By Akash Krishnatry

India Ratings and Research (Ind-Ra) has affirmed HEG Limited’s Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows:  

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Commercial paper

-

-

30-365 days

INR1,000

IND A1+

Affirmed

Fund-based limits

-

-

-

INR12,000 (increased from INR5,690)

IND AA/Stable/IND A1+

Affirmed

Non-fund-based limits

-

-

-

INR9,200 (increased from INR2,133)

IND AA/Stable/IND A1+

Affirmed

KEY RATING DRIVERS

Strong Industry Dynamics: Ind-Ra expects the global demand-supply dynamics to remain healthy for graphite electrode (GE) players owing to a reduction in the overall ultra-high powered GE capacity to 725,000 tonnes per annum (tpa) in 2018 from 810,000tpa in 2014, resulting from capacity closures. Also, low capacity additions by 2022 and limited availability of needle coke, would restrict new supplies and overall capacity utilisation levels. Moreover, the agency expects robust GE demand to sustain, as the environmentally superior electric arc furnace (EAF) route steel production’s share would gradually improve, along with the overall steel demand growth.

HEG has been witnessing higher GE prices since 2HFY18 owing to a surge in EAF route steel production, supported by China’s steel capacity rationalisation. Ind-Ra expects China’s steel exports to remain around 70 million metric tonnes (mmt) in the medium term as capacities are unlikely to grow considerably and the global large consumers of steel are likely to continue protectionist regime. China’s exports reduced to 69mmt in 2018 (2017: 75mmt, 2016: 110mmt), while global importing nations ramped up their EAFs, thus supporting strong GE demand over 2018. Ind-Ra expects ultra-high power GE demand to remain stable at around 700,000 over the short-to-medium term. During 2017-2018, the demand for GE increased 35-40 kilo tonnes per annum, leading to panic in the markets and abnormal realisations of around USD20,000/tonne from the long-term average of around USD4,000/tonne. 

Healthy Revenue and Profitability:
 HEG’s revenue increased to INR65.9 billion in FY19 (FY18: INR27.5 billion), EBITDA to INR46.5 billion (INR17.2 billion) and EBITDA margins to 71% (63%), driven by a sudden demand-supply gap amid favourable industry dynamics. Considering the healthy balance in the medium term, Ind-Ra expects HEG’s profitability to stabilise at INR12 billion-15 billion over FY20-FY21. Moreover, the company ties up capacity with customers according to the available needle coke prices, thus partially mitigating price shocks in the commodities.

Ind-Ra’s expects continued healthy realisation in FY20-FY21 owing to the healthy demand-supply scenario in the steel industry and EAF route of production. The agency expects the needle coke prices to stabilise to about USD4,000/tonne owing to the destocking of the higher inventories held by GE producers during FY19. Furthermore, capacity utilisation of GE producers should stabilise at 80%-85% in FY20-FY21. However, given the constrained supply of needle coke and the alternative use in LI-ion batteries, a higher-than-expected rise in prices could lead to lower-than-expected gross margins for the GE producers in the long term.

Comfortable Liquidity:
HEG had unrestricted cash and bank balances, and liquid investments of INR9.3 billion at FYE19 (FYE18: INR52 million). The average utilisation of the fund-based working capital limits was around 50% during the 12 months ended May 2019. Despite the capex execution, the agency expects the company to have positive free cash flow from operations over FY20-FY21. Although fund flow from operations are likely to moderate to around INR12 billion from the abnormally high levels of around INR35 billion over FY19, cash flow from operations shall be supported through release of working capital as the average finished good prices normalise around USD8,000/tonne from the highs of USD15,000/tonne in FY19. HEG has no term loans outstanding and Ind-Ra does not expect any term loan requirements over FY20-FY21. HEG’s gross interest coverage was comfortable at 259x in FY19 (FY18: 30x). The company had a net cash position in FY19 (FY18 net adjusted leverage: 0.2x). 

Ongoing Capex:
HEG is undergoing fully equity-funded capex of INR12 billion towards brownfield capacity expansion of 20,000mt over FY20-FY22. The project execution and stabilisation risks are limited because of the debt-free capex funding, five-decade-long experience of the company’s management in the existing business and the expected growth in EAF steel production. However, the capex stabilisation may have moderate risks on feedstock availability and plant ramp up. Ind-Ra expects HEG to maintain a liquid balance sheet and have a low reliance on external debt; thus, the credit metrics will remain commensurate with the rating level. However, any unrelated diversification or leveraged inorganic growth would be key rating monitorables.

Working Capital-Intensive Operations: 
The manufacturing of GE involves a large processing period and a moderate-to-long credit period to customers. Its working capital cycle improved to around 150 days in FY19 from 220 days in FY18, as the GE market has transformed to a supplier’s market from a buyer’s market.

Industry Risks: HEG is exposed to cyclicality in the steel business, as well as to risks arising from the volatility in the costs of raw materials, mostly crude/coal derivatives. HEG has a single manufacturing unit and its cash flows are dependent on single product revenue. However, it is well diversified in terms of markets and customers across geographies, which mitigates this risk to some extent. 


RATING SENSITIVITIES

Positive: The sustenance of the strong liquidity position through business cycles, continued favourable industry dynamics and the company’s ability to successfully compete globally leading to healthy returns on capital, and/or diversification of cash flows would be positive for the ratings.

Negative:
 Any debt-led capex and/or acquisition, elongation of the working capital cycle and/or adverse profitability resulting in net adjusted leverage exceeding 1.5x on a sustained basis would result in a negative rating.


COMPANY PROFILE

Formed in 1977, HEG is a flagship company of the LNJ Bhilwara Group. It manufactures GE at its 80,000tpa facility in Madhya Pradesh.

FINANCIAL SUMMARY

Particulars

FY19

FY18

Revenue (INR million)

65,928

27,501*

EBITDA (INR million)

46,582

17,216

EBITDA margin (%)

70.7

62.6

Gross interest coverage (x)

259

30

Net leverage (x)

n.m.

0.2

* Net of excise duty
Source: Ind-Ra, HEG


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

20 April 2018

11 December 2017

16 November 2016

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND A+/Positive

IND A/Stable

Fund-based limits

Long-term/Short-term

INR12,000

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND A+/Positive/IND A1+

IND A/Stable/IND A1

Non-fund-based limits

Long-term/Short-term

INR9,200

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND A+/Positive/IND A1+

IND A/Stable/IND A1

Commercial paper

Short-term

INR1,000

IND A1+

IND A1+

IND A1+

IND A1


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Akash Krishnatry

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687263

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121