Decarbonization Policies And EAF Expansion Will Drive Demand

Key Takeaways

• Global shift to electric arc furnace steelmaking and emerging market investments favor HEG's growth in graphite electrodes and export market share.
  
• Supply chain shifts and capacity expansions enhance HEG's cost advantage, margins, and resilience against input price volatility.
  
• Structural steel sector challenges, industry overcapacity, raw material risks, and geopolitical trade barriers threaten HEG's revenue growth, pricing power, and long-term profitability.

Catalysts

Manufactures and sells graphite electrodes in India and internationally.

• Accelerating global adoption of electric arc furnace (EAF) steelmaking due to decarbonization policies-HEG is positioned to benefit from massive new EAF capacity additions outside China (projected at 100 million tonnes by 2030), which is expected to drive substantial incremental demand for graphite electrodes and support long-term revenue and pricing power.
  
• Major infrastructure and automotive sector investments, particularly in India and other emerging markets, are fueling outsized steel production growth relative to developed markets-HEG, as a leading Indian manufacturer with high utilization and cost advantages, stands to expand market share and boost export revenues.
  
• Supply chain diversification by global steelmakers away from China, combined with ongoing closures of older, high-cost electrode plants in Western markets, is shifting market share to cost-competitive players in India like HEG, which should improve long-term margins and export volumes.
  
• HEG's ongoing capacity expansion (from 100,000 to 115,000 tonnes by 2028) at lower capex-per-tonne, along with technological upgrades and improved operational efficiencies, will allow the company to capitalize on industry upturns with higher EBITDA margins and scale-driven cost savings.
  
• Strategic moves towards backward integration for key raw materials (e.g., needle coke), as seen in their investment stake in GrafTech, are expected to provide cost stability and protect margins, insulating future earnings from input price volatility as electrode demand and prices recover.

HEG Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming HEG's revenue will grow by 24.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.5% today to 13.8% in 3 years time.
• Analysts expect earnings to reach ₹7.1 billion (and earnings per share of ₹37.0) by about June 2029, up from ₹3.4 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 30.1x on those 2029 earnings, down from 32.0x today. This future PE is greater than the current PE for the IN Electrical industry at 28.5x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.95%, as per the Simply Wall St company report.

Risks

• Prolonged stagnation or decline in global steel production-particularly outside India-with Q1 steel output down 1.9% globally and major economies (China -2.4%, Japan -5%, South Korea -2.8%, Turkey -1.7%) facing persistent macroeconomic headwinds, indicating long-term structural challenges for demand, which could limit HEG's revenue growth and pricing power.
  
• Ongoing global graphite electrode industry overcapacity, with current utilization rates for peers as low as 60–65% ex-China, and significant new capacity announcements (by both HEG and Indian competitors), risking prolonged excess supply relative to demand and keeping electrode realizations and industry net margins under sustained pressure.
  
• Dependence on the cyclical and volatile steel sector, particularly electric arc furnace (EAF) steelmaking, exposes HEG to demand shocks; if the global shift to EAFs saturates or decarbonization policies accelerate demand destruction for carbon-based steel, this could undermine long-term revenue and earnings stability.
  
• Increasing raw material risk-particularly needle coke availability and price volatility-remains an unresolved concern given the limited global suppliers, and rising input costs could compress HEG's gross margins and overall profitability, especially if upstream supply/demand tightens faster than electrode price recovery.
  
• Heightened geopolitical risks and new trade barriers, such as the recently-imposed 25% U.S. duty on graphite electrodes, threaten export volumes, market access, and price realization in critical markets, which may exacerbate earnings and revenue volatility for HEG over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹700.0 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 analysts, you'd need to believe that by 2029, revenues will be ₹51.9 billion, earnings will come to ₹7.1 billion, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 16.9%.
• Given the current share price of ₹560.55, the analyst price target of ₹700.0 is 19.9% 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.