Smallcap Graphite Electrode Manufacturer Announces First Ever Stock Split

Stock price appreciation can be a double-edged sword.

While a rising stock price typically signifies robust company performance and investor confidence, it can paradoxically become a hindrance.

When a company's shares ascend to dizzying heights, it can deter potential investors who perceive the stock as being overpriced or out of reach, thereby limiting the investor base and potentially stifling future growth. For that reason, companies usually consider a stock split exercise.

A stock split divides each existing share of stock into multiple shares. It doesn't inherently create or destroy value.

But stock splits are considered bullish catalysts and good news for investors. They're a sign that a company has performed well and a vote of confidence in its future.

HEG Ltd., a BSE 500 company is set to trade ex-split soon.

• On 23 September, HEG's board approved the sub-division of equity shares from existing 1 (one) equity share having a face value of Rs 10 each, into 5 equity shares having a face value of Rs 2 each, fully paid-up.
• The stock split ratio is 1:5.
• The face value will be cut from Rs 10 to Re 2 per share.
• The company has fixed 18 October 2024 as the record date for the same.
• According to the company, the rationale for subdivision is to improve the liquidity of its equity shares in the stock market and to make it more affordable to small retail investors.

Interestingly, this is the first time the company has come out with a stock split.

GrafTech Stake Acquisition

Earlier this month on 7 October, HEG acquired an 8.23% stake in GrafTech International, a graphite electrode manufacturing company listed on the New York Stock Exchange, through secondary market transactions.

The total investment made by HEG for this acquisition amounts to Rs 2.5 billion (bn).

HEG stated that further share purchases, if undertaken, will be subject to board approval. GrafTech International is a leading manufacturer of high-quality graphite electrode products essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals.

It has a competitive portfolio of low-cost, ultra-high power graphite electrode manufacturing facilities, with some of the highest capacity facilities in the world. GrafTech International has its presence globally.

HEG Demerger

HEG has also approved the demerger of its graphite business into a new company. Alongside this, HEG plans to merge Bhilwara Energy into HEG Ltd.

According to an exchange notification on 22 May, the demerger will involve a share swap ratio of 1:1. This means shareholders of HEG Ltd will receive one fully paid-up equity share of Rs 10 each in the resulting graphite business company for every one equity share of Rs 10 each held in HEG Ltd.

For the merger, HEG specified that shareholders of the transferor company will receive eight fully paid-up equity shares with a face value of Rs 10 each in the resulting company (transferee company) for every thirty-five equity shares with a face value of Rs 10 each they hold in the transferor company.

HEG's demerger and merger strategy is driven by the intention to unlock shareholder value. The existing company aims to become a platform for green energy businesses, including hydro and wind energy, advanced carbon business, and other new-age opportunities.

A Close Look at Financials...

The company reported disappointing results for the June 2024 quarter.

For the June 2024 quarter, total income decreased by 15%, falling to Rs 5.9 bn compared to Rs 6.9 bn a year earlier.

HEG experienced a significant year-on-year (YoY) decline in net profit, plummeting 83.4% to Rs 230 million (m) from Rs 1,390 m in the same period last year.

For the fiscal year 2024, HEG recorded a 2.9% YoY decline in revenue, totalling Rs 23.9 bn. Additionally, net profit for the year fell by 41.5% to Rs 3.1 bn, primarily due to lower sales.

HEG Financial Snapshot (FY20-24)

(Rs m, Consolidated)	FY20	FY21	FY22	FY23	FY24
Revenue	21,490.00	12,562.00	22,016.00	24,672.00	23,949.00
Revenue Growth (%)	(-67.4)	(-41.6)	75.3	12.1	(-2.9)
Net Profit	534	(-179.0)	4,310.00	5,324.00	3,117.00
Net Profit Margin (%)	2.5	(-1.4)	19.6	21.6	13
Return on Equity (%)	1.5	(-0.5)	11	12.4	7
Return on Capital Employed (%)	1.9	(-0.3)	14.5	16.4	9.7

Source: Equitymaster

Despite these financial challenges, HEG has maintained a strong return on equity (RoE) and return on capital employed (RoCE), averaging a healthy 6.4% and 8.4%, respectively.

What Next?

With the global emphasis on carbon neutrality, innovative technologies are emerging as sustainable and cost-effective solutions poised to transform the steel production landscape.

Electric arc furnace (EAF) steelmaking is expected to grow significantly, becoming the primary method for steel production and paving the way toward a greener, more sustainable future.

Graphite electrodes are crucial for steel production in EAFs, and the share of crude steel produced from the EAF route (excluding China) has increased from approximately 44% in 2015 to nearly 50% in 2022.

Industry experts anticipate that by 2030, EAF production will account for around 60% of the market share, rising to 80% by 2050, with a strong emphasis on green steel production.

This projected growth presents substantial opportunities for businesses, particularly with the expected surge in demand for graphite electrodes.

As one of the top five global producers of graphite electrodes, HEG is well-positioned to capitalize on this transition.

Furthermore, the shift toward e-mobility and the increasing use of stationary applications are projected to drive domestic demand for lithium-ion (Li-On) batteries to approximately 150-160 GWh by 2030, necessitating around 150,000 tons of graphite anodes.

In response to the government's push to localize battery components, HEG plans to take advantage of this opportunity by establishing a graphite anode production facility with a capacity of 20,000 tons, backed by a capital expenditure of approximately Rs 18 bn.

How Shares of HEG have Performed Recently

The share price of HEG has climbed by 16% in the past one month.

Over the past one year, shares of the company have rallied 40%. In the past five years, shares have delivered multibagger returns of over 158%.

The company touched its 52-week high of Rs 2,743 on 22 May 2024 and its 52-week low of Rs 1,461.9 on 26 October 2023.

About HEG

HEG was incorporated in 1972 as Hindustan Electro-Graphites. The company is among the leading graphite electrode manufacturer in India.

The company owns one of the largest integrated graphite electrode plants in South-East Asia that processes sophisticated ultra-high-power electrodes.

HEG is a flagship company of LNJ Bhilwara Group. HEG exports over 80% of its production to more than 25 countries that include the US, Canada, Germany, France, Italy, Australia, and South Korea.

The company has clientele including majors such as ArcelorMittal, Posco, ThyssenKrupp, US Dynamics, Nucor, Severstal, and Usinor to name a few.

To know more about the company, check out the HEG fact sheet and quarterly results on our website.

You can also compare HEG with its peers:

HEG vs Graphite India

HEG vs De Nora India

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...