HEG Ltd (HEG)

CMP: ₹ 2,100 Target: ₹ 2,520 (20%) Target Period: 12 months BUY

September 17, 2024

Structural tailwinds in place for long term growth…

About the stock: HEG is one of the leading graphite electrode manufacturers in

Company Update
India and a key exporter with ~65%- 70% of production exported to global markets.

• Graphite electrode production capacity of 100,000 ton in Madhya Pradesh. Particulars

Particulars ₹ crore
Q1FY25 Results: HEG reported muted performance in Q1FY25. On standalone
Market Capitalisation 8,106
basis, Topline for the quarter stood at ₹ 572 crore. Adjusted EBITDA came in at ₹70
Total Debt (FY24) 619
crore with EBTDA margins at 12.2%. PAT stood at ₹2.6 crore. It approved 1:5 stock
Cash & Investments 990
split; i.e. 1 share of face value of ₹ 10 will be split into 5 shares of face value of ₹ 2.
EV (₹ crore) 7736
Investment Rationale: 52 Week H/L (₹) 2,745 / 1,462
Equity Capital (₹ crore) 39
• HEG to benefit from global shift towards EAF route: As the global steel Face Value (₹) 10.0
industry progresses decarbonization, it is increasingly adopting Electric
Arc Furnace (EAF) route of steel making, which emits ~75% less carbon vs. Shareholding pattern
Sep-23 Dec-23 Mar-24 Jun-24
traditional steelmaking (BOF) and also reduces production costs. EAF
Promoter 55.8 55.8 55.8 55.8
share in total crude steel production (ex-China) is expected to rise from
FII 6.8 6.9 6.9 6.1
~50% in 2023 to ~55% in next 3 to 4 years. By 2030, more than ~170 million DII 7.2 8.9 10.4 13.1
tons of EAF capacity (ex-China) is expected to be added, leading to an Other 30.2 28.5 27.0 25.1
incremental demand for graphite electrodes by ~2 lakh tons vs. present
Price Chart
industry size of ~8 lakh tonne. HEG, being amongst the top 5 graphite

ICICI Securities – Retail Equity Research

electrodes producer globally, is poised to benefit from this transition. With
structural tailwinds, we expect demand and pricing recovery in graphite
electrode space from H2FY25 onwards & we bake in capacity utilisation of
~75% for FY25E and ~80% for FY26E, on expanded base (1 lakh tonne).

• Promising opportunities lies ahead in new venture- graphite anode:

Transition towards E-mobility space and rise in use of stationary

ar

ar

ar
e

e
e

e
applications will drive demand for Li-On batteries domestically to ~150- i t ( ) E ( )

160 GWh by 2030, resulting in need for ~1.5 lakh tons graphite anode.
Recent event & key risks
With government’s aim to localize battery components, HEG plans to
seized the opportunity by setting up a 20,000 tons capacity of graphite • Posted muted performance in
anode at a capex of ~₹1,800 crore. This venture is anticipated to offer Q1FY25 with MTM impact on
value addition benefits with targeted EBITDA margins & RoCE pegged at certain long-term investments.
20%+. The company is fine tuning plan of action in this space (location etc.,
• Key Risk: ((i) delay in global
amid falling battery prices globally) with likely commissioning in FY27E.
transitioning to EAF route,
• Unlocking value by demerging graphite electrode business: HEG plans affecting demand (ii) More
to segregate itself into two entities i.e. (i) Pure play Graphite Electrode than-expected rise in needle
business and (ii) Greentech which includes power business by merger of coke prices impacting margins.
Bhilwara Energy (owning 100% stake) and TACC (anode material
Research Analyst
business) thereby creating two listed entities i.e. HEG Graphite & HEG
Greentech. Existing shareholders will receive one share of each entity for Shashank Kanodia, CFA
every share held in HEG ltd. This move aims to unlock business potential [Link]@[Link]

by prioritizing core business strength. Transaction looks fair to us. Manisha Kesari
[Link]@[Link]
Rating and Target Price
• We have a positive view on HEG amid of ongoing global shift towards EAF
route and expansion led volume growth in offering. We assign BUY rating
with a target price of ₹2,520 thereby valuing it on SoTP basis on FY26E.
Key Financial Summary
Key Financials 4 year CAGR 2 year CAGR
FY20 FY21 FY22 FY23 FY24 FY25E FY26E
(₹ Crore) (FY20-24) (FY24-26E)
Net Sales 2,149.0 1,256.2 2,201.6 2,467.2 2,394.9 2.7% 2,288.7 2,994.9 11.8%
Reported EBITDA -5.8 -59.1 527.2 619.7 384.0 NA 340.5 700.4 35.0%
Adjusted PAT 53.4 -25.3 390.6 455.5 231.6 44.3% 149.2 419.3 34.6%
Adjusted EPS (₹) 13.8 -6.5 101.2 118.0 60.0 38.7 108.6
EV/EBITDA (x) NA NA 14.6 12.9 20.6 23.3 12.0
RoCE (%) 1.6 -0.5 11.9 13.0 7.4 4.6 11.7
RoE (%) 1.6 -0.7 10.3 11.2 5.6 3.6 9.3
Source: Company, ICICI Direct Research
 Company Update | HEG Ltd ICICI Direct Research

Recent Developments: Demerger Announcement

• HEG has announced a corporate action to demerge its graphite electrode
business into a new listed entity named as HEG Graphite Ltd. This new
listed entity will have an identical shareholding (mirror) as of existing HEG
Ltd, with the promoter holding a 56% stake and the remaining 44% held
by public shareholders.

• The existing HEG ltd will be renamed as HEG Greentech Ltd, which owns
49% stakes in Bhilwara Energy (BEL; operates in hydro power generation)
and 100% stakes of TACC, a graphite anode business for lithium-ion cells.
It plans to acquire remaining 51% stakes of BEL from the promoter group,
thereby merging it with this entity and owning 100% of BEL.
Consequently, the promoter shareholdings will increase from 56% to
70.5% in in HEG Greentech.

• The transaction appears to be fair in nature with BEL possessing operating

renewable energy assets and net cash positive B/S. The entire process is
expected to complete by the mid of FY26.

Exhibit 1: Post restructuring Corporate Structure

Source: Company, ICICI Direct Research

Exhibit 2: Indicative Timeline

Source: Company, ICICI Direct Research

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 Company Update | HEG Ltd ICICI Direct Research

Q1FY25 Earnings Conference Call Highlights

• Graphite Industry: In line with decarbonization efforts, ~100 million
tonnes (MT) of new greenfield capacities for Electric Arc Furnaces have
been announced globally (Ex China), expected to become operational
between 2024 and 2030. Of this, 60 to 65 million tons are likely to be
operational by early of 2027, which will likely increase the electrode
demand by 100,000 to 125,000 tons over the next 3 years.

• Graphite Electrodes: Capacity utilisation for Q1FY25 was at 80%, with a

target of around 75% utilisation level for FY25 amid a sluggish global
demand environment. Additionally, graphite electrodes realisation has
been under pressure, with expectations that prices will remain muted over
the next 2 to 3 quarters.

• TACC: E ’s upcoming graphite electrode capacity of 20,000 tons,

originally schedule to be operational by mid of 2025, has now been
delayed by two more quarters, pushing the timeline to FY27. The
postponement was due to delays in the commissioning of lithium-ion
battery production, with prices declining from $90 per kwh to $55 per kwh,
as well as renegotiation with state governments for lower power prices. It
has invested ₹60 crores of capex till date, out of which ₹ -35 crores was
allocated for land purchase. It expects project RoCE, margins to be 20%+.

• Others: As of 31st June 2024, Cash balance stood at ₹9 7 crores. Malana

Power business posted an EBITDA stood at ₹ crores in FY24. Other
Expenses for the quarter was higher due to one-time adjustment of
treasury-related investments in equity shares, where the company booked
a mark-to-market loss of ₹ 30-31 crores on certain long-term investment.

Exhibit 3: EAF Steel Forecast Trend -BCG/SMS Group in million MT

Source: Company, ICICI Direct Research

Exhibit 4: Graphite Electrode Capacity Build Up at HEG (in ‘ T)

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 3

 Company Update | HEG Ltd ICICI Direct Research

Financial Story in Charts

Exhibit 5: Capacity Utilisation trend at HEG
90 78 75 80
89
75000 100

60000
75
tonne

45000
50

%
30000

71200

66000

80000
72000

74825
25
15000

0 0
FY22 FY23 FY24 FY25E FY26E

Production Capacity utilisation

Source: Company, ICICI Direct Research; for FY24 the capacity is weighted average for 80,000 – 9M’24 and 1,00,000 – 3M’24

Exhibit 6: Topline trend

3,500
2,995
3,000
2,467 2,395
2,500 2,202 2,289

2,000
₹ crore

1,500
1,000
500
0
FY22 FY23 FY24 FY25E FY26E

Source: Company, ICICI Direct Research

Exhibit 7: EBITDA and EBITDA margins trend

800 30
700 25
24 25
600 23
20
500
16
₹ crores

15
400 15
%

700
300 620
527 10
200 384 341
5
100
0 0
FY22 FY23 FY24 FY25E FY26E
EBITDA EBITDA Margin

Source: Company, ICICI Direct Research

Exhibit 8: Valuation table

Particulars Amount
FY26E EBITDA (₹ crore) 700
EV/EBITDA Multiple (x) 10 We have a positive view on HEG amid of ongoing
EV (₹ Crore) 7,004 global shift towards EAF route and expansion led
Net Debt (₹ crore) 82 volume growth in offering. We assign BUY rating at a
2x P/B Bhilwara Energy Equity Invst. (₹ crore) 614 target price of ₹2,520 thereby valuing it on SoTP basis,
2x CWIP to new Anode Plant (2x P/B, ₹ crore) 2,189 i.e. 10x EV/EBITDA on core graphite electrode
HEG Implied Equity Value (₹ crore) 9,724 business, 2x P/B on equity investment in BEL and 2x
No. of Shares (crore) 3.9 CWIP to graphite anode business, all on FY26E.
Target Price (₹) 2,520
CMP (₹) 2,100
Upside (10%) 20.0%
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Company Update | HEG Ltd ICICI Direct Research

Financial Summary

Exhibit 9: Profit and loss statement ₹ crore Exhibit 10: Cash flow statement ₹ crore
(Year-end March) FY23 FY24 FY25E FY26E (Year-end March) FY23 FY24 FY25E FY26E
Total Operating Income 2,467 2,395 2,289 2,995 Profit/(Loss) after taxation 456 232 149 419
Growth (%) 12 -3 -4 31 Add: Depreciation & Amortization 102 175 191 197
Raw Material Expenses 915 1151 1066 1314 Sub: Other Income -109 -142 -69 -84
Employee Expenses 92 95 98 112 Net Increase in Current Assets -231 247 67 -284
Other expenses 841 765 785 869 Net Increase in Current Liabilities -48 -29 -1 122
Total Operating Expenditure 1848 2011 1948 2295 CF from operating activities 169 483 337 370
EBITDA 620 384 341 700 (Inc)/dec in Investments 370 -332 45 490
Growth (%) 18 -38 -11 106 (Inc)/dec in Fixed Assets -478 -317 -300 -800
Depreciation 102 175 191 197 Add: Other Income 109 142 69 84
Interest 26 36 30 27 CF from investing activities 1 -507 -186 -226
Other Income 109 142 69 84 Inc / (Dec) in Equity Capital 0 0 0 0
PBT 600 315 189 560 Inc / (Dec) in Loan 78 -122 -50 -50
Exceptional Item 0 0 -31 0 Dividend & Dividend Tax -164 -88 -60 -106
Total Tax 145 84 40 141 Others -4 -64 -31 0
Reported PAT 456 232 118 419 CF from financing activities -90 -274 -141 -156
Adjusted PAT 456 232 149 419 Net Cash flow 80 -298 9 -12
Growth (%) 17 -49 -36 181 Opening Cash 602 681 383 393
EP (₹) 118 60 39 109 Closing Cash 681 383 393 381
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 11: Balance Sheet ₹crore Exhibit 12: Key ratios

(Year-end March) FY23 FY24 FY25E FY26E (Year-end March) FY21 FY23 FY24 FY25E FY26E
Liabilities Per share data (₹)
Equity Capital 39 39 39 39 EPS 118 60 39 109
Reserve and Surplus 4,039 4,106 4,164 4,478 BV 1,056 1,074 1,089 1,170
Total Shareholders funds 4,077 4,145 4,203 4,516 DPS 43 23 15 27
Total Debt 741 619 569 519 Cash Per Share 177 99 102 99
Deferred Tax Liability 87 96 96 96 Operating Ratios (%)
Non Current Liabilities 7 9 9 9 EBITDA margins 25.1 16.0 14.9 23.4
Total Liabilities 4,912 4,870 4,877 5,141
PBT margins 24.3 13.2 8.2 18.7
Net Profit margins 18.5 9.7 6.5 14.0
Assets
Inventory days 285 217 220 210
Gross Block 2,545 3,128 3,228 3,328
Debtor days 72 77 75 75
Less: Acc Depreciation 1,183 1,346 1,536 1,733
Creditor days 164 135 135 135
Net Block 1,363 1,782 1,692 1,595
Return Ratios (%)
Capital WIP 472 194 394 1,094
RoE 11.2 5.6 3.6 9.3
Total Fixed Assets 1,835 1,977 2,086 2,690
Investments 666 998 953 463 RoCE 13.0 7.4 4.6 11.7
Inventory 1,440 1,194 1,174 1,320 RoIC 15.6 5.8 4.4 14.4
Debtors 489 508 470 615 Valuation Ratios (x)
Loans and Advances 268 167 177 187 P/E NA 18.2 35.8 55.6 19.8
Other Current Assets 109 190 171 154 EV / EBITDA NA 12.9 20.6 23.3 12.0
Cash 681 383 393 381 EV / Revenues 3.4 3.6 3.7 2.8
Total Current Assets 2,988 2,442 2,385 2,657 Market Cap / Revenues 3.4 3.5 3.6 2.8
Creditors 412 425 394 486 Price to Book Value 2.0 2.0 2.0 1.8
Other Current Liab. (incl Prov.) 165 122 152 182 Solvency Ratios
Current Liabilities & Prov 576 547 546 668 Debt / Equity 0.2 0.1 0.1 0.1
Net Current Assets 2,411 1,895 1,839 1,989 Debt/EBITDA NA 1.2 1.6 1.7 0.7
Others - - - - Current Ratio 5.2 4.5 4.4 4.0
Application of Funds 4,912 4,870 4,877 5,141 Quick Ratio 2.7 2.3 2.2 2.0
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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 Company Update | HEG Ltd ICICI Direct Research

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Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

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 Company Update | HEG Ltd ICICI Direct Research

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