Graphite Electrodes - Chinese crackdown on polluting industries has augured well: ICICI Direct

ICICI Direct's sector report on Graphite Electrodes

 
Both HEG and Graphite India, domestic graphite electrode stocks, have seen a sharp run up on the bourses in the last few months. A sustained positive outlook on the global graphite electrode segment coupled with healthy realisations of both global and domestic manufacturers has driven the strong rally. Key triggers have been: 1) consolidation of graphite electrode market globally, 2) ~20% of the global graphite electrode capacity (ex-China) shutting down in the last three year s, 3) increase in steel production through EAF route (outside China) coupled with an increase in global steel prices, 4) closure of steel capacity in China leading to a decline in exports of steel and graphite electrodes from the region.

Traditionally, a large part of the order book of HEG and Graphite India is negotiated in January, February every year. Thus, benefits of increased electrodes prices have been limited in H1FY18 as the contracts were negotiated at old prices. However, going forward, the topline, EBITDA of these domestic players is likely to get a boost with the new contracts likely to be negotiated at higher prices. Thus, we believe there is more leg room in the stock price appreciation. On the back of an improved financial performance, we expect ROCE of both graphite electrodes players to improve substantially to 44-50% by FY20E. We maintain our positive stance on both Graphite India and HEG. We have a BUY recommendation on both stocks.

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IDirect_Graphite_SectorUpdate_Jan18