143% return in 1 year and 1,400% in 5 years! This multibagger has analysts talking

Leading electrode graphite major HEG Ltd has been buzzing on Dalal Street due to robust uptick in global steel prices as well as production. The company’s scrip has gained 142% in the last one year and 1,384% in five years.

Analysts on Dalal Street are bullish on the company despite the recent run-up in the counter. They believe that the uptick in steel production has augured well for graphite electrode demand. Going forward, the growth trend in global steel production is likely to continue with a healthy demand recovery in major steel consuming industries.

“The domestic steel industry is also poised to grow with increased government spending on infrastructure. The combination of these factors is expected to drive demand for graphite electrodes and also have a positive rub-off effect on graphite electrode prices. Graphite electrode prices have already started to move northwards, auguring well for graphite electrode companies,” ICICI Securities said.

Another graphite electrodes major Graphite India has also gained 282% and 904% in the last one year and five years, respectively.

Q4 results

Of late, HEG reported a consolidated net loss of Rs 16.08 crore for the quarter ended March 31. It had reported a loss of Rs 376.96 crore in the same quarter last year. On the other hand, revenue from operations increased marginally to Rs 380.48 crore in Q4FY21 over Rs 374.44 crore in Q4FY20. Graphite India is yet to announce its March quarter results.

In the first four months of CY21, global crude steel production witnessed healthy growth, auguring well for graphite electrode majors. During January-April 2021, global steel production was at 663 million tonnes (MT), up 13.7% YoY. In addition to higher global steel output, steel prices witnessed healthy strength. “Higher global steel output and strength in global steel prices have put graphite electrode players such as HEG in a sweet spot,” ICICI Securities said in a report.

Should you buy now?

The brokerage has a ‘Buy’ call on HEG with a price target of Rs 2,800, indicating an upside of over 20% from the current market price of Rs 2,262. “HEG’s capacity utilisation has sequentially improved from around 45% in Q1FY21 to 85% in Q4FY21. We have upgraded the stock from ‘Hold’ to ‘Buy’ on the back of an improved industry outlook,” ICICI Securities said in a report.

Graphite electrodes are the main heating element used in an electric arc furnace (EAF), a steelmaking process where scrap from old cars or appliances is melted to produce new steel. It needs around 1.7-1.8 kg of electrodes to produce 1 tonne of steel. Ex-China, global steel production via EAF is around 47%. HEG exports 65-70% of sales. Thereby, Covid disruption in India may not materially impact Q1FY22.

Global brokerage firm Jefferies also holds a bullish view on HEG with a revised price target of Rs 3,065 (earlier Rs 2,855). “Commodity stocks have entered an upgrade cycle after 2-3 weak years. Factoring improving operational performance and favourable industry outlook, we value HEG at EV/EBITDA of 7 times, at around 10% premium to its historical 10-year average (vs 6.5 times),” Jefferies said adding electrode prices have also risen by over 20% year-to-date (YTD).