What Caused Shares Of HEG, Graphite India To Rise For The Third Straight Day

Shares of HEG Ltd. and Graphite India Ltd. rallied for the third straight session as the domestic graphite electrode makers expect demand to improve after economic activity picked up on easing lockdown curbs.

“We expect resurgence in demand from 2021 onwards once the impact of Covid-19 subsides hopefully, and the remaining electrode inventories get consumed,” Manish Gulati, executive director at HEG, said during an analyst call.

Graphite India Chairman KK Bangur, in an investor presentation, said: “We remain cautiously hopeful that the downcycle of the electrode industry is bottoming out and with the uptick in overall economic activity, we can expect a growth in the medium-term.”

Prices of graphite electrodes—used in electric arc furnace for making steel—in China have risen to their highest in a year, according to Bloomberg data.

According to ICICI Direct’s Dewang Sanghavi, while prices of needle coke, a key raw material for graphite electrodes, have softened, they have not yet fully realigned with electrode prices. “Hence, it’s likely to lead to elevated input costs in the near term,” Sanghavi said in a post-earnings note for Graphite India.

HEG and Graphite India suffered a net loss in the quarter ended September. While HEG’s net loss stood at Rs 46.84 crore, that of Graphite India was at Rs 41 crore during the three-month period. Operating performance of both companies remained subdued on muted demand. Sequentially, however, HEG’s revenue improved 38% to Rs 323 crore, while Graphite India’s sales rose 19% to Rs 485 crore on a consolidated basis.

“The performance was encouraged by an improvement in business activity,” Bangur said in the investor presentation. “This, however, was offset by lower realisations as pricing continues to remain under pressure.”

According to Jefferies India Analyst Sonali Salgaonkar, despite poor operational performance, HEG’s balance sheet remains strong with cash at Rs 760 crore.

Taking Stock

According to Gulati, destocking should have been done by now. “By September, we were expecting this inventory should be out of the market. But because of Covid, this is taking longer.” HEG had to take a hit of Rs 28.96 crore on the cost of inventory during the quarter ended September.

While Bangur agreed that destocking of electrode inventory at the customer end was delayed due to the pandemic, it has now resumed.

Trading Patterns

• Both HEG and Graphite India gained for the third straight day, ending with gains of 3.5% and 12.2% respectively.
• HEG has gained 16.6% in the last three trading sessions, while Graphite India is up 32%.
• Both HEG and Graphite India saw a breakout above their respective 200-day moving average during Thursday's trading session.
• Graphite India is trading at the highest level in seven months.
• Of the three analysts tracking Graphite India, one each has a 'buy', 'hold' and 'sell' rating.
• Of the three analysts tracking HEG, one has a 'buy' rating and the other two suggest a 'hold'.