electrodes due of organic demand growth on account of turn-around in steel industry and further inorganic EAF demand due to Chinese pollution norms.
Company Background:
HEG is worlds 3rd largest firm engaged in production of Graphite Electrodes in India with an installed capacity of 80,000 Tonne p.a. and 3 captive power plants with a capacity of 76.5 MW at a single location in Mandideep, Madhya Pradesh. With 1000 + employees and 100 + clients including Top 20 Steel producers HEG exports 60 % of its Graphite Electrode production.
Product Prospects:
1. Graphite Electrodes
Graphite Electrodes is the only core product of HEG Ltd. Graphite prices are expected to strengthen hereon but can be easily passed on to Steel companies as these electrodes account for only 2 – 3 % of the steel industry’s costs. Owing to higher organic demand on account of growing steel industry and further push by Chinese anti-pollution measures capacity utilisation is expected to be around 80 % for FY 18 as against ~65% witnessed in FY 17 thus spurting top-line. Q4FY17 already witnessed ~80% utilization levels. Further debt reduction to the extent of 1500 Mn. shall improve PBT margins.
2. Power
With 2 thermal power plants and 1 hydro power plant, HEG produces enough energy to suffice the need of Graphite Electrode plant which conceives ~ 42 % of total cost and sells remaining power which contributes around 8 crores or ~ 1 % to top line. Since it is a non core business we keep our outlook flat on the segment.
Factors in favour:
1) Increase In prices of BOF route raw materials:
Coke, iron ore & lime prices are strengthening making the BOF (Basic Oxygen Furnace) route costlier, this gives an edge to EAF Steel process which makes it more cost competitive using steel-scrap and no coke.
2) Chinese Government Environmental Crackdown:
Chinese Steel Manufacturers shut down due to government intervention in highly polluting industries resulting in a cut of steel production through BOF route of nearly 150 Million Metric Tonne over the next 3 years.
3) Availability Of Scrap Steel:
Shut down of induction furnace based steel in next 3 years would increase the availability of scrap steel one of the major raw materials of EAF steel process.
Key Financials:
(Rs. MN) / As per IndAS
Disclaimer
This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.
Copyright © 2017 Pankaj Mangaldas Securities pvt. ltd. , All rights reserved.
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