Shares of India’s major GE (Graphite Electrode) manufacturer soared 20% intra-day to hit the upper circuit on BSE, after global brokerage firm BoAML initiated coverage on the stock. Interestingly, HEG shares zoomed 20% in the morning trade to hit the intra-day high of Rs 3,871 on BSE this morning. BofAML has a target price of Rs 6,700 on the shares, implying an upside of more than 73% from the current market prices.
According to the research and brokerage firm, the valuations are attractive at current levels due to correction in the stock following weak market sentiment for more than a month. Further, the firm said that the demand for graphite electrode will continue to remain strong globally due to Chinese curbs on pollution and steel output.
“The stock is trading at 3.8x P/E and 2.0x EV/EBITDA on FY20E – well below peers in Japan and China. We attribute this to the current weakness of Indian equities and investors’ lack of conviction in the extent and longevity of the cycle. The price target is set at average prior cycle peak earnings/trough level multiples of 7.5x P/E and 5.2x EV/EBITDA for FY20E,” BoAML said in its report.
BoAML notes that graphite electrodes (GE) is a key consumable used in Electric Arc Furnace (EAF) steel production. The ongoing Chinese curbs on pollution and steel output look set to put EAF on a path of structural growth, while rising competition for needle coke from EV batteries limits production, notes the firm in its report.
The recent stock market plunge has taken a toll on HEG shares too, as the stock has fallen by more than 17% from its 52-week high of Rs 4,542. BoAML expects HEG’s net income at a record Rs 3,130 crore this year – up from Rs 1,100 crore in FY18. Graphite electrode prices are remaining firm, and the company is capable of passing on rising needle coke costs, according to the global brokerage firm.