Will Capitalize On Global Shift To Electric Arc Furnaces By 2030

Key Takeaways

• HEG's expansion and capacity utilization position it to benefit from increasing global demand, potentially enhancing revenue and margins.
  
• HEG GreenTech's potential demerger could diversify earnings, while improved pricing accentuates competitive advantages.
  
• Declining steel production and pricing pressures lead to challenges in revenue and margin compression, with non-core gains highlighting risk in HEG's earnings stability.

Catalysts

Manufactures and sells graphite electrodes in India and internationally.

• HEG's recent expansion from 80,000 tonnes to 100,000 tonnes has stabilized, making it the largest single location plant in the western world, providing cost advantages over other large producers. This expansion and increased capacity utilization could enhance future revenue and margins as global demand rebounds.
  
• Global decarbonization efforts and announcements of new electric arc furnace (EAF) capacities totaling more than 100 million tonnes by 2030 present significant future demand for graphite electrodes. This could drive revenue growth in mid to long term as these capacities become operational.
  
• The company is well-positioned to tap into potential demand increases due to its experience exporting to 25-30 countries and maintaining strong market relationships, potentially bolstering future revenues as new EAF capacities come online.
  
• HEG GreenTech's potential demerger and plans for enhanced generation and storage capabilities in renewable energy could create new growth avenues, boosting earnings and contributing to financial diversification and stability.
  
• Expectations of improved electrode pricing and a shift in industry dynamics due to factors like the CBAM (Carbon Border Adjustment Mechanism) could enhance HEG's competitive positioning and drive margin improvements in future periods.

HEG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HEG's revenue will grow by 27.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 30.1% in 3 years time.
• Analysts expect earnings to reach ₹14.1 billion (and earnings per share of ₹53.45) by about February 2028, up from ₹1.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 37.2x today. This future PE is lower than the current PE for the IN Electrical industry at 40.4x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.53%, as per the Simply Wall St company report.

HEG Future Earnings Per Share Growth

Risks

• Global crude steel production, which directly influences the demand for graphite electrodes, has been in decline with a notable 5.5% drop in the production during the last quarter, putting pressure on HEG's sales prices and revenue.
  
• The sustained pressure on electrode pricing due to reduced demand suggests ongoing market challenges, which could further compress net margins.
  
• Despite operational expansion, HEG's capacity utilization reports at only 80%, indicating a potential misalignment between production capabilities and market demand that might impact future earnings growth.
  
• The narrowing spread between electrode prices and needle coke prices, a key input, signals potential margin compression unless pricing can recover or input costs decrease.
  
• HEG's improvement in profit derived from mark-to-market gains on treasury-related investments, not from core business growth, indicates volatility and risk in relying on non-operational income to stabilize net margins.

Valuation

• The analysts have a consensus price target of ₹504.5 for HEG based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹46.9 billion, earnings will come to ₹14.1 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 15.5%.
  
• Given the current share price of ₹351.0, the analyst price target of ₹504.5 is 30.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.