HEG Limited — Q3 FY25 earnings call

Call held 14 Feb 2025

Management summary

HEG reported a mixed Q3 FY25, with a 15.12% YoY decline in revenue to INR 477 crores, but a strong 76.36% YoY increase in EBITDA to INR 194 crores and a 164.86% YoY rise in standalone PAT to INR 98 crores. The company maintained its debt-free status with a robust treasury of INR 1,000 crores and operated its plant at 80% capacity utilization. While electrode pricing remains under pressure, the demerger of the anode business is underway, valued at INR 3,200 crores, aiming to unlock significant shareholder value.

Highlights

  • EBITDA for Q3 FY25 was INR 194 crores, a significant increase from INR 110 crores in Q3 FY24, representing a 76.36% YoY growth.

  • Standalone Net Profit After Tax for Q3 FY25 was INR 98 crores, a substantial rise from INR 37 crores in Q3 FY24, marking a 164.86% YoY growth.

  • The company remains long-term debt-free and holds a treasury size of nearly INR 1,000 crores as of December 31, 2024.

  • HEG's plant operated at approximately 80% capacity utilization (at 100,000 tons), which management claims is the highest among graphite electrode companies in the Western world.

  • The demerger process for the anode business is progressing, with an estimated valuation of INR 3,200 crores for the new entity, aiming to unlock shareholder value.

Concerns

  • Revenue from operations for Q3 FY25 declined to INR 477 crores from INR 562 crores in the corresponding quarter of the previous financial year, a 15.12% YoY decrease.

  • Electrode pricing remains under pressure due to subdued demand, leading to a narrowing of profit spread despite stable needle coke prices.

  • Global crude steel production (excluding China) showed only a marginal growth of 0.2% in CY2024, and China's increased steel exports (111 million tons) are impacting graphite electrode demand in other markets.

  • The potential 7.5% reciprocal import duty from the U.S. could reduce HEG's EBITDA margin on U.S. exports from 16-17% to 10%.

Key financials

  1. Revenue from operations ₹477 Cr -15.1%YoY
  2. EBITDA ₹194 Cr +76.4%YoY
  3. Net Profit After Tax (Standalone) ₹98 Cr +164.9%YoY
  4. Net Profit After Tax (Consolidated) ₹83 Cr +88.6%YoY
  5. EBITDA Margin 40.7%

What they filed

Q1 FY27: revenue up 11.1%, net profit up 16.2% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue568 478 537 613 699 +23%656 +37%603 +12%681 +11%
EBITDA97 67 -61 106 118 +22%143 +113%-148 −143%151 +42%
Net profit82 83 -74 105 143 +74%207 +149%-114 −54%122 +16%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Order book

medium confidence

Execution

3 to 6 months for raw material to electrode production, 2 to 4 to 5 months for production

Composition

  • Exports (geography) 66%
The company's capacity utilization remains 80% at 100,000 tons, with 80-85% of current quarter's production already sold and at least 50% for the next quarter (April-June). The lead time from raw material purchase to electrode sale is 3-6 months, meaning current discussions relate to Q3 of the calendar year.

Source: Prepared remarks

Capital allocation

high confidence
  • Capex ₹1,700 Cr
    • Anode plant expansion (from 10,000 tons to 20,000 tons) ₹1,700 Cr
    total capex spend remains same, right, INR1,700-odd crores?
  • Debt Gross ₹0 Cr · Net cash ₹1,000 Cr
    The company is long-term debt-free and had a treasury size of nearly INR1,000 crores as on 31st December 2024.
  • M&A GrafTech Acquisition · Pending regulatory

    Investment in a backward-integrated company with 70% raw material (needle coke) self-sufficiency, offering stability against price volatility and potential for significant share price appreciation due to expected increase in electrode demand.

    Investment made from substantial treasury (6-8% return) with belief that GrafTech's prices will rise significantly more than HEG's due to its unique position.

    we are looking at good days... we were sitting on a fairly substantial treasury, which was giving us 6%, 7% -- a rate of 6%, 7%, 8% return. So, we said, why not? If we are sitting on cash and making 7%, 8% returns, and if we believe in this business, and so, obviously, if we believe in this business and we believe in all whatever I just explained that their prices are likely to shoot up much more than ours. That's what actually prompted us to do it.
  • Liquidity Cash ₹1,000 Cr Company is long-term debt-free with a treasury of nearly INR 1,000 crores as of December 31, 2024.
    The company is long-term debt-free and had a treasury size of nearly INR1,000 crores as on 31st December 2024.

Guidance & targets

Other

  • Demerger completion and listing of new entity Other · End of 2025 · High confidence By end of 2025
    We hope to get all the required approvals by the end of this year.

    — Ravi Jhunjhunwala

Capacity

  • Anode plant operational status Capacity · September 2026 · High confidence Fully operational
    I think this plant will be fully operational by September 2026.

    — Riju Jhunjhunwala

Capex

  • Anode plant total capex Capex · Anode Plant Project · High confidence INR 1,700-1,750 crores
    INR1,700 crores to INR1,750 crores, depending on your -- there's been a bit of an issue with the whole dollar appreciation, which we, of course, are trying to talk to all the Chinese partners that this has to be on their account because prices of -- capital expenditure should also go down and not go up only because of the dollar appreciation.

    — Riju Jhunjhunwala

What to watch in Q4 FY25

Demerger completion and listing of new entity

End of 2025
Current Papers re-filed with SEBI, delayed by 2 months.
Target Approvals by end of year, listing of new entity.

Why it matters

This is a key strategic initiative to unlock shareholder value for the anode business.

Our demerger scheme is in the process. It got delayed by about 2 months due to our share split, which was also important to do, and the papers have now been re-filed with SEBI. We hope to get all the required approvals by the end of this year.

Risks & concerns

  • Electrode pricing pressure and narrowing profit spreads

    medium

    Subdued demand for electrodes is keeping prices under pressure, and stable needle coke prices are narrowing profit margins.

    Management acknowledged

  • Impact of China's steel exports and stalled EAF shift

    medium

    China's high steel exports (111 million tons) and slower-than-expected shift to EAFs create an oversupply of Chinese electrodes, affecting global demand dynamics, but Chinese electrodes are generally lower quality (not UHP) and not a direct threat to HEG's core market.

    Management downplayed

  • Potential U.S. reciprocal import duties

    medium

    If the U.S. imposes a 7.5% reciprocal duty, it would directly impact the profitability of HEG's exports to one of its largest markets, reducing EBITDA margin on those exports to 10%.

    Management acknowledged

Q&A highlights

7 direct
Value creation from the anode business demerger Direct
PwC and ISEC reports on the fair valuation of the asset, which will be the new entity, that is close to INR3,200 crores. That is the fair value of that asset. So, once this process has been done entirely, it will create immense value for the shareholders.

Provides a specific valuation for the demerged entity, offering clarity on the potential shareholder value unlock.

Asked by Praful Kumar

Impact of potential U.S. reciprocal duties Direct
As and when they do, we'll have to bear that 7.5%... our EBITDA margin last quarter was also about 16%, 17%. So, to that extent, whatever exports we do to U.S., the EBITDA will come down to 10%.

Quantifies the potential negative impact of U.S. duties on the company's profitability for exports to a key market.

Asked by Praful Kumar

Industry capacity utilization (ex-China) and current production Direct
overall industry capacity utilization ex China -- probably you will end up at a number around -- anywhere between 60%, 65% or in that range, 60% to 65%... about 3.5 lakh tons is the current production in the market. Is that right? Ex China, yes.

Clarifies the current state of the global graphite electrode market (ex-China), indicating significant underutilization and production levels.

Asked by Rajesh Majumdar

Threat from Chinese electrodes and their quality Direct
China's electrodes and the Chinese electrodes technology and the quality is still far behind... not of the UHP variety because a large part is the HP grade variety.

Reassures that Chinese electrodes, while contributing to oversupply, are generally not a direct competitive threat in the high-quality UHP segment HEG serves.

Asked by Rajesh Majumdar

Rationale for investment in GrafTech Direct
GrafTech is in a very special situation compared to all the other 4, 5 graphite producers. That's the only company who has -- who is backward integrated to the raw material, needle coke... their market cap was practically half of ours, which didn't make sense.

Explains the strategic rationale behind the significant investment in a competitor, highlighting GrafTech's unique backward integration and perceived undervaluation.

Asked by Zeb Porczyk

Anode plant location, capacity, and capex Direct
We've already procured the site. It's 105 acres in Dewas... 20,000 tons plant, which we increased from 10,000 tons... INR1,700 crores to INR1,750 crores.

Provides concrete details on the anode plant project, including its location, increased capacity, and confirmed capex, indicating solid progress.

Asked by Shashank Kanodia

Anode plant payback period validity Direct
It would remain the same right now because the battery prices that now we have taken in our business plan and changed all our other assumptions accordingly. I think the battery prices, the way we are seeing globally now, they have more or less bottomed out.

Confirms the continued viability of the anode plant project's financial projections despite market changes, suggesting confidence in its long-term returns.

Asked by Shashank Kanodia

Price hike strategy in response to competitors Partial
No, I didn't say that. I didn't mean that. Even if I did say, I didn't mean it. See, announcing on paper and making that change on ground are 2 different things... if I could get a price increase, I'll be very happy to do it this afternoon.

Further clarifies management's stance on price increases, indicating they will not proactively announce hikes but will follow market trends if competitors' increases are accepted.

Asked by Zeb Porczyk

3 min read 6 chapters

Detailed narrative

Global Steel Market & Electrode Demand Dynamics

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.

Q3 FY25 Financial Performance Overview

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.

Operational Efficiency & Capacity Utilization

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.

Demerger and Anode Plant Project Progress

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.

Strategic Investment in GrafTech

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.

Competitive Landscape and Pricing Strategy

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%.

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