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August 10, 2017 | PM Securities
Our Take
HEG’s Q1fy18 results showing sluggish growth on account of annual sales contracts entered at the start of the year at lower realizations in tandem with the market prices prevailing at that point in time coupled with raw material price increase in the current period. As 70% of the contracts are entered by January, we expect Q2 and Q3 FY18 to show muted growth followed by improvement towards the 4th quarter and probable robust growth in Q1FY19 owing to renegotiation of sales contracts . HEG’s capacity utilization stood at 70 % for Q1 FY17 and is expected to clock ~80% to 85% for the fiscal year on account of increasing demand of Steel production through Electric Arc Furnace (EAF) route. With benefits of reduced global capacity, increased demand, improved realizations and increasing utilization we foresee size-able benifits flowing in to HEG Q1FY19 onwards. We assign a Holdrating to the stock.
Earning’s Call KTA
Graphite Electrode Industry Outlook:
Complete shutdown of Induction Furnace steel production in China estimated to be around 40 – 120 Mn tones in the month of June 2017 along with 40 Mn tones of Blast Furnace steel production.
Due to environmental breakdown in China, it has become net importer of all grades of electrodes from net exporter a year prior.
Closed Graphite Electrode plants in China could take 18 -24 months to get in stream due to shift in underlying structure of the steel industry
2. Gross Debt – Stood at 677 Cr Rs in Q1 FY18
Long term debt stood at 250 Cr Rs, with repayment commitment of 135 Cr Rs in FY18. Management has also indicated to reduce the debt by 40 Cr Rs thereafter in FY19.
FY19 could see aided benefit of 12 – 15 Cr Rs due to debt repayment, reducing finance cost from current levels of 54.72 Cr Rs.
3. Raw Materials – Stood at 113 Cr Rs in Q1 FY18
Needle Coke being the sizeable cost for HEG covers ~2/3 of the raw material cost and is witnessing strong price increments. Also needle coke being an industry with very high entry barriers increment in supply is not envisaged in-organically.
Current needle coke prices are spurting and HEG purchases it at spot prices however sales contracts are at a fixed price on yearly basis which may result in timid growth in the coming 2-3 quarters.
4. Sales Contracts:
Contractual obligations are planned to change in FY 19 from current 1 year to semiannual contracts on accounts of volatility in both Graphite Electrode Market as well as Needle Coke market.
Sales were booked at lower fixed prices, whereas needle coke is sourced at spot-prices along with inability to renegotiate the contracts both on customers and suppliers part resulted in subdued results.
5. Q1FY18 Key Financial Update:
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.
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