HEG Limited

Global crude steel production in CY2024 declined by 0.8% to 1,883 million tons, with ex-China production showing a marginal 0.2% growth. India, however, saw a 6.3% rise to nearly 150 million tons. China's steel exports surged to 111 million tons, the highest in 8 years, impacting global demand for graphite electrodes. Despite this, management remains optimistic about the medium to long-term outlook, citing the irreversible decarbonization shift and approximately 100 million tons of new greenfield electric arc furnace (EAF) capacity expected worldwide.

HEG reported a 15.12% YoY decline in revenue from operations to INR 477 crores in Q3 FY25, compared to INR 562 crores in Q3 FY24. Despite this, EBITDA significantly increased by 76.36% YoY to INR 194 crores (from INR 110 crores in Q3 FY24), resulting in an EBITDA margin of 40.67%. Standalone Net Profit After Tax surged by 164.86% YoY to INR 98 crores, and consolidated PAT rose by 88.63% YoY to INR 83 crores. The company maintained its long-term debt-free status with a treasury of nearly INR 1,000 crores as of December 31, 2024.

HEG's plant operated at approximately 80% capacity utilization for its 100,000-ton capacity, which management claims is the highest among Western graphite electrode companies. The company exports about two-thirds of its production to over 30 countries. While electrode pricing is under pressure, management believes HEG remains the lowest-cost producer globally. The lead time from raw material procurement to electrode sale is 3-6 months, with 80-85% of the current quarter's capacity already sold and at least 50% for the next quarter.

The demerger scheme for the anode business is in process, delayed by 2-3 months due to a share split, with re-filed papers with SEBI. Approvals are expected by the end of 2025, aiming to unlock shareholder value. The new anode entity is estimated to be valued at INR 3,200 crores. The anode plant, with an increased capacity of 20,000 tons (from 10,000 tons), is located on 105 acres in Dewas, with INR 100 crores already spent. The total capex for this project is estimated at INR 1,700-1,750 crores, with the plant expected to be fully operational by September 2026.

HEG has increased its investment limit in foreign stocks, specifically in GrafTech, aiming for a stake exceeding 10%. The rationale is GrafTech's unique backward integration with 70% self-sufficiency in needle coke, a critical raw material, which allows for price stability. Management views GrafTech as undervalued, with its market cap being half of HEG's despite having twice the electrode capacity and backward integration, believing its prices are likely to appreciate significantly. This investment leverages HEG's substantial treasury, which was yielding 6-8% returns.

The global graphite electrode industry (ex-China) has a nameplate capacity of 700,000 tons, with current utilization estimated at 60-65%, leading to production of 4.5-5 lakh tons. While some Western competitors have announced 15-20% price increases, HEG is not proactively raising prices, preferring to follow market acceptance. Management notes that Chinese electrodes, while contributing to oversupply, are generally of lower quality (HP grade, not UHP) and do not pose a direct threat to HEG's high-quality UHP segment. The potential 7.5% U.S. reciprocal duty, if implemented, would reduce HEG's EBITDA margin on U.S. exports from 16-17% to 10%.