Earnings up 10-13% to factor in higher utilisation and rupee fall; GRIL/HEG TPs raised to Rs 1,450/5,500.
Both GRIL and HEG reported strong Q2FY19 results. The GE realisation for the quarter was at $14,000/t (up 9% q-o-q) for GRIL and $15,000/t (up 5% q-o-q) for HEG. We raise our estimates to factor in ` depreciation, higher utilisation. We also lower our multiple factoring margins well above cyclical average. However, we believe margins should stay strong given strong fundamentals. Maintain Buy on GRIL with revised PTs of Rs 1,450, and HEG with Rs 5,500.
Strong performance continues
HEG reported Q2FY19 results ahead while GRIL standalone results were in line with JefE. The average GE realisation for the quarter continued its uptrend. Given the higher domestic sales for GRIL as compared to HEG and slightly lower GE prices in domestic market, we are estimating GRIL average realisation of ~$13,600/t in FY19e and ~$13,100 in FY20e. For HEG we estimate average GE realisation at $14,500/t in FY19e and $14,000/t in FY20e.
HEG Q2FY19 utilisation was 85%, up from 82% in Q1FY19. HEG management is confident of improving it further given additional needle coke supply from Phillips66. GRIL on consolidated basis reported 93% utilisation in Q2FY19e vs 88% in Q1FY19. We have increased our volume assumption by 4% for HEG as we raise our utilisation estimates to 85% (vs 82% earlier), and 6% for GRIL as we raise utilisation to 90% (vs 85% earlier).
Rising needle coke prices built in
Needle coke prices in CY18 have seen an increase of $1,500-2,000/t. While the estimated needle coke cost for the quarter was $2,200/t, it has seen an increase of $800-1,200/t from Q4FY18 to Q2FY19. The full impact of the price increase should be reflected in 2HFY19. We have already built this in our needle coke prices assumptions and expect average needle coke price for FY19e of $3,200/t, and rising further to $3,800/t in FY20e.
We have revised our earnings by 10-13% as we factor in: (a) ` depreciation and
(b) higher utilisation. We have lowered our multiple to factor in above cycle average margins. However, we believe given the demand supply tightness in electrode industry, the margins will sustain going forward. Every $1 change in the Rupee improves Ebitda and EPS by 2%. Every 5% increase in utilisation improves Ebitda and EPS by 6%.