Jefferies initiated coverage on Graphite India Ltd. and HEG Ltd., the two listed manufacturers of graphite electrodes in India, anticipating rise in demand.
Graphite electrodes are back from an ‘inexpensive’ period of “softer demand” as its demand in all countries, excluding China, is expected to grow at a compounded annual growth rate (CAGR) of 4 percent.
While China is fighting against pollution by shutting down environmentally harmful steel industries, the electric arc furnace (EAF) industry has replaced this, hence the increase in demand. This increase in demand will increase prices of graphite electrodes.
Graphite India controls 13 percent of the world's capacity making it the fourth largest with 80 kilo-tonne of facility, and 18 kilo-tonne in Germany, the report said.
Jefferies expects the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) for the period between financial year 2017 and 2020 to increase at a CAGR of 197 percent and earnings per share (EPS) to increase at a CAGR of 116 percent. This is expected to lift returns above 25 percent, the report added.
HEG, on the other hand, is expected to garner profit in financial year 2018 with stronger growth. It has a capacity of 80 kilo-tonne and is fifth largest player in the world.
Decline in EAF steel production could a risk on the downside, the report added.