China’s Push for Blue Skies May Fuel Gains for Most Profitable Graphite Maker

(Bloomberg) -- The world's most profitable graphite electrode maker expects China's push for blue skies to fuel higher margins as it bolsters demand for the steelmaking ingredient.

India's HEG Ltd. expects revenue to more than double and the pretax margin to rise to as much 75 percent as demand remains strong because of environmental curbs in China, according to Chief Executive Officer Ravi Jhunjhunwala. That's after its earnings before interest, taxes, depreciation, and amortization margin rose to a record 64.6 percent in the year ended March 31, making it the most profitable graphite electrode producer on the planet, data compiled by Bloomberg shows.

“Things are looking good as of now. I think we are on track to reach about 68 billion rupees ($975 million) in revenues,” Jhunjhunwala said in a phone interview last week. ”Our Ebitda margin continues to widen and I think it will be fair to say that we see them in the 70 to 75 percent range for the next few quarters and some time to come.”

HEG's shares have surged about 28 times since the beginning of 2017 on rising demand for graphite electrodes, an essential component of electric arc furnaces that turn scrap into steel. Electrode prices are estimated at as much as $15,000 a ton, more than double the historical average of $4,500 a ton and are expected to keep rising into 2019, following China's efforts to reduce overcapacity and pollution in its steel industry, Bank of America Merrill Lynch analysts including Paul Dewberry said in an October report.

China's “blue-sky protection plan” is widening anti-pollution controls that are shuttering plants that make graphite electrodes and traditional blast-furnace steel mills, while lifting output of less-polluting steel from electric arc furnaces. It's also pushing more global steel production to Europe, HEG's highest export market, Jhunjhunwala said.

“Electrode demand tends to rise in relation with global economic growth,” he said. “Even if we assume global growth at around 2.5 percent to 3 percent, we see new electrode demand in the range of 15,000 to 20,000 tons per annum.”

HEG plans to increase its annual capacity by a quarter to 100,000 tons in about three years to meet higher demand. While it will spend as much as 12 billion rupees to expand capacity, which it plans to finance it through its own cash, any new graphite electrode supply will be constrained by the limited availability of key raw material needle coke.

“We continue to face shortage of supply for needle coke, our main input cost. How to find it remains a concern,” he said.

The company also plans to buy about 3.4 percent of its total equity, or as many as 1.4 million shares, for as much as 5,500 rupees apiece, spending nearly 7.5 billion rupees. Shares of the company dropped 0.2 percent to 4,173.65 rupees as of 10:42 am in Mumbai.

“We have always returned about 35 percent of our annual profits to the shareholders and will aim to maintain that,” Jhunjhunwala said.

--With assistance from Swansy Afonso.

To contact the reporter on this story: Ameya Karve in Mumbai at akarve@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Alpana Sarma, Keith Gosman

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