HEG, Graphite India shares: Reasons behind Jefferies' Buy call on these 2 stocks 

Foreign brokerage Jefferies has cut its target prices on Graphite India Ltd and HEG Ltd -- makers of graphite electrodes, which are used by manufacturers of steel -- by up to 9 per cent, but maintained its 'Buy' recommendations on the two stocks.

On Graphite India, which has an installed electrode capacity of 98,000 mt, Jefferies said it likes Graphite India's a strong balance sheet, marked by minimal debt and sizable cash balance and investments. The share of EAF route of steel production may rise, benefiting the electrodes industry over the medium term, it said.

HEG, Jefferies said, also is a key graphite electrode player in India, with current installed electrode capacity of 100,000 mt. HEG recently expanded its capacity by 20,000 mt, which was commissioned in November 2023. Jefferies likes HEG's robust balance sheet, marked by minimal debt and sizable cash balance and investments including treasury size.

For HEG, Jefferies' target price stood at Rs 2,560. It values the stock at EV/Ebitda multiple of 7 times, at a slight discount to stock's historical 10-year average multiple. For Graphite India, Jefferies suggested a target of Rs 660. It assigned the stock an EV/Ebitda multiple of 11 times, broadly in line with the stock's historical 10-year average multiple.

In its base case, Jefferies assumed graphite electrode average selling price to be at $5,700 per mt in FY25, $5,900 per mt in FY26 and $5,900 per mt in FY27. It assumed the average needle coke price over FY25-27 at $1,800-1,900 per mt. Over FY24-27, it expects Graphite India's sales to grow at 14 per cent and EPS at 6 per cent CAGR. "FY19 was a peak up-cycle for GE companies globally. Ebitda margin expected from -4.9% in FY24 to 19% by FY27e," it said.

In its base case for HEG, Jefferies assumed graphite electrode average selling price of $4,900 per mt in FY25, $5,500 per mt in FY26 and $5,500 per mt in FY27. It assumed the average needle coke price over FY25-27 at $2,000 per mt. "We expect op-margin to bottom out at 14.4 per cent in FY25 and expand to 34.6 per cent over FY25-27," it said.

Demand slowdown in EAF production, lower GE utilisations, spiralling needle coke prices, weakening GE realisation, resulting in shrinking spreads, and disruption across key markets are seen as key risks for the two stocks.