>HEG LIMITED (ICICI DIRECT)

Margins dip as realisations drop…
HEG reported lower-than-expected results for Q4FY10 with EBITDA and net profits registering QoQ decline of ~20% and ~14%, respectively, due to moderation in the graphite electrode price (down 7-10% QoQ) and increase in raw material costs. Net profit for FY10 stood at ~Rs 171 crore, up ~60% YoY on the back of higher realisations (up ~7% YoY) and lower power costs. EBITDA margins for FY10 came in at a healthy 30.7%, showing growth of 560 bps YoY but remained subdued in Q4FY10 due to product price fall. Though price moderation remains a short-term concern we maintain our positive stance on the company on the back of i) largest single location advantage resulting in operational cost benefits ii) 100% captive power availability with surplus 25 MW merchant sales iii) brownfield expansion activities to 80,000 tonne getting triggered at an opportune time and iv) increase in capacity utilisation on the back of a smart recovery in the global steel industry.

■ Increase in capacity utilisation overshadowed by price fall
The company continued to achieve better capacity utilisation (~90% in Q4FY10, up from 75% in Q3FY10) on the back of improved demand from the steel industry. Graphite electrode prices have seen a moderation in Q4FY10 due to increased competition among graphite players globally. Prices are expected to remain subdued for most of 2010.

Valuation
At the CMP of Rs 345, the stock is trading at FY12E P/E of 8.4x and FY12E EV/EBITDA of 6x (~15% discount to global average). We expect the company to operate at above 85% capacity utilisation levels on the back of robust demand and value the stock at 6.5x FY12E EV/EBITDA (10% discount to global average). We have arrived at a revised target price of Rs 423 and assign a STRONG BUY rating to the stock.

To read the full report: HEG LIMITED