Buy This Small Cap Electrodes-Graphite Stock For 17% Gains, Says ICICI Direct

ICICI Direct upgrades its call on HEG Ltd stock from Hold to Buy for decent gains of up to 17% with a target price of Rs 1,225 per share. HEG is a small-cap company in the Electrodes-graphite industry having a market capitalisation of Rs 4,068.35 crore.

HEG is one of the leading graphite electrode manufacturers and exporters globally. HEG has a graphite electrode manufacturing plant of 80000 tonnes per annum at Mandideep in Madhya Pradesh. HEG has a captive power generation capacity of ~76.5 MW (two thermal power plants and one hydro-power plant).

Stock Outlook & Returns

On Friday, November 18, the HEG shares last traded at Rs 1,054.10 per share on NSE, gaining 5.74% compared to its previous close of Rs 996.90 per share. The stock recorded its 52-week high on 17 November 2021 at Rs 2,125 and its 52-week low on 20 June 2022 at Rs 890.80, respectively. 

The stock moved up by 5.12% in a week, whereas, in 1 month it moved down by 4.95%. In the past 3 months, it moved down by 20.42%. In a year, it moved down by 48.55%. In the past 3 years, it moved up by 4.87%. In the past 5 years, it moved down by 42.83%.

Q2FY23 Results

HEG reported a steady operational performance in Q2FY23. For Q2FY23, total operating income was at Rs 598 crore, up 16% YoY but down 17% QoQ.

Reported EBITDA for the quarter was at Rs 179 crore, up 26% YoY but down 3% QoQ. EBITDA margin for the quarter was at 29.9%, up 250 bps YoY, 440 bps QoQ.

Standalone PAT for the quarter was at Rs 130 crore, up 15% YoY but down 3% QoQ. During the quarter, share of profit from associates was at Rs 39 crore, up 111% YoY, 53% QoQ. Consolidated PAT for the quarter was at Rs 169 crore, up 28% YoY, 6% QoQ.

ICICI Direct Maintains Buy with Rs 1,225 target price

HEG's share price has given a return of ~45% over the last two years (from ~Rs 717 in November 2020 to Rs 1042 in November 2022). 

The brokerage said, "Countries across the world are moving towards their carbon neutrality goals. Hence, corporates are adopting environment friendly manufacturing processes. Steel manufacturers are gradually moving towards the EAF process, auguring well for graphite electrodes demand over the medium to long term horizon. This is likely to support an uptick in graphite electrode prices. Hence, we upgrade the stock from HOLD to BUY. We value HEG at Rs 1225, 6x FY24E EV/EBITDA."

 

Key triggers for future price performance

HEG's capacity expansion from 80000 tonnes to 100000 tonnes per annum is going on in full swing. The commercial production of the new 20000 tonne graphite electrode capacity is expected by early CY23. 

Over FY22-24E, we expect topline to grow at 21.5% CAGR while EBITDA and PAT are expected to register a CAGR of 22.0% and 18.3%, respectively.

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.