HEG, Graphite India extend gain after strong Q4 results

HEG was up 4% to Rs 3,392, surging 16% in past seven trading days, while Graphite India trading 2% higher at Rs 765, extending its past two days 3% gain in otherwise weak market

Shares of graphite electrode manufacturers HEG and Graphite India were trading higher for the fourth straight days after these companies reported a robust net profit growth in March quarter (Q4FY18).

HEG was up 4% to Rs 3,392, surging 16% in past seven trading days, after the company reported net profit of Rs 6.34 billion in March quarter (Q4FY18), on back of strong operational income. It had posted net loss of Rs 34 million in year ago quarter.

The company’s operational revenues grew by nearly five-fold at Rs 12.92 billion in Q4FY18 as against Rs 2.67 billion in Q4FY17. EBIDTA (Earnings before interest, tax, depreciation and amortization) margins improved 708 bps to 73.87% from 66.79%.

The company announced a final dividend of Rs 50/share in addition to the interim dividend of Rs 30/share announced earlier in February 2018, thereby taking the total dividend for FY18 to Rs 80/share.

“A relatively lower cost inventory of needle coke aided HEG in reporting healthy margins in FY18. However, going forward, on account of higher needle coke cost, we expect EBITDA margins to moderate to around 39-40% (from 62.6% in FY18). We model capacity utilisation of around 85% for FY19E and FY20E. We believe the current scarce availability of needle coke continues to be a limiting factor. Any increase in availability of needle coke presents an upside risk in terms of capacity utilization,” analysts at ICICI Securities said in result update with ‘buy’ rating on the stock and 12 month price target of Rs 4,200.

Graphite India too trading 2% higher at Rs 765, extending its past two days 3% gain in otherwise weak market, after the company reported seven-fold jump in its net profit at Rs 4.54 billion in March quarter (Q4FY18) driven by improved realization and higher capacity utilization. It had profit of Rs 620 million in the same period last year.

Net sales of the company rose more than double from Rs 3.73 billion to Rs 12.12 billion on account of improved realizations and increased sales volume. EBIDTA (Earnings before interest, tax, depreciation and amortization) margins improved from 12% in Q4FY17 to 58% in Q4FY18 supported by improved realization with higher volume and optimum capacity utilization.

“We continue to remain positive on Graphite India given the current demand-supply imbalance, which is likely to favour the domestic graphite electrode players. We expect the company to report a topline growth of around 25% in FY18-20E. In terms of profitability, the increase in needle coke cost is likely to moderate the EBITDA margins to around 34-35% in FY19-20E,” the brokerage firm said in result update with maintain ‘buy’ rating on the stock and 12 month target price of Rs 1,000 per share.