Hold HEG; target of Rs 245: Emkay

Emkay Global Financial Services has recommended hold rating on HEG with a target of Rs 245 in its August 9, 2012 research report. The research firm says HEG's capacity utilization for the quarter stood at 75%, falling from 90% in Q4FY12. This is indicating some concerns on the demand side.

“HEG’s EBITDA margin rose by 1100 bps YoY and 900 bps QoQ to 27% in Q1FY13, which we believe, is due to fall in net raw material costs (with stock adjustments) to 41%, a decline of 900 bps QoQ. The reasons behind this are use of old, low cost needle coke inventory, weak INR and slight improvement in realizations. On segmental basis also, graphite and power segments contributed better than expectations. While EBIT margin of the graphite electrode segment rose 527 bps and 854 bps respectively on QoQ and YoY basis to 17.5%, power segment EBIT margin more than doubled (both YoY and QoQ) to 38% on account of better availability of linkage coal. We believe, it could be difficult for the company to maintain such margins in the coming quarters especially in the current scenario, as slowing demand could impact the realizations of graphite electrode and coal supply under the present uncertainty can become an issue.”

 “Capacity utilization for the quarter stood at 75%, falling from 90% in Q4FY12. This, we believe, is indicating some concerns on the demand side, as global steel industry has been undergoing turbulent weather. Global majors also have shown lower utilizations and we believe, for the near term this can be a concern. The company has been guiding for a capacity utilization of high 80’s going forward. Realizations on the other hand remained slightly higher during this quarter and the company also got benefit of sharp depreciation in INR, as its products are primarily exported. Weakening demand, we feel may provide some pressure on the global graphite electrode prices, however, Indian producers are likely to get benefited by weak INR for the near term. Order booking of the company meanwhile continues to be on an average for 3-6 months on a rolling basis.”

“The exceptional loss due to hedging of foreign currency has been a major headwind for the company. As per the management, this amount has mostly been exhausted and despite some expected moderation in margin from the current levels, we may see strong bottomline. At the CMP of Rs 227, the stock trades at 4.2xFY14 EPS and 5.5xFY14 EV/EBITDA. Continue to value the stock on SOTP basis (5xFY14 EV/EBITDA for core business and 30% discount to BEL stake). Assign Hold with TP of Rs 245/share,” says  Emkay Global Financial Services research report.

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