HEG

Positioned as Proxy for Steel Up-Cycle

continues to outperform expectations, leveraging its cost leadership and high utilisation levels to gain market share in the global graphite electrode industry. Despite fragile steel demand, HEG’s strong execution and capacity expansion have supported revenue growth and margin improvement. With a robust medium-term demand outlook tied to Electric Arc Furnace (EAF) capacity additions worldwide, HEG remains well-positioned as a proxy for the steel up-cycle. Q3FY26 Performance Highlights - Utilisation: 85% in Q3, 89% for FY26, underscoring efficiency. - Revenue: +37% YoY, driven by volume growth from 20,000-tonne capacity expansion (Q4FY24). - Realisations: Flat over recent quarters. - Gross margin: Declined ~235 bps. - EBITDA margin: Improved 500 bps, aided by operating leverage and moderate power cost increases. Industry Context - Global steel production: -3% QoQ, led by declines in China, US, and Korea; offset by growth in India (+10.4% YoY), Japan, and Germany. - China: Steel output down 7.5% over five years, but exports rising, intensifying global competition. - India: Remains growth engine, supported by infrastructure spending. Medium-Term Demand Drivers - EAF capacity additions: ~110 mmt by 2030, with 20 mmt added in CY24–25. - Additional graphite electrode demand: ~180,000 tonnes annually, ~25–30% of current global ex-China capacity. - HEG’s expansion: Plans to add 15% capacity (15,000 tonnes) by early 2028. Outlook & Valuation - China’s anti-involution policy could reduce dumping, supporting pricing in India and globally. - US trade deal prospects may revive exports; HEG previously derived ~10% of sales from the US. - Stake in US-based Graftech enhances positioning for US steel up-cycle. - Valuation: 14.7x EV/EBITDA FY28e, considered reasonable given competitive strength. - Recommendation: Positive stance; HEG can be accumulated as a structural proxy for the steel up-cycle.