Hold HEG; target of Rs 750: ICICI Direct

ICICI Direct's research report on HEG

HEG reported a subdued set of Q1FY21 numbers on account of a muted operational performance wherein it reported a loss at the EBITDA level. For standalone operations, topline came in at Rs 233.3 crore (down 71% YoY) & reported EBITDA loss came in at Rs 11.3 crore (vs. EBITDA profit of Rs 347.8 crore in Q1FY20). For the quarter, it reported a negative EBITDA margin of 4.8% compared to positive margin of 42.6% in Q1FY20. During the quarter, as the lockdown was in force for a significant period, the company's operations and financial results were impacted. On account of Covid-19 related lockdowns, the company reported subdued volumes, leading to negative operating leverage. For Q1FY21, other expenses as a percentage of sales were at 33.5% compared to 16.9% in Q1FY20 and 30% in Q4FY20. Other income for the quarter aided the company to report a profit at the net level. Other income for the quarter was at Rs 46 crore in comparison to Rs 39.2 crore in Q1FY20. Hence, for standalone operations, HEG reported a profit of Rs 10.8 crore in Q1FY21 (net profit of Rs 234.4 crore in Q1FY20).

Outlook
HEG reported a muted performance in Q1FY21 on the back of weak demand from the steel sector. Going forward, over the near term, demand for graphite electrodes is expected to remain subdued due to partial closure of steel capacities globally, lower steel production and de-stocking of electrode inventory at the customer end at a slower pace than anticipated, thereby adversely impacting demand prospects. FY21 is expected to remain a challenging year for the company as graphite electrode demand and realisation is expected to remain under pressure. We value the stock at 4x FY22E EV/EBITDA and arrive at a target price of Rs 750. We have a HOLD recommendation on the stock.

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