INSUBCONTINENT EXCLUSIVE:
Jefferies Group has a buy call on HEG Ltd
with a target price of Rs 4400.0
The current market price of HEG Ltd
is Rs 3783.65 Time period given bythe brokerage is a year when HEG Ltd
price can reach defined target
HEG Ltd., incorporated in 1972, is a largecap company with a market cap of Rs 15569.88 crore.
Investment rationale by JeffriesWe hosted a
non-deal road show in Mumbai with more than 20 investors meeting the HEG management
Key takeaways from discussion were: 1) Realisation to remain robust
2) Phillips66 needle coke debottlenecking will help improve utilisation
4) Demand for GE within China to increase
5) Looking at different avenues within carbon space for cash utilisation.
Realisation to remain robust: Management highlighted they have
booked volumes for the 1HFY19E at realisations higher than 4QFY18 realisation (~US$11,800/t)
As perthe management, demand supply tightness continues and expect demand supply gap to further widen going forward leading to higher GE
On the spot prices,management commented that it remains at elevated level of more US$17,000/t
Phillips66 debottlenecking to improve utilisation: As highlighted in our note, Phillips66 is increasing its production capacity by about
As per the management, the debottlenecking process is expected to be complete by Oct- Nov 2018
However, thiswould help in improving the utilisation of the company but would not be enough for the capacity expansion
Some portion of the increased production is expected to be diverted to lithium ion batteries
There were lot of concerns over China adding GE capacities which will lead to decline in GE realisations
As per our interaction with some of the industry experts, nipple is a crucial component as it holds the electrode vertically in Electric Arc
China increasing EAF share in steel production: Graftech in a SEC filing mentioned that they estimate at least 105 new EAFs totalling 66mn
ton of steel capacity has been installed or has commenced construction in 2017
This would lead to sharp rise in the demand for graphite electrodes within China
We believe the reason China going for smaller size EAF is because they produce only low grade of electrodes and bigger size EAF needs UHP
grade of electrodes which China cant produce.
Cash Utilisation Plans: As highlighted in our annual report analysis note, HEG is discussing
capacity expansion of 20kt
Management expects the capex for this expansion will be ~US$100 mn and will take at least 2-2.5 years to come onstream
Apart from this expansion, the company is also looking at different avenues within carbon space like graphite micro fines used as anode
material in lithium ion batteries
Management also indicated of at least maintaining pay-out ratio going forward.
