HEG August 2024 Concall Highlights: Navigating Challenging Market Conditions with Expanded Capacity
HEG Limited's Q1 FY25 earnings call revealed a mixed performance, with profit before tax lower year-on-year due to a one-time treasury-related investment loss. However, the company's operational performance remained strong, and its newly expanded capacity positions it well for future growth in the expanding global graphite electrode market. Management highlighted the ongoing challenges from subdued steel production and aggressive pricing from Chinese competitors, but expressed optimism for the long-term prospects of the industry driven by decarbonization efforts.
a. Financial Performance:
HEG's Q1 FY25 revenue from operations stood at INR 571 crores, a decline of 15% compared to INR 671 crores in the same quarter last year. EBITDA for the quarter fell to INR 59 crores from INR 178 crores in Q1 FY24. On a standalone basis, net profit after tax was INR 3 crores, significantly lower than the INR 98 crores recorded in the prior year period. Consolidated net profit after tax for the quarter was INR 23 crores, compared to INR 139 crores in the corresponding quarter of the previous financial year.
The company attributed the decline in profitability primarily to the one-time mark-to-market loss on a treasury-related investment, which was booked under other expenses. Management, however, reassured investors that they remain bullish on the long-term prospects of the investment.
"Here, I would like to mention about onetime impact of one of our treasury-related investments in equity shares where we have taken a mark-to-market loss due to fall in its stock price and booked it under the head of other expenses. We are, however, bullish on this particular investment in the medium to long term, and we do not see any cause for concern at this stage," said Ravi Jhunjhunwala, Chairman, Managing Director & CEO.
b. Operational Updates:
The company's 100,000-ton capacity expansion project is now fully operational, making it the largest single-location graphite electrode production facility in the Western world. Capacity utilization in Q1 FY25 was around 80%, and management expects utilization to be around 75% for the full year despite the challenging global steel market.
The electrode pricing environment remains challenging due to reduced demand, primarily caused by China's dominance in steel production and aggressive export policies. The price spread between electrode and needle coke prices has narrowed, placing pressure on margins. However, HEG reported that its raw material and finished goods inventories are at healthy levels, with no overhang of higher-cost inventory.
"Our capacity utilization is the highest amongst all our peers in the world. The electrode pricing continues to remain under pressure due to reduced demand," added Mr. Jhunjhunwala.
c. Management Insights:
Management emphasized that the long-term outlook for the industry remains positive, driven by the global shift towards decarbonization and the increasing adoption of electric arc furnaces (EAFs) in steel production. They anticipate that over 100 million tons of new EAF capacity will come online globally between now and 2030, leading to a significant increase in demand for graphite electrodes.
"Decarbonization has now become an irreversible process. We are constantly tracking more and more announcements of the new Greenfield electric arc furnaces from different parts of the world," highlighted Mr. Jhunjhunwala.
Management also addressed the challenging global macroeconomic environment and specifically highlighted the impact of China's aggressive steel export policies on the graphite electrode industry. They emphasized that China's overcapacity and lower power costs have resulted in prices that are below variable cost for many producers, creating intense pressure on global markets.
d. Strategic Initiatives and Future Plans:
HEG is actively pursuing strategies to optimize its cost structure, particularly focusing on securing lower power costs. Management has acknowledged the need to renegotiate power prices with the Madhya Pradesh government and explore alternative power sourcing options in other states.
The demerger and restructuring of the company are progressing as planned, with the scheme currently under review by SEBI and stock exchanges. Management expects this process to be completed by mid-2025.
The company is also aggressively pursuing opportunities in the battery energy storage system (BESS) market, where its anode products are finding increasing demand. They are working closely with various battery manufacturers in India and exploring new avenues for growth.
"We are hoping that the demand would come back sometime from 2025 onwards and we are fully equipped to take advantage of that through our expanded capacity," asserted Mr. Jhunjhunwala.
e. Q&A Session Highlights:
Power Costs and Competitive Landscape: Management addressed concerns about power costs, emphasizing that while they have secured subsidized power at their current facility, they are actively seeking more competitive pricing for their new anode facility. They acknowledged the industry's challenges related to aggressive pricing from Chinese competitors and discussed the complexities of achieving collective pricing strategies.
GrafTech Investment: Management provided clarification on their investment in GrafTech, assuring investors that they do not anticipate any issues arising from the potential delisting of the stock.
Anode Powder Market: Discussions revolved around the declining battery prices and their impact on anode powder demand. HEG's strategy to capture the BESS market and its competitive positioning were highlighted.
Future Outlook and Demand: Management expressed confidence in the long-term growth of the graphite electrode market, driven by decarbonization trends and increased EAF adoption. They discussed the expected demand from India's growing battery industry, particularly from companies like Exide and Ola.
Conclusion
HEG's Q1 FY25 earnings call revealed a challenging operating environment characterized by subdued steel production, pressure on margins, and intense competition. However, the company's expanded capacity, operational efficiency, and strong cost position position it well to capitalize on the long-term growth prospects of the graphite electrode market. The company's focus on cost optimization, particularly securing lower power prices, alongside its entry into the BESS market, suggests a strategic approach to navigating current challenges and capitalizing on future opportunities. While the near-term outlook remains uncertain, HEG's long-term prospects appear promising, given its competitive position and the growing global demand for graphite electrodes in the transition to a more sustainable future.
Disclaimer: The views, tips, and opinions expressed in this article are those of the contributing experts, investment professionals, broking houses, or rating agencies, and do not necessarily reflect Acme Inc’s position. This content does not constitute financial advice. Readers should exercise caution and consult certified experts before making investment decisions. Acme Inc bears no responsibility for any actions taken based on information provided in this article.