Business Today - - BT 500 - By Di­pak Mon­dal

WHEN CHINA DE­CIDED to crack down on some of its most pol­lut­ing in­dus­tries in 2017, which also in­cluded many blast and in­duc­tion fur­nace steel plants, steel ex­port from the world’s largest pro­ducer halved. This ben­e­fit­ted not just the steel man­u­fac­tur­ers in other coun­tries, but also man­u­fac­tur­ers of graphite elec­trode, which is pri­mar­ily used in the steel in­dus­try. In­ter­est­ingly, there are only five such man­u­fac­tur­ers glob­ally, two be­ing from In­dia. The two Ja­panese firms con­trol 54 per cent of the global mar­ket, the US com­pany con­trols about 23 per cent and the two In­dian com­pa­nies to­gether con­trol an­other 23 per cent.

HEG, one of the In­dian man­u­fac­tur­ers (other be­ing Graphite In­dia), has reaped the ben­e­fits of a sud­den change in the com­plex busi­ness dy­nam­ics of the in­dus­try. The com­pany’s sales jumped from ` 860 crore in 2016/17 to ` 2,750 crore in 2017/18. And it ex­pects the mo­men­tum to con­tinue. Ravi Jhunjhunwala, CMD and CEO of HEG, says they ex­pect the rev­enue in the cur­rent fi­nan­cial year (2018/19) to touch ` 6,000 crore.

The man­age­ment has rea­son enough to be con­fi­dent. In the first quar­ter of the cur­rent fi­nan­cial year, net sales of HEG were ` 1,587 crore, 7.5 times the sales of ` 213 crore in the cor­re­spond­ing quar­ter last year. The spurt in sales in 2017/18 saw the com­pany post­ing a profit (`1,081 crore) af­ter two con­tin­u­ous years of losses (`50 crore in 2016/17).

This jump in sales is also re­flected in the com­pany’s stock price move­ment. HEG’s shares opened at ` 947 on 3 Oc­to­ber 2017 and by the close of trad­ing ses­sion on 28 Sep­tem­ber 2018, it was at ` 3,328 af­ter hav­ing touched at high of ` 4,560 dur­ing the pe­riod. The av­er­age mar­ket cap in the Oc­to­ber 2016-Sep­tem­ber 2017 pe­riod was ` 1,235 crore; this jumped to ` 11,592 crore in the Oc­to­ber 2017-Sep­tem­ber 2018 pe­riod, a growth of 838 per cent.

HEG, which ex­ports 70 per cent of its to­tal pro­duc­tion, also ben­e­fited from the de­pre­ci­a­tion in the ru­pee.

Turn­around Story

HEG’s growth story orig­i­nates in China, the largest pro­ducer of steel. China de­cided to shut down 150 mil­lion tonne pro­duc­tion ca­pac­ity due to en­vi­ron­men­tal con­cerns. All th­ese plants used blast and in­duc­tion fur­naces, which are said to cause three times more pol­lu­tion than steel plants us­ing elec­tric arc fur­nace (EAF), which use graphite elec­trodes.

While 94 per cent of the steel in China was pro­duced us­ing blast fur­naces, only the rest was pro­duced through EAF plants. In the rest of the world, 53 per cent steel is pro­duced through the blast fur­nace route and the rest 47 per cent through the elec­tric fur­nace route. China has now started to shut down the blast fur­nace fac­to­ries, re­sult­ing in its steel ex­ports fall­ing sharply from 120-130 mil­lion tonne (mt) in 2015 to 70 mt by 2017. “Given that the de­mand for steel in China has re­mained healthy de­spite a re­duc­tion in pro­duc­tion due to the ca­pac­ity clo­sures, China’s ex­ports are likely to de­cline to 60 mt in FY18. As a re­sult, im­port­ing coun­tries have restarted their elec­tric arc fur­naces, re­sult­ing in a likely 75,000 tonne-80,000 tonne per an­num in­crease in graphite elec­trode de­mand,” states a De­cem­ber 2017 re­port by rat­ing agency In­dia Rat­ings.

“The 50-60 mt-drop in steel ex­port has to be made good by ramp­ing up pro­duc­tion in the rest of the world; 35-40 mt of that has come through elec­tric arc fur­naces, be­cause of which the de­mand for graphite elec­trodes has gone through the roof. And this has hap­pened at a time when 15-20 per cent of the world’s ca­pac­ity of elec­trode was shut down be­cause the mar­kets were bad,” says Jhunjhunwala.

The global ca­pac­ity of graphite elec­trodes came down from 860,000 tonne in 2010 to 725,000 tonne per an­num in 2018 be­cause the world’s EAF steel pro­duc­tion de­clined by about 30 mt dur­ing 2012-16. How­ever, the two In­dian com­pa­nies have in­creased their ca­pac­ity from 120,000 tonne in 2010 to 160,000 tonne now.

As the com­pany’s rev­enue and prof­its in­creased, it paid back the debt on its book. HEG is now debt-free; it has no long-term or short-term debt. Ac­cord­ing to In­dia Rat­ings, the com­pany has sig­nif­i­cantly delever­aged its bal­ance sheet on ac­count of es­ti­mated strong cash flows from op­er­a­tions to­talling ` 500-600 crore in 2017-18. In that year, all term loans (`270 crore in 2016-17) were pre­paid and work­ing cap­i­tal bor­row­ings stood lower at ` 300 crore, de­spite an in­crease in work­ing cap­i­tal re­quire­ments due to an in­crease in raw ma­te­rial and graphite elec­trode prices.

With the de­mand for elec­trode graphite al­ready touch­ing 700,000 tonne in 2018 af­ter lan­guish­ing at about 625,000 tonne for long, it is the In­dian com­pa­nies which are likely to gain. In fact, says Jhunjhunwala, in the past 20-25 years, ev­ery in­cre­men­tal in­crease in de­mand has been met by the two In­dian com­pa­nies. HEG has a ca­pac­ity to pro­duce 80,000 tonne per an­num, while it pro­duces 64,000 tonne now. There­fore, it can ramp up pro­duc­tion to ful­fil the de­mand-sup­ply gap. It plans to in­crease the ca­pac­ity of its Mad­hya Pradesh unit by an­other 20,000 tonne in the ex­pec­ta­tion that EAF steel ca­pac­ity would go up glob­ally.

Due to en­vi­ron­men­tal con­cerns, ex­cept in China no new blast fur­nace ca­pac­ity has been added over the past 10 years, says Jhunjhunwala. A likely risk in the fu­ture could be China again ramp­ing up its blast fur­nace­based steel plants. But China plans to in­crease its EAF ca­pac­ity from 6 per cent of the to­tal pro­duc­tion to 20 per cent by 2020. The com­pany also faces risks aris­ing from volatil­ity in the cost of raw ma­te­ri­als – nee­dle coke is one of the main raw ma­te­ri­als used, but ac­cord­ing to an ICICI Di­rect Re­search note, the im­pact of change in prices comes with a lag of six months.



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