This stock turned Rs 1 lakh into Rs 9 lakh in one year

The stock markets throw all kinds of surprises all the time. Generally, investing in a stock requires a minimum of two-three years after which one can expect decent returns. But the HEG Ltd stock has bypassed all the basic rules of investing during the last one year, it seems.

The stock of leading graphite electrode manufacturer rose nearly nine times during the last one year. The mid cap stock which stood at Rs 481.60 on August 3 last year closed at 4,348 level on Thursday.

That is an astonishing 793% gain in one year. On January 2, 2017, the stock price stood at 151.10. Since then the stock has gained 2,777%.

So why did the stock rise this much?

Business Today decoded the same and came across the firm's quarterly earnings which were announced on August 1.

The firm posted a rise of 645% in revenue to Rs 1,595 crore compared with Rs 214 crore in Q1 of FY 18. It reported Rs 770 crore in net profit in June quarter compared with Rs 8.43 crore loss in Q1FY18.

Q1 earnings before interest, tax depreciation and amortisation (EBITDA) rose to Rs 1,196 crore as against Rs 24 crore in the corresponding period last year. The firm is also engaged in the business of power generation and operates three power generation facilities with a total rated capacity of about 76.5 MW.

It reported Rs 1,586.84 crore in revenue from the graphite business for the quarter ended June compared with meagre Rs 212.42 crore revenue in the corresponding period of last fiscal.

Compared to the graphite business, the power business generated revenue worth Rs 26.51 crore in Q1 compared with Rs 54.24 crore in the corresponding quarter of last fiscal.

Profit before tax and interest from graphite segment rose to Rs 1179.22 crore in June quarter compared with Rs 11.49 crore loss in the corresponding quarter of previous fiscal.

Hence, the startling Q1 earnings show can be attributed to the robust performance in the graphite segment of the firm.

So what has happened in the graphite business of the firm which led to the exceptional Q1 performance?

The firm is a leading graphite electrode manufacturer and has seen rising demand for electrodes during the last one year. HEG currently has graphite electrode capacity of 80,000 mt, the largest single-site integrated graphite electrode facility in the world. This plant is located at Mandideep, near Bhopal. The company exports over 70% of its production to more than 30 countries across the world.

Graphite electrode is used in making steel through the electric arc furnace route.

There are two types of furnaces to make steel: Electric arc furnace (EAF) and blast furnace. In the blast furnace method, iron ore is combined with varying amounts of coke (less than 30%) and small amounts of flux. Making steel via blast furnace leads to a lot of pollution.

The electric arc furnace process does not involve iron-making. It reuses existing steel scrap, avoiding the need for iron ore and their processing. Graphite electrodes placed in the furnace supply power raising the temperature to 1600C, melting the scrap. The method does not use coal as a raw material.

Steel production via electric arc furnaces leads to lesser pollution compared to the blast furnace method.

In 2017, world's largest steel producer China closed highly polluting unaccounted blast furnace capacity totalling 155 million tonnes. It also committed to close down an additional 150 million tonnes of blast furnace capacity over the period of 5 years at the rate of 30 million tonnes/per annum between 2019-23.

Most of these are being replaced by electric arc furnaces. China installed or commenced construction of 105 new EAFs with capacity of 66 million tonnes in 2017. China steel exports in 2017 fell about 30% to 75 million tonnes from 108 mt y-o-y. In the first quarter of 2018, Chinese steel exports fell further to a level of annualized 60 million tonnes.

Currently, EAF accounts for 45% of steel production in the world (without China).

Steel production via EAFs is seen growing at a faster pace in China as compared to basic oxygen furnaces (BOF) which is good news for graphite electrode maker HEG.

In fact, during Q1 earnings statement, Ravi Jhunjhunwala, chairman and managing director, HEG Ltd said, "The graphite industry globally, and in India, remains buoyant given the structural changes that have been brought about because of macroeconomic factors. Due to challenging entry barriers and being a highly capital intensive business, supply constrains are expected to continue till the foreseeable future.''

"The steel industry continues to grow globally, and electric arc furnaces continue to take a more important place. Our main raw material, needle coke, which has also found new application in Lithium ion batteries, has made any meaningful expansion in the industry difficult, hence making the entry barriers higher,'' Jhunjhunwala said.

"Given the factors above and given China's war on polluting industries, we believe the current upsurge in global graphite electrode demand to sustain its momentum over the foreseeable future as the demand-supply gap is widening. HEG is contemplating an increase in the operational capacity to capitalise on the structural changes in the industry," Jhunjhunwala added.

Edited by Aseem Thapliyal