Pivotal player driving the green steel revolution …
About stock: HEG is one of the leading graphite electrode manufacturers in India and is a key exporter with ~65%- 70% of production exported to global markets.
• It has the world’s largest single site graphite electrode manufacturing plant of 100,000 tonne capacity in state of Madhya Pradesh.
Investment Rationale
• Decarbonization, global shift towards EAF route; positive for HEG: In the pursuit of decarbonization and lower the carbon footprint, global steel manufacturers are shifting towards Electric Arc Furnace (EAF) route of steel making, which emits ~75% less carbon vs. the traditional steelmaking method i.e. BOF (blast furnace) while also offering lower production costs and greater cost effectiveness. EAF share in total crude steel production (exChina) has increased from ~44% in 2015 to ~50% in 2022 and is expected to further rise to ~55% in next few years. Moreover, by 2030, it is projected that more than ~170 million tons of EAF capacity (ex-China) will be added, resulting in incremental demand for graphite electrodes, an industrial consumable product utilized in EAF, by ~2 lakh tons vs. the present industry size of ~8 lakh tonne. HEG, one of the top 5 graphite electrodes producer globally, stands to benefit significantly from this shift towards green steel, with its largest single site plant boasting a capacity of 1 lakh tonne, including new capacity of 20,000 tonne. At HEG, on expanded base, we have built in capacity utilisation of ~75% for FY25E and ~82% for FY26E.
• Promising prospect await in new venture- graphite anode (sunrise space): Li-On batteries is the new sunrise sector catering to E-mobility space (Electric Vehicles) & stationary applications with demand pegged at ~150- 160 GWh by 2030, resulting in ~1.5 lakh tons demand for graphite anode, a key component in lithium-ion cell. As government aims to localize significant segments of battery components, HEG aims to seize this opportunity by venturing into manufacturing of graphite anode. HEG is setting up a capacity of 20,000 tons of this material (catering to ~20 GWh of cell capacity) at a capex cost of ~₹1,700-1,800 crores with expected commissioning in H2FY26 and intended asset turnover of 1-1.1x, EBITDA margins of ~25%+ and RoCE of ~20%. With core expertise in processing needle coke for manufacturing graphite electrodes, this venture will offer VAP benefits to HEG and shall provide stability to its earrings profile, structurally positive in nature.
Rating and Target Price
• We have assigned BUY rating on HEG, on the back of structural demand drivers in place amid ongoing global shift towards EAF route of steelmaking, capacity expansion led volume growth in offering & graphite anode business.
• We assign a target price of ₹ 2,420 to HEG thereby valuing it on SoTP basis, i.e. 7.5x EV/EBITDA on core graphite electrode business, 2x P/B on equity investment in BEL and 1x CWIP to graphite anode business, all on FY26E
Leave a Reply