Buy HEG; target of Rs 276: Emkay

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Buy HEG; target of Rs 276: Emkay

Emkay Global Financial Services is bullish on HEG and has recommended buy rating on the stock with a target of Rs 276 in its May 4, 2011 research report.

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Emkay Global Financial Services is bullish on HEG and has recommended buy rating on the stock with a target of Rs 276 in its May 4, 2011 research report.

"HEG, Q4FY11 topline at Rs 2816 million, down 16% YoY and 9% QoQ on account of subdued prices for graphite electrodes and lower volumes. EBITDA fell by 22% and 17% on YoY and QoQ respectively to Rs 581 million mainly due to rise in employee costs and other expenditure. Rise in other income coupled with lower depreciation, interests and taxes helped the company to report a PAT of Rs 344 million, down 12% YoY and 10% QoQ. Our SOTP target comes at Rs 276 valuing the core business at 5xFY13 EV/ EBITDA and 25.8% stake in Bhilwara energy at 1.5x P/BV with 20% holding company discount."

"Barring Q1FY11, the company has been consistently maintaining higher capacity utilizations indicating strength of the order book. In Q4FY11 too the plant was run at almost 90% utilization level. The sales however were not at par with the production during the quarter and that has been one of the reasons behind QoQ drop in topline performance of the company. For Q1FY12, the company is 100% booked and we expect some spillover sales of Q4FY11 to be reported in Q1FY12. As per the management, the company has already commissioned part of its additional 14000 tonnes of capacity and full operation is likely to be available during Q3FY12. We factored in fully expanded capacity from Q4FY12. Out of the Rs 225 crore capex along with Rs 50 cr for quality purpose, the company has spent Rs 75 crore in FY11 and the remaining would be spent during the final stage."

"The realizations in graphite electrodes have been lower for past few quarters and the same trend continued in Q4FY11 also. Though, some of the global players announced a price hike recently, the Indian producers could not realize the benefit till now, as most of the quantity (in the range of 75- 80%) is booked on a longer term basis. However, the same can be taken as a positive as the company would benefit in case of higher spot realizations for its 20- 25% exposure. We would prefer to wait and watch to get more clarity on the same before factoring in any substantial rise in graphite electrode prices. On the cost front higher thermal coal prices have been a concern for the company as the cost of power generation has been Rs 3.5/ unit. Sustained higher crude oil prices also could be a concern from CY12, as it would call for a hike needle coke prices. For CFY11, the company has already locked both quantity and prices of needle coke."

"At the CMP of Rs 224, the stock is trading at 6.5x its FY13E EPS and 4.8x FY13E 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 target price of Rs 276/ share. Assign BUY rating on the stock," says Emkay Global Financial Services research report.

Public holding more than 90% in Indian cos

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