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Research
HEG Ltd - Performance impacted by muted utilisation... - ICICIdirect
Posted On : 2013-08-25 22:02:00( TIMEZONE : IST )
HEG reported a muted set of Q1FY14 numbers on the back of subdued capacity utilisation levels of the graphite electrodes segment. The capacity utilisation for Q1FY14 stood at 58%, notably lower than our estimate of ~75%. Subsequently, the topline for the quarter stood at Rs. 234.1 crore (Idirect estimate: Rs. 408.6 crore) lower by 47.2% QoQ and 39.1% YoY. For Q1FY14, the EBITDA and EBIT margin for the graphite division also came in muted at 7.3% and 1.69%, respectively, and was significantly lower YoY (EBITDA and EBIT margin of 20.7% and 17.45%, respectively, in Q1FY13). Margins during the quarter were impacted on the back of subdued graphite electrodes realisations. The subsequent EBITDA came in at Rs. 37.5 crore (Idirect estimate: Rs. 66.9 crore). During the quarter, there was an MTM forex loss to the tune of Rs. 15.3 crore resulting in a net loss of Rs. 9.3 crore. Going forward, the company will be one of the key beneficiaries of currency depreciation, thereby witnessing a marginal improvement in its operating margins. However, on the back of a softening trend in realisations and a muted demand scenario, we have a cautious view on the stock. We maintain our HOLD rating on the stock with a revised target price of Rs. 146.
Muted utilisation level for Q1FY14
Capacity utilisation in Q1FY14 was at ~58% vs. 85% in Q4FY13 and 75% in Q1FY13. Capacity utilisation in FY13 stood at ~78% while the management expects the capacity utilisation level in FY14 to be at ~70-75%.
Demand concerns persist!!
We remain cautious on the demand for graphite electrodes, going forward, on the back of subdued demand of steel globally. However, HEG will be one of the key beneficiaries of currency depreciation, which will protect its margins, going forward. We have modelled the capacity utilisation of 72% and 78% for FY14E and FY15E, respectively on the company's expanded capacity of 80,000 tonne. We have valued the stock on an SOTP basis valuing the core business at a 30% discount to its global peer's average EV/EBITDA of 8.0x, consequently valuing it at FY15E EV/EBITDA at 5.6x (earlier valued at 6.1x) and giving a 30% discount to its stake in BEL. We have arrived at a target price of Rs. 146 and assigned a HOLD recommendation to the stock.
