Shares of Graphite India Ltd and HEG Ltd have eroded over 50% of investors wealth from their respective record highs on concerns of margin pressure due to the rising raw material cost. Graphite India scrip has dropped 55% from its all time high of ?1,126 on 14 August 2018. HEG stock is down 51% from its record high of ?4,950 on 16 October 2018. At 9.25 am, Graphite India shares fell 7.5% to ?510.55 while HEG Ltd declined 6.11% to ?2,575 a share. So far in 2019, both the stocks have fallen over 32% each.
Both the companies are manufacturers of graphite electrodes which are key components of electric arc furnaces that turn scrap into steel. Both the companies produce two grades of graphite electrodes, High Power and Ultra High Power, which are manufactured according to the customers' needs and requirements.
The price of non-UHP (ultra high power) has been hit after India ended anti-dumping duties on graphite electrodes imported from China in September 2018 and higher imports from China while UHP prices have been impacted by weakness in steel prices.
Also, both the Indian graphite electrode (GE) producers had stopped exporting to Iran in the December quarter while awaiting clarification on exemption from US sanctions.
Iran is key export destination which accounts 8-10% of combined volumes for Graphite India and HEG.
"The stoppage of exports has eased tightness at the margin. With expectations of further price fall, we believe steel mills are destocking their GE inventory while they were re-stocking in panic during 2018," said Macquarie Research in a 17 January report.
HEG will announce its December quarter earnings on 12 February while Graphite India has not announced its earnings date yet. Brokerage firm ICICI Direct Research expects Graphite India to report revenues of ?1,605.20 crore, down 20% from a quarter ago while profit will be at ?678.80 crore, down 25.6% a quarter ago. HEG is expected to report revenues of ?1,630.80 crore, down 9.1% from last quarter while profit is estimated at ?681.70 crore, down 23.3%.
ICICI Direct believes that the higher price of needle coke to impact raw material cost. It expects Graphite India to report EBITDA at ?982.60 crore, implying EBITDA margin of 61.2% versus 68.1% in second quarter of fiscal year 2019. HEG is expected to report EBITDA at ?1,021.50 crore, implying EBITDA margin of 62.60% versus 76.30% in second quarter of fiscal year 2019.
"The down-trending margin in the next 2-3 quarters should keep stocks under pressure. However, we believe valuations and payout should limit downside. With 25-30% payout assumption, both offer 5-6% dividend yield. We remain constructive on the sector and would recommend to use any substantial correction as an opportunity to add with a two-year investment horizon," Macquarie report added.
Of the analysts covering Graphite stock, six have a “buy" rating while one have a “hold" and a sell rating. For HEG, six have “buy" rating and there are no sell or hold ratings to the stock, shows Bloomberg data.