Jefferies upgrade: HEG and Graphite India shine as electrode demand surges

Jefferies upgrade: HEG and Graphite India shine as electrode demand surges

This post delves into the recent upgrades by Jefferies on HEG Ltd. and Graphite India Ltd., exploring the factors behind their increased target prices and the promising landscape for electrode demand.

Decarbonisation Sparks Upgrade and Optimism
Jefferies Financial Group Inc. has recently upgraded its target prices for HEG Ltd. and Graphite India Ltd., citing the increasing demand for electrodes driven by the global push towards decarbonisation. This move reflects a positive outlook on the prospects of these companies, indicating potential gains for investors.

HEG Ltd: A Strong Buy with 49% Upside
Jefferies maintains its ‘buy’ rating on HEG and has raised the target price by an impressive 49% to Rs 2,170. This adjustment implies a substantial 27.64% upside, making HEG an enticing option for investors seeking growth opportunities in the market. Jefferies’ confidence in HEG is grounded in the company’s strategic positioning and its response to the evolving market dynamics.

Graphite India Ltd: A Buy Rating and 23% Upside
Similar optimism extends to Graphite India, with Jefferies keeping its ‘buy’ rating intact and elevating the target price by 23% to Rs 515. This adjustment suggests a 19.1% upside, underlining Graphite India’s potential for strong performance. The rationale behind this upgrade is closely tied to the increasing demand for electrodes, primarily fueled by the global shift towards cleaner technologies and decarbonisation.

Decarbonisation Driving Electrode Demand Surge
One of the key drivers behind these upgrades is the surge in demand for electrodes, attributed to the global decarbonisation objective. Jefferies notes that the production of electric arc furnaces is expected to increase by 100 million tonnes by 2030, spurred by the decarbonisation push. This surge in production is anticipated to lead to a potential demand for 200,000 tonnes of electrodes globally, excluding China.

Environmental Impact
The shift towards electric arc furnaces is noteworthy not only for its economic implications but also for its positive environmental impact. Electric arc furnaces produce only a quarter of the emissions compared to traditional blast furnaces. This aligns with the broader goal of reducing carbon footprints and mitigating climate change, making it an attractive option for industries worldwide.

Decarbonisation’s Track Record and Future Outlook
The commitment to decarbonisation has already made a significant impact, as evidenced by a 78-million-tonne increase in electric arc furnace production globally, excluding China, from 2015 to 2022. This trajectory is expected to continue, with decarbonisation and the growing adoption of electric arc furnaces acting as catalysts for medium-term electrode demand.

Export-Oriented Companies to Benefit
Jefferies identifies HEG and Graphite India as potential beneficiaries of this trend, emphasizing their export-oriented business models. HEG relies on exports for 70% of its revenue, while Graphite India sees 50% of its revenue coming from exports. This global reach positions them well to capitalize on the increasing demand for electrodes.

Financial Projections and Strategic Initiatives
Jefferies has adjusted its EBITDA estimates for HEG, anticipating a 4% increase for FY25 and a substantial 10% increase for FY26. Additionally, HEG is set to venture into manufacturing graphite anodes for lithium-ion cells, aiming to produce 10,000 tonnes that will cater to 10 gigawatt hours of cell manufacturing. Furthermore, HEG’s FY25 volume growth is expected to be supported by a 20,000-tonne electrode capacity expansion scheduled to commission by September.

Price Dynamics and Capacity Utilisation Forecast
Jefferies anticipates an increase in electrode-selling prices to $6,000–6,100 per tonne, although this would still remain 50% below the up-cycle peak in FY19. The forecast for FY24 indicates a dip in capacity utilisation to 60–66%, followed by a recovery to 75–80% in FY25 due to the expected revival in demand. These projections provide valuable insights for investors seeking to understand the potential price dynamics and utilization trends in the coming years.

In conclusion, the upgrades by Jefferies Financial Group Inc. underscore the promising trajectory of HEG and Graphite India in the current market landscape. With the global decarbonisation agenda driving electrode demand, these companies are strategically positioned to benefit from the growing market dynamics. Investors looking for growth opportunities in the evolving landscape of clean technologies and sustainable practices may find HEG and Graphite India well-aligned with the future of industry trends and environmental responsibility.

Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.