Ind-Ra downgrades HEG's long-term issuer rating

Credit ratings agency India Ratings and Research (Ind-Ra) downgraded HEG's long-term issuer rating to 'IND AA-' from 'IND AA' with a stable outlook.

The rating on HEG's commercial paper worth Rs 100 crore was affirmed at "IND A1+". The company's fund-based working capital limits of Rs 900 crore was rated IND AA-/Stable/IND A1. HEG's non-fund-based limits worth Rs 470 crore was rated IND AA-/Stable/IND A1+. While long-term rating were downgraded, short-term rating were affirmed.

The downgrade reflects a significant fall in the price of graphite electrode (GE) over 2HFY20 resulting in a sharp compression in the spreads between GE prices and its raw material needle coke (NC) prices, coupled with a significant inventory valuation hit, which resulted in a significantly lower-than-Ind-Ra-expected EBITDA.

The rating downgrade also factors in the limited diversification achieved by the company to mitigate EBITDA volatility risks. The strong cash flows generated over FY18-FY20 have been used towards shareholder dividends and equity share buyback in line with HEG's historical dividend payout ratio of 30%-35%. Moreover, the company has embarked on a significantly large capex to increase the capacity that has the potential to lower the liquidity available on the balance sheet and the management expects the same to come on-stream by FY23.

The stable outlook reflects the favourable industry structure, healthy on balance sheet liquidity, and the low production cost advantages enjoyed by HEG on account of its single-location plant, labour cost advantages and moderate electricity tariffs.

HEG reported consolidated net loss of Rs 366 crore in Q4 March 2020 compared with net profit of Rs 524.42 crore in Q4 March 2019. Its consolidated net sales slumped 72.2% to Rs 374.44 crore in Q4 March 2020 over Q4 March 2019.

HEG is engaged in manufacturing of graphite electrodes, which are used by manufacturers of steel. The firm's segments include graphite, power and unallocable items/others.

Shares of HEG rose 1.09% to Rs 754.15 on BSE. The scrip hovered in the range of Rs 748 to Rs 774 so far.

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