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HEG Ltd -Stable performance…
HEG reported its Q3FY11 results that came in line with our estimates.
Revenues grew at a modest pace to | 310 crore (up ~7% YoY and ~4%
QoQ) against expected | 298 crore. Topline growth can be attributed to
higher sales volumes. However, realisations of graphite electrodes and
power remain muted. EBITDA margins improved sequentially by 230
bps but declined 970 bps YoY due to a rise in operational expenses (up
~22% YoY) due to higher input prices. Despite the decline in the
interest cost (by ~32% YoY), PAT fell ~16% YoY but managed to grow
~28% QoQ to | 38.2 crore against our expectation of | 29.5 crore. Going
forward, improved production from EAF-based units will see better
capacity utilisation levels backed by an improved demand scenario. On
the cost front, needle coke contract price negotiations for CY11 are in
progress and are expected to settle at slightly lower prices compared to
last year. We have revised our target price to | 206/share and assigned
an ADD rating to the stock.
ƒ Capacity utilisation levels to improve
Capacity utilisation for Q3FY11 improved from 85% (in Q2FY11) to
~90% whereas YoY the utilisation level has improved significantly
to 75%. The improvement in utilisation level was backed by robust
demand from EAF-based units. Going forward, for Q4FY11, the
management has guided that utilisation levels will remain stable at
~95% in Q4FY11 and expects it to remain at 80-85% in FY12.
ƒ Capacity expansion well on schedule
The capacity expansion from 66000 TPA to 80000 TPA is well on
schedule and is expected to be complete by Q2FY12. The first phase
is expected to commence from Q1FY12 and full capacity
commercial production by Q2FY12.
Valuation
At the CMP of | 195, the stock is trading at FY12E PE of 5.7x and FY12E
EV/EBITDA of 4.3x. We have valued the stock at 4x FY12E EV/EBITDA to
arrive at a revised target price of | 206/share and assigned an ADD rating
to the stock
Result Analysis
Revenues improved mainly on account of an uptick in graphite electrode
volumes led by improved capacity utilisation in Q3FY11 at ~90% against
average of ~66% in FY10. Realisations, however, remained weak on
account of ~9% correction in graphite electrodes prices that contracted
on a yearly basis. Also, higher raw material and power & fuel expenses
led to EBITDA margins declining 970 bps YoY. However, sequentially
lower fuel and power cost led to an improvement in margins by 230 bps.
The management has indicated that adequate raw material sourcing viz.
needle coke supplies for existing capacities as well as expanded
capacities along with captive power supply will lead to sustainable
margins for FY12.
Conference call highlights
• The capacity expansion from 66,000 TPA to 80,000 TPA with an
outlay of | 225 crore is on schedule. It is expected to be
completed in phases, viz. March-April 2011 and July-August 2011.
The expansion is anchored by a revival in demand growth of
graphite electrodes and is supported by increased demand for
steel produced through the EAF route
• Adequate raw material sourcing viz. needle coke supplies have
been booked for the whole year. The management has guided
that CY11 contract prices are modestly lower than prices in CY10.
The company has enough sourced raw material, which will be
adequate to feed its existing as well as expanded capacities
• The captive power of total rated capacity of 77 MW will support
capacity expansion plans of the graphite business along with
reduced dependence on purchased power, thus resulting in
reduced power cost in the coming quarters
• Rupee volatility and upward movement in raw material costs may
influence the performance, going forward
• On the order book front, the company is fully booked for two
quarters of CY11. Going forward, it expects more orders to flow in
as demand growth for graphite electrodes is expected to remain
strong due to higher production of steel through the EAF route
Outlook & Earnings Revision
World crude steel output increased by 15% as compared to 2009, driven
by strong demand from the Asian economies. Steel production through
the EAF route has also been on an uptick. This presents new
opportunities for growth through a positive volume outlook and improved
capacity utilisation levels. The growth in production was primarily led by
China. Europe and the US have also shown a gradual increase in
production through the EAF route. We believe steel production growth
will remain healthy enough to help the graphite electrode industry to
maintain current capacity utilisation levels. We have factored in the recent
concerns on prices and demand into our estimates and accordingly
revised them. We have revised our PAT estimates upwards by ~5.4% for
FY11 and reduced them ~15% for FY12E.
Valuations
At the CMP of | 195, the stock is trading at FY12E P/E of 5.7x and FY12E
EV/EBITDA of 4.3x. We expect the company to operate at around 75-80%
capacity utilisation levels in FY12E. Though the BEL deal seems to be
highly attractive, we have not factored that into our estimates. We have
valued the stock at 4x FY12E EV/EBITDA to arrive at a revised target price
of | 206/share. We have assigned an ADD rating to the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HEG Ltd -Stable performance…
HEG reported its Q3FY11 results that came in line with our estimates.
Revenues grew at a modest pace to | 310 crore (up ~7% YoY and ~4%
QoQ) against expected | 298 crore. Topline growth can be attributed to
higher sales volumes. However, realisations of graphite electrodes and
power remain muted. EBITDA margins improved sequentially by 230
bps but declined 970 bps YoY due to a rise in operational expenses (up
~22% YoY) due to higher input prices. Despite the decline in the
interest cost (by ~32% YoY), PAT fell ~16% YoY but managed to grow
~28% QoQ to | 38.2 crore against our expectation of | 29.5 crore. Going
forward, improved production from EAF-based units will see better
capacity utilisation levels backed by an improved demand scenario. On
the cost front, needle coke contract price negotiations for CY11 are in
progress and are expected to settle at slightly lower prices compared to
last year. We have revised our target price to | 206/share and assigned
an ADD rating to the stock.
ƒ Capacity utilisation levels to improve
Capacity utilisation for Q3FY11 improved from 85% (in Q2FY11) to
~90% whereas YoY the utilisation level has improved significantly
to 75%. The improvement in utilisation level was backed by robust
demand from EAF-based units. Going forward, for Q4FY11, the
management has guided that utilisation levels will remain stable at
~95% in Q4FY11 and expects it to remain at 80-85% in FY12.
ƒ Capacity expansion well on schedule
The capacity expansion from 66000 TPA to 80000 TPA is well on
schedule and is expected to be complete by Q2FY12. The first phase
is expected to commence from Q1FY12 and full capacity
commercial production by Q2FY12.
Valuation
At the CMP of | 195, the stock is trading at FY12E PE of 5.7x and FY12E
EV/EBITDA of 4.3x. We have valued the stock at 4x FY12E EV/EBITDA to
arrive at a revised target price of | 206/share and assigned an ADD rating
to the stock
Result Analysis
Revenues improved mainly on account of an uptick in graphite electrode
volumes led by improved capacity utilisation in Q3FY11 at ~90% against
average of ~66% in FY10. Realisations, however, remained weak on
account of ~9% correction in graphite electrodes prices that contracted
on a yearly basis. Also, higher raw material and power & fuel expenses
led to EBITDA margins declining 970 bps YoY. However, sequentially
lower fuel and power cost led to an improvement in margins by 230 bps.
The management has indicated that adequate raw material sourcing viz.
needle coke supplies for existing capacities as well as expanded
capacities along with captive power supply will lead to sustainable
margins for FY12.
Conference call highlights
• The capacity expansion from 66,000 TPA to 80,000 TPA with an
outlay of | 225 crore is on schedule. It is expected to be
completed in phases, viz. March-April 2011 and July-August 2011.
The expansion is anchored by a revival in demand growth of
graphite electrodes and is supported by increased demand for
steel produced through the EAF route
• Adequate raw material sourcing viz. needle coke supplies have
been booked for the whole year. The management has guided
that CY11 contract prices are modestly lower than prices in CY10.
The company has enough sourced raw material, which will be
adequate to feed its existing as well as expanded capacities
• The captive power of total rated capacity of 77 MW will support
capacity expansion plans of the graphite business along with
reduced dependence on purchased power, thus resulting in
reduced power cost in the coming quarters
• Rupee volatility and upward movement in raw material costs may
influence the performance, going forward
• On the order book front, the company is fully booked for two
quarters of CY11. Going forward, it expects more orders to flow in
as demand growth for graphite electrodes is expected to remain
strong due to higher production of steel through the EAF route
Outlook & Earnings Revision
World crude steel output increased by 15% as compared to 2009, driven
by strong demand from the Asian economies. Steel production through
the EAF route has also been on an uptick. This presents new
opportunities for growth through a positive volume outlook and improved
capacity utilisation levels. The growth in production was primarily led by
China. Europe and the US have also shown a gradual increase in
production through the EAF route. We believe steel production growth
will remain healthy enough to help the graphite electrode industry to
maintain current capacity utilisation levels. We have factored in the recent
concerns on prices and demand into our estimates and accordingly
revised them. We have revised our PAT estimates upwards by ~5.4% for
FY11 and reduced them ~15% for FY12E.
Valuations
At the CMP of | 195, the stock is trading at FY12E P/E of 5.7x and FY12E
EV/EBITDA of 4.3x. We expect the company to operate at around 75-80%
capacity utilisation levels in FY12E. Though the BEL deal seems to be
highly attractive, we have not factored that into our estimates. We have
valued the stock at 4x FY12E EV/EBITDA to arrive at a revised target price
of | 206/share. We have assigned an ADD rating to the stock.
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