Accumulate HEG; target of Rs 261: Emkay

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Accumulate HEG; target of Rs 261: Emkay

Emkay Global Financial Services is bullish on HEG and has recommended accumulate rating on the stock with a target of Rs 261 in its August 2, 2011 research report.

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Emkay Global Financial Services is bullish on HEG and has recommended accumulate rating on the stock with a target of Rs 261 in its August 2, 2011 research report.

"HEG, similar to the last five quarters, the realizations in graphite electrodes remained subdued in Q1FY12. Some of the global players such as Graftech and SGL have recently announced price hikes in graphite electrodes and specialties, but the Indian graphite producers are yet to benefit out of that. The management is also not very confident of witnessing such benefits in near future. Added to this, the higher domestic input costs in terms of CPC, furnace oil and LDO put significant pressure on the margins in the quarter as a result of higher crude oil prices . The company has booked needle coke requirements for CY11 at almost similar rates as CY10."

"Out of the three plants under operation, the Tawanagar Hydro plant did not operate in the quarter due to its seasonal factors . Due to maintenance shutdown, power generation from thermal power plants remained low during the quarter. The maintenance cost for the shutdown, increased thermal coal prices (rose by ~20%) and the incremental cost of power purchased from the grid due to the shutdown, affected the EBITDA margins to a large extent. The management continues to maintain that the phase- II of the final capacity addition (66 ktpa to 80 ktpa) has been progressing well and is expected to be fully commissioned by Q3FY12. The phase- I of the expansion project commenced during the end of Q4FY11. We feel that the impact of higher volumes would be visible in Q4FY12. In Q4FY11, as per its buy- back plan, the company brought back 14,45,728 shares from the market at an average price of Rs 245/ share. The company has extinguished 14,43,452 share during the quarter. This represents 60% of the total buy back plan."

"At the CMP of Rs 230, the stock is discounting its FY13E EPS by 7.1x and is available at 5.2xFY13E EV/ EBITDA. On SOTP basis, we value the core business 5xFY13EV/ EBITDA and apply 20% discount to the attributable Bhilwara Energy value after valuing the existing businesses 1.5x P/BV to arrive at a revised target price of Rs 261/ share. We downgrade the stock to Accumulate," says Emkay Global Financial Services research report.

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To read the full report click on the attachment