Shares of HEG Ltd and Graphite India have been on a losing streak recently and investors have lost more than 50 percent of their wealth from their respective record highs. Abhisar Jain, senior VP of metals and mining at Centrum Broking, shared his views on these two struggling stocks.
“Coming to the possible reasons for such a sharp fall in such a short time, we believe that there are a few factors - however, we obviously believe that the fall has been much more than expected - there is obviously a fall in the steel prices and the steel spreads in the last three-four months triggered from the fall in steel prices in China and possible expectation of a slowdown in demand at a global level in steel as well as in China. So the steel spreads have seen a reduction with steel prices falling by around 15-20 percent and that is possibly resulting into a tougher negotiation by the steel makers for the graphite electrode supplies and showing up in the fall in the graphite electrode prices themselves," Jain told CNBC-TV18 on Tuesday.
Talking about the other reasons for the drop in shares, Jain said, "Secondly, we have also seen the rise in the needle coke contract rises because the needle coke which is a key raw material for the graphite electrodes follows a six months contract cycle and it was coming with a lag. So for H1CY19, the contract rises for needle coke have been settled at anywhere between USD 800 and USD 1000 higher. Thirdly, there is a continuation of graphite electrode exports from China although we believe that these exports are of low quality electrodes which not necessarily competes with all the high quality exports that the top six companies including the two Indian companies do but nonetheless the GE exports from China have gone up by 20 percent year-on-year (YoY) in CY18 and that obviously is putting pressure on the global supply at the margin and also in the lower grade electrodes."
According to Jain, another key reason for the fall in shares is Iran sanctions. "India exports electrodes to Iran, which forms around 8 percent kind of a share. We have seen sanctions on Iran leading to stoppage in supplies to Iran, which in turn has put some pressure in terms of the supply being a little bit higher in the domestic market and hence the ultra-high power (UHP) prices in the domestic market for the January to March quarter have been negotiated at around 10-15 percent lower. These were the few reasons, which have played out in the last three-four months,” he said.
Jain has a neutral rating on Graphite India, but the brokerage will be revisiting its estimates once the company reports the numbers.
"We expect the Q3FY19 numbers to be still strong though lower than the H1 profitability, we feel that the deduction in EBITDA per tonne will not be huge as of now. We would be recommending gradual addition from the current levels but our rating currently is neutral,” said Jain.