Graphite India, HEG share prices rise 6% : 3 factors keeping Jefferies cautiously positive on these stocks

Graphite India and HEG share prices rose more than 6% in morning trades on Thursday. The share prices already have already risen 68-78% in a year as both stocks scaled 52-week highs in first week of the current month.

Graphite India and HEG ltd though are seeing volume growth as was visible in their quarterly performance during December quarter, all eyes are on the improvement in operating performance that can lift their earnings.

Graphite India and HEG Ltd December quarter performance performance missed Jefferies Q3 earnings estimates. While volumes grew YoY due to better utilization, pricing pressure continued. The capacity utiisation was at 80-85%. Global steel production was flattish YoY, but Indian production rose by around 14%YoY.

Both pricing and margin pressure could stay for 2-3 quarters said analysts at Jefferies India Ltd in their result review report.  The raw material prices are declining but benefits would flow with a lag. Also HEG's graphite electrode inventory is 2 months of sales versus. normalized 1 month, highlighted analysts. 

In the backdrop of a miss in Q3 performance Jefferies has cut FY25-26 estimated Ebitda (Earnings before interest, tax, depreciation and amortisation) by 2-7% and expect FY24 to be muted, but they remain cautiously optimistic on FY25 macros. 

Here are two reason why Jefferies remains cautiously positive on these stocks

Optimistic on 2024 Macro (FY25): Jefferies global metals team is cautiously optimistic for 2024, after a tough CY22-23. The expectations are of a potentially weaker dollar, lower bond yields, the US Federal reserve holding or cutting interest rates, some stability in China, a strong India demand,etc.

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The steel cycle thereby may see some uptick. After about 10% fall over January-October'2023, Asian (China) HRC steel price rose by 8%, suggest Jefferies data. As Graphite electrodes derives demand from ElectricArc Furnace (EAF steel production), they typically follow the steel cycle with a lag.  Also Exports are ~70% and 50% of HEG and Graphite India's sales mix. Further new EAF steel capacities are coming up. Also decarbonization is seen as a tailwind.

Supply Rationalization to lift realizations: In February 2024, Graftech (USA) cited reduction of its Graphite Electrode capacity by 12%, and they are expected to continue to operate these facilities at reduced levels in FY24, highlighted Jefferies.  The declining supplies could support selling price and can be a positive for Graphite Electrode producers.

New Segment forays: Both Graphite India Ltd and HEG are foraying into verticals, with emerging opportunities. HEG's new graphite electrode capacity commenced production from November'2023 and capacity utilisation is to rise starting ongoing quarter. HEG had cited its intent to execute entire capex for graphite anodes in a single phase over next 3 years for economies of scale. This would cater to 20-22 Giga Watt Hours of cell manufacturing capacity, said Jefferies. Jefferies factor total Rs1500 crore capex in our FY24-26 estimates.

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Also during  Q3FY24, Graphite invested Rs50 Crore in Godi India for a 31% stake. This investment could help them diversify into advanced chemistry battery technologies for development of EV and energy storage battery cell, said analysts at Jefferies.

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