HEG zooms 20% after BofAML initiates coverage with 'Buy' rating

The stock is locked in upper circuit of 20% at Rs 3,871 on the BSE after Bank of America Merrill Lynch initiated coverage of the stock with a 'Buy' rating price objective of Rs 6,700.

Shares of graphite electrode manufacturer HEG are locked in upper circuit of 20% at Rs 3,871 per share on the BSE after Bank of America Merrill Lynch (BofAML) initiated coverage of the stock with a 'Buy' rating.

The brokerage firm set price objective of Rs 6,700 - an upside potential of 108% against its Tuesday’s closing price of Rs 3,226, plus an 8.5% forecast dividend yield.

“HEG has seen a significant rise in profitability over the last 12 months as graphite electrode (GE) prices have risen fivefold. Chinese limits on steel production and efforts to cut pollution are lifting steel output by Electric Arc Furnaces (EAF). High entry barriers and limited needle coke supplies mean we see capacity staying tight and a multi-year period of high prices and profit. With 99% of revenue from electrodes, 2/3 as exports, HEG is the purest play on the global sector,” BofAML said in a note.

The stock is trading at 3.8x P/E and 2.0x EV/EBITDA on FY20E – well below peers in Japan and China. We attribute this to the current weakness of Indian equities and investors’ lack of conviction in the extent and longevity of the cycle, it added.

The brokerage firm said its current expectation is that earnings in this cycle will peak in FY20E after which increased electrode production will begin to slowly normalize graphite electrode prices. However, an ongoing lack of needle coke and continuing efforts by China to reduce polluting blast furnaces could prolong this upcycle further.

The trading volumes on HEG counter has been more than doubled with a combined 460,031 equity shares changed hands. There were pending buy orders for 24,539 shares on the NSE and BSE.  The stock has corrected nearly 30% from its all-time high level of Rs 4,560 touched on August 2, 2018.

Meanwhile, Graphite India, the peer group company too locked in upper circuit of 5% at Rs 829 on the BSE. A combined 82,223 equity shares changed hands and there were pending buy orders for 516,042 shares on both the exchanges.