February 12, 2023

HEG
HOLD | TP: Rs1800 (Not Edited & Formatted)*

Weak results but upcycle in graphite electrodes imminent

1. HEG reported a topline of Rs. 5,624 Mn which was up 6% YoY and down 16% QoQ. EBITDA margins declined by
950 bps YoY to 15.4%, although it was flat QoQ.
2. EBITDA came in at Rs. 866 Mn, which was down 34% YoY and 15% QoQ. PAT was at Rs. 437 Mn, which was down
58% YoY and 54% QoQ.
3. Although the results look weak, HEG has gained volume in CY23 compared to CY22 in key markets like United
States and Turkey. With EU ETS to be implemented by CY25, which will render operation of Blast Furnace in Europe
unprofitable. Moreover, 63 million Tonnes of EAF capacity is coming online by CY26. Assuming 1.8 kg electrode per
tonne of steel, this will create incremental electrode demand of 113,400 Tonnes.

Global Macros for graphite electrode are improving.

There are two fundamental reasons why macros for graphite electrodes are improving. First, EU ETS scheme, which is
ready to be implemented by CY25, and secondly increased consumption in US due to infrastructure spending by the
government. Moreover, HEG is already taking away market share from its peer Graftech in US, because of its cost
advantage associated with economies of scale. We believe this trend will ultimately play out in FY25 and hence we
remain positive on the graphite electrode space.

Figure 1: Inventory for steel mills is decreasing in the United States.

SOURCES: INCRED RESEARCH, COMPANY REPORTS

Figure 2: While new order for Steel Mills is consistently trending higher.

SOURCES: INCRED RESEARCH, COMPANY REPORTS

Figure 1: The steel sector in Europe is going to face carbon allocation shortage, once EU ETS is implemented in CY25. Hence it
would become almost improbable to operate a BF plant in Europe

SOURCES: INCRED RESEARCH, COMPANY REPORTS

Figure 2: Costs to be incurred by US steel mills, if they continue operating Blast Furnace plant.

SOURCES: INCRED RESEARCH, COMPANY REPORTS

*P.S. As it’s a Quick Take, the document is not edited/formatted.

Thanks and Regards,

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