Hold HEG; target of Rs 235: Emkay

Emkay Global Financial Services has recommended hold rating on HEG with a target of Rs 235, in its October 26, 2012 research report.

“HEG, capacity utilizations during the quarter rose from ~75% level during Q1FY13 to 85% (of the expanded capacity) during Q2FY13. This coupled with depreciation in INR (of 2%) during the quarter helped the topline to register a growth of 38% on YoY basis and 14% sequentially. The USD realizations did not improve however on QoQ basis despite some global majors announcing price hike to the tune of 8-10%. We remain cautious on the demand side, as the steel industry is likely to stay under stress and thus, we don’t expect any substantial improvement in demand in the near future. Since, the company has been primarily exporting its products, we believe any further depreciation in INR would help the company to show a better performance and vice versa.”

“Since past few quarters, the EBITDA level performance of the company has been volatile and during Q2FY13, it fell 1133 bps QoQ to 15.5%. This is primarily due to exhaustion of older stock of needle coke contracted at a lower price. In Q2FY13, the company used mainly the high priced newly contracted needle coke, which resulted into sharp jump in the net raw material costs as a percentage of sales to 53%. The segmental EBIT margin for graphite electrode shrank to 7.3%. As, the full impact of the newly contracted needle coke is yet to be reflected, we believe, scope of improvement in the margins is limited. Power segment performance has been satisfactory with EBIT margin of 34% as against 38% in Q1FY13. However, we have concerns on further improvement from hereon, as hydro power units may see lower utilizations. Overall, we feel that the sustainable margins for the company should be in the range of 15- 20% for the near future unless and until there is strong improvement in the realizations.”

“At the CMP of Rs 234, the stock trades at 4.5xFY14 EPS and 5.6xFY14 EV/EBITDA. Continue to value the stock on SOTP basis (5xFY14 EV/EBITDA for core business and 30% discount to BEL stake). Maintain Hold with TP of Rs 235/share,” says Emkay Global Financial Services research reports. 

Institutional holding more than 40% in Indian cos

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