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Why HEG Expects Margins To Fall From Record 

HEG to cut power costs to protect margins.

Employees place cells into a graphite holder, before loading the holder into an anti-reflection machine, on the cell production line at a manufacturing plant in Bangalore, India. (Photographer: Dhiraj Singh/Bloomberg)
Employees place cells into a graphite holder, before loading the holder into an anti-reflection machine, on the cell production line at a manufacturing plant in Bangalore, India. (Photographer: Dhiraj Singh/Bloomberg)

HEG Ltd., which had a splendid last financial year due to higher prices of graphite electrodes, expects margins to fall in 2018-19.

Demand for graphite electrodes, used in electric arc furnaces, “is expected to remain robust”, the company said in its annual report. The cost of manufacturing will catch up as needle coke prices are expected to rise, it said. “This will rationalise margins to more sustainable levels.”

Needle coke is highly polluting. That led to a crackdown in China to curb winter pollution. A supply crunch pushed graphite electrode prices higher, helping companies like HEG. It reported an Ebitda margin of 63 percent—the highest since at least 2009, in the year through March. The stock returned over 1,300 percent gains during the period.

Foreseeing higher needle coke prices, the company has initiated steps to reduce its power costs. Here are other key highlights from its annual report:

Capacity Expansion Plans

Expecting the global graphite electrode demand to rise, HEG is looking to expand capacity by 20,000 tonnes a year to takes its total production ability to 100,000 TPA.

Bullish Outlook For Industry

HEG expects the upsurge in the global graphite electrode demand to sustain. The demand-supply gap will only only widen in the coming years which augurs well for the company, it said in the annual report.

Key Highlights For FY18

  • Highest profits since inception.
  • Pays off long-term and short-term debt, turning into a net cash company
  • Declared a total dividend of Rs 80 a share (2.5% yield) in year ended March.
  • Working capital cycle shrunk by 122 days to 104 days.
  • Share of exports to revenues rose 71 percent in FY18 vs 60 percent in FY17.