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B. Krishnakumar

Fired by steel boom.

INVESTORS may include the HEG stock in their portfolio. Taking into account the growth prospects and the implementation of capacity expansion projects, HEG's performance can be expected to improve. Investors may buy the stock at the prevailing level and add on at declines.

HEG is among the major producers of graphite electrodes. It also has a sponge iron unit and a power plant predominantly for captive consumption. Graphite electrodes are used by companies that use the electric arc furnace method of steel production.

Thanks to the growth in steel production, HEG has managed to record healthy revenues and earnings despite the negative effects of certain one-time performance-related parameters.

For the year-ended March 2004, the turnover dropped 18 per cent to Rs 439.5 crore owing to the de-merger of the textile division. The post-tax earnings, however, improved 37 per cent to Rs 51 crore. The performance this fiscal has been strained because of the problems at the power plant. This led to higher power, and operating, costs for the company.

This apart, the expenses incurred towards the lawsuit filed by the company against the imposition of anti-dumping duty by the European Union took a toll on the performance.

As a result, the post-tax earnings for the quarter ended December 2005 dropped 13 per cent to Rs 12.9 crore while the turnover rose 15 per cent to Rs 134.22 crore. The performance and profitability should improve once the power plant problems get resolved.

The company is implementing an expansion project to enhance the electrodes capacity to 52,000 tonnes from 30,000 tonnes. It is also setting up a 30 MW power plant. These projects are likely to be commissioned by the first quarter of the next fiscal. The company is also setting up a steel billet project as a forward integration measure.

This is expected to go on stream in 2005-06. The implementation of this project will be another growth trigger for HEG.

The Budget has reduced the Customs duty on graphite electrodes to 10 per cent from 15 per cent. This exposes HEG to the threat of imports.

But the company should be able to combat this considering the firm price trends and the capacity expansion projects. Our positive view on the stock is subject to the continuation of the robust trends in steel production.

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