Guidance Adherence - HEG
Average
HEG Ltd.’s management demonstrates a mixed track record regarding guidance, exhibiting transparency in acknowledging market challenges and operational performance but showing notable inconsistencies and significant delays in timelines for new strategic projects.
Q1 FY2025-26 Performance Snapshot
For the latest quarter, Q1 FY2025-26, HEG Ltd. reported standalone revenue from operations of INR 613 crores and EBITDA of INR 154 crores. The standalone net profit after tax was INR 72 crores, while the consolidated net profit after tax was INR 105 crores. The operational EBITDA margin was 23%. This performance shows a significant improvement compared to the corresponding quarter of the previous year (Q1 FY2024-25), where standalone revenue was INR 571 crores, EBITDA was INR 59 crores, and standalone PAT was INR 3 crores. Management highlighted this improvement, stating that the company delivered EBITDA of INR 154 crores in Q1 FY’26 as against INR 59 crores in the corresponding quarter of the previous year (Q1 FY25), and a net profit after tax of INR 72 crores (standalone) against INR 3 crores (standalone) in Q1 FY25.
Guidance Accuracy and Evolution
Graphite Electrode Capacity Expansion (80,000 to 100,000 tons)
Initial Guidance (Q1 FY2022-23 & Q2 FY2022-23): Management stated the expansion project would be “completed by December 2022 and ready with commercial production by early 2023.”
Actual Performance: The expansion was largely completed as guided, with a minor delay mentioned in Q3 FY2022-23 for “one shop delayed but expected to be operational by mid-April.” By Q1 FY2024-25, management confirmed, “The company’s 80,000-ton to 100,000-ton capacity expansion is complete.”
Assessment: Guidance on capacity expansion was largely accurate with minor, well-explained delays, reflecting effective execution in the core business.
Graphite Anode Plant Project
This project has seen frequent and significant revisions, highlighting a key area of concern for management’s precision.
Initial Commissioning Guidance (Q2 FY2022-23 to Q4 FY2023-24):
Q2 FY2022-23: “commercial production expected by early 2025” for a 10,000-ton plant.
Q3 FY2022-23: “a planned 10,000-ton capacity plant (INR 1000 crore investment) operational by Q2 2025.”
Q1 FY2023-24: “commencing in 2H CY2025” for 10,000 tonnes.
Q3 FY2023-24: “plant production should start around March or April of 2025.”
Q4 FY2023-24: “aiming for 10,000 tons of anode production by mid-2025.”
Revised Commissioning Guidance:
Q1 FY2024-25: “commissioning pushed back 1-2 quarters” (implying Q3-Q4 FY2025) due to “lower-than-expected lithium-ion battery prices and ongoing negotiations with state governments on power prices.”
Q4 FY2024-25: A significant revision was announced: “The graphite anode plant is expected to be commissioned in April 2027.”
Q1 FY2025-26: Confirmed as “operational by March 2027” for a 20,000-ton plant.
Q2 FY2025-26: Further clarified that “revenue for the other HEG Greentech businesses will start flowing in from Q4 FY27 for the anode segment.”
Assessment: The anode plant commissioning guidance has been consistently over-optimistic and subject to significant delays, a major red flag. The initial expectation of early/mid-2025 for a 10,000-ton plant has shifted by over two years to Q4 FY2027 for a 20,000-ton plant. While explanations for delays are provided (market conditions, power negotiations), the magnitude and frequency of revisions indicate a lack of precision in initial project planning and execution timelines for new ventures.
Capex for Anode Plant:
Initial Guidance (Q1 FY2023-24): “approximately 800 Crores” for 10,000 tonnes.
Revised Guidance (Q2 FY2023-24): For expanding to 20,000 tons, it would “cost less than double, potentially 10% below INR 2,000 crores.”
Latest (Q4 FY2024-25): “total CAPEX of Rs. 1,850 crore” for the graphite anode plant.
Assessment: The capex guidance for the scaled-up (20,000-ton) project has been fairly consistent (roughly doubling for double the capacity), indicating reasonable cost estimation once the scope was finalized.
EBITDA Margin for Anode Business:
Initial Guidance (Q1 FY2023-24): “25-30% EBITDA.”
Q2 FY2023-24: “targeting kind of a 30% EBITDA margin. And so based on that... safely between 25% to 35%.”
Q1 FY2024-25: Management demonstrated transparency by explaining sensitivity: “at USD 10,000 per ton, our EBITDA margin was coming to around 30%, 35%. And the same prices go down to USD 7,000, the EBITDA margins go down to around 20%... with power price reduction, even at USD 7,000, you make a healthy 25%, 26% EBITDA margin.”
Q2 FY2025-26: For the entire Greentech project, “expecting EBITDA margins in the range of about 30%, rather 35% to 40%.”
Assessment: While specific numbers are not yet available (due to project delays), the management has provided a consistent target range of 25-35% EBITDA margin for the anode business, and openly discussed its sensitivity to market pricing and operational efficiencies.
HEG Greentech Demerger Timeline
Initial Guidance (Q1 FY2024-25): “expected to be completed by mid-next year” (mid-2025).
Revised Guidance:
Q2 FY2024-25: “expected to be completed by September/October 2025.”
Q3 FY2024-25: “delayed by about 2 months due to our share split... We hope to get all the required approvals by the end of this year” (end of calendar year 2024). This was an aggressive and missed target.
Q4 FY2024-25: “expected to be completed by the end of calendar year 2025.”
Q2 FY2025-26: Still “under execution.”
Assessment: The demerger timeline has been repeatedly revised and delayed, indicating significant unforeseen challenges or internal complexities. This is another red flag concerning project management and setting realistic expectations.
HEG Greentech Revenue and EBITDA (FY2025-26)
Guidance (Q1 FY2025-26): Management guided for “INR 500-600 crore revenue and INR 200-225 crore EBITDA in FY26, primarily from hydro assets and RePlus (battery company).”
Actual (Q2 FY2025-26 Concall): The Chief Strategy Officer clarified that “H1 EBITDA is primarily from the hydro assets... The revenue for the other HEG Greentech businesses will start flowing in from Q4 FY27 for the anode segment... For the IPP business, revenue and positive EBIDTA are expected to begin from Q2 FY27.”
Assessment: This represents a significant inconsistency in management messaging. The initial FY26 guidance for Greentech revenue and EBITDA appears highly optimistic given that the major components (anode plant, IPP business) will not be operational until much later. This vague or misleading guidance without clear justification is a notable red flag.
Operational EBITDA Margins (Graphite Electrodes)
FY2022-23: Actual 28% (Concall Q1 FY26).
FY2023-24: Actual 21% (Concall Q1 FY26).
FY2024-25: Actual 17% (Concall Q1 FY26). In Q2 FY24-25, management expected “similar EBITDA margins (around 17%) for the remainder of the year,” which was met for the full year.
Q1 FY2025-26: Actual 23%. Management stated “this quarter was about 23%.”
Q2 FY2025-26: Management guided “margins will be similar, similar to the last 2 quarters” (implying 23%). Actual was 28%, indicating better-than-guided operational performance.
Assessment: The management has provided a fairly consistent and accurate reflection of operational EBITDA margins, acknowledging the downward trend in recent years due to market conditions but showing an improvement in Q1 and Q2 FY2025-26. Their guidance for Q2 FY26 was slightly conservative, as actuals turned out better.
Management Credibility Factors
Transparency in Communication: The management has been transparent in discussing the impact of external factors, such as “mark-to-market loss on GrafTech investments” (Rs. 160 crores in Q4 FY2024-25), clearly separating it from operational performance to provide a clearer picture. They also offered to have one-on-one calls to clarify any speculations (Q4 FY2023-24 concall).
Consistency in Messaging: There are inconsistencies, particularly in the timelines and projected contributions of new strategic businesses (anode plant, Greentech demerger, Greentech FY26 targets). This creates uncertainty and challenges for investors.
Quality of Risk Disclosures: Management consistently highlights risks and market challenges such as “subdued demand,” “price pressure on needle coke and graphite electrodes,” impact of “China’s increased steel exports,” “global crude steel production declines,” and geopolitical developments (Russia-Ukraine conflict).
Track Record of Execution: While capacity expansion in the core graphite electrode business was executed largely on time, the execution timelines for the new graphite anode plant and the Greentech demerger have seen significant and repeated slippages.
Response to Market Challenges: Management has generally presented a realistic view of challenging market conditions, emphasizing HEG’s position as a low-cost producer and long-term optimism due to decarbonization and EAF adoption.
External Factor Analysis
The graphite electrode industry has faced significant headwinds.
Global Steel Demand: Weak global crude steel production (e.g., -0.8% in 2023, -0.9% in 2024 forecasted by WSA, Q2 FY2024-25 IP) has directly impacted demand and pricing for graphite electrodes.
Chinese Exports: Increased Chinese steel exports have further contributed to price pressure in global markets, as noted in the Q1 FY2024-25 concall.
Needle Coke Prices: Needle coke prices have been volatile, and management has transparently discussed the impact on margins and the time lag in adjustments.
Strategic Investments: The mark-to-market losses on investment in GrafTech International indicate exposure to market volatility from treasury operations, though it’s clearly segregated from operational performance.
Anode Market Dynamics: The anode business has faced “lower-than-expected lithium-ion battery prices” and challenges in “negotiations with state governments on power prices,” leading to significant project delays.
Red Flags
Repeated and Significant Delays in Anode Plant Commissioning: The timeline has shifted from early/mid-2025 to March 2027 (Q4 FY2027 for revenue generation), representing a two-year delay. This is a substantial miss for a key growth initiative.
Frequent Revisions to Demerger Timeline: The demerger has been pushed back multiple times from mid-2025 to end-2025, and is still “under execution” in Q2 FY2025-26, suggesting ongoing hurdles in a crucial strategic restructuring.
Inconsistent / Overly Optimistic Greentech FY2025-26 Guidance: The Q1 FY2025-26 guidance for significant revenue and EBITDA from Greentech in FY2026 appears highly unrealistic given that the anode plant and IPP projects are now expected to contribute revenue only from FY2027. This suggests either poor internal coordination or a tendency to overstate near-term prospects for new ventures.
Conclusion
HEG Ltd.’s management demonstrates transparency in discussing current financial performance and external market challenges. They have largely delivered on operational aspects of their core graphite electrode business, including capacity expansion. However, their credibility is impacted by recurrent and substantial delays in strategic growth projects (graphite anode plant and Greentech demerger), along with inconsistencies in the forward-looking financial projections for these new businesses. While external factors play a role in these delays, the repeated nature of the revisions, particularly for projects announced with seemingly firm timelines, suggests a need for more conservative and precise guidance for new initiatives.
Overall, the management’s credibility leans towards Average. While transparent about current results and challenges, their track record on executing and forecasting timelines for new, transformative projects is weak, necessitating close scrutiny by investors.
Financial Reporting Standards - HEG
Below Average
HEG Ltd’s financial reporting quality, while offering transparency in certain areas, exhibits several significant concerns, particularly related to the consistency and clarity of reported earnings, inventory management, and the financial implications of its ongoing demerger. The company’s long-term debt-free status and management’s engagement in concalls are positives, but these are offset by recurring issues that can obscure the true operational performance and raise questions about shareholder value protection.
Financial Performance Overview
HEG Ltd’s financial journey has been marked by volatility, peaking in FY 2022-2023 and experiencing a downturn in FY 2023-2024 and FY 2024-2025, before showing a recovery in the latest quarters.
Latest Performance: Q1 and Q2 FY 2025-2026
In Q1 FY 2025-2026, HEG Ltd reported a consolidated revenue from operations of Rs. 616.93 crores, a notable increase from Rs. 542.25 crores in the preceding quarter (Q4 FY 2024-2025). Profitability saw a significant turnaround, with Profit Before Tax (PBT) at Rs. 127.46 crores and Profit After Tax (PAT) at Rs. 104.83 crores, recovering from a loss in Q4 FY 2024-2025. The consolidated Earnings Per Share (EPS) stood at Rs. 5.43. The EBITDA margin improved to 23%, aligning with management’s operational EBITDA figures (Ravi Jhunjhunwala, Q1 FY26 concall: “our EBITDA in ‘22-’23 was 28%, ‘23-’24 was 21%, which dropped down to 17% in ‘24-’25. So immediate previous year was 17%, and this quarter was about 23%.”).
The positive trend continued into Q2 FY 2025-2026, with consolidated revenue from operations increasing to Rs. 699.22 crores. Management clarified that this growth was “completely on volume” as “prices are flattish” (Manish Gulati, Q2 FY26 concall). PBT rose to Rs. 175.23 crores, and PAT to Rs. 143.33 crores. The EPS for Q2 FY 2025-2026 was Rs. 7.43. The EBITDA margin was 28% and PAT margin was 16%.
Management projects near-term margin stability for Q3 FY 2025-2026 due to stable needle coke prices and executed order books, while maintaining a bullish long-term outlook for the electrode industry given anticipated demand from new Electric Arc Furnaces (EAFs).
Previous Financial Years (FY 2024-2025 and FY 2023-2024)
FY 2024-2025 saw a decline in annual performance, with revenue from operations at Rs. 2,159.69 crore, PBT at Rs. 160.37 crore, and PAT at Rs. 115.06 crore, all lower than the previous year. The EBITDA margin for the year was 17%.
Q4 FY 2024-2025 was particularly challenging, reporting a loss before tax of Rs. 84.60 crore and a negative EBITDA of Rs. -5 crore. This significant dip was largely attributed to a “loss on the fair value of investment in GrafTech”.
FY 2023-2024 also marked a period of declining performance compared to FY 2022-2023. Annual revenue from operations was Rs. 2,394.90 crore, PBT was Rs. 395.37 crore, and PAT was Rs. 311.67 crore. The EBITDA margin was 21%.
FY 2022-2023 stands out as a strong year, with revenue from operations of Rs. 2,467.24 crore, PBT of Rs. 677.33 crore, PAT of Rs. 532.36 crore, and an EBITDA margin of 28%.
Financial Reporting Quality Assessment
1. Revenue Recognition Quality
Revenue Trends and Drivers: Recent revenue growth from Q4 FY 2024-2025 to Q2 FY 2025-2026 is driven purely by volume, which is generally a healthy indicator of underlying demand for the company’s products, especially given flat pricing in the electrode market.
Customer Concentration: The company demonstrates reasonable geographical diversification, with only 8-12% of its sales being to the U.S. across 35 countries, mitigating concentration risk in any single market (Q1 FY26 and Q2 FY26 concalls).
Channel Inventory Levels: HEG Ltd has a history of maintaining higher-than-normal finished goods inventory (2.5 months compared to a typical 1 month). Management explains this as a strategic decision to convert pre-purchased needle coke (a major input cost) into electrodes, even during periods of softer demand, which they believe is more cost-effective than holding raw materials (Ravi Jhunjhunwala, Q3 FY23 concall). While a rationale is provided, consistently elevated inventory levels warrant continuous monitoring for potential demand issues or inventory obsolescence.
2. Earnings Quality Assessment
Non-GAAP Adjustments and Volatility: A primary concern is the significant and recurring impact of mark-to-market (MTM) gains or losses on its investment in GrafTech. While management explains that these adjustments are mandated by IndAS and auditor recommendations, they cause substantial volatility in reported quarterly PBT and PAT, often distorting the underlying operational performance (Manish Gulati, Q1 FY26 concall: “that mark-to-market ends up confusing a lot of investors”). This necessitates investors to rely on “operational EBITDA” figures provided by management, complicating a straightforward assessment of earnings quality. For instance, the negative EBITDA of Rs. -5 crore in Q4 FY 2024-2025 was directly attributed to this MTM loss.
Segment Reporting: The company’s ongoing demerger of its Greentech business (TACC, hydro assets, battery initiatives) from the core graphite electrode business is a significant structural change. This initiative is intended to “unlock the value of the shareholders” by creating two distinct entities with different valuation multiples (Q3 FY25 concall). This move, once completed, should lead to clearer segment reporting and improved transparency regarding the performance of each business line. Currently, the Greentech segment’s revenue and EBITDA contribution is primarily from hydro assets, with other segments like anode manufacturing and IPP projects expected to contribute significantly from Q4 FY 2026-2027 and Q2 FY 2026-2027, respectively (Puneet Anand, Q2 FY26 concall).
3. Balance Sheet Analysis
Debt Status: A strong positive is HEG Ltd’s consistent status as a “long-term debt-free” company (multiple concalls from FY23 to FY26). Management has explicitly stated no plans to incur additional debt in FY 2025-2026 or FY 2026-2027 (Q2 FY26 concall). This healthy balance sheet provides financial flexibility.
Investments and Borrowings: The company’s treasury size (investments including cash and cash equivalents) has seen fluctuations, generally decreasing from peak levels in FY 2022-2023 but showing a recent uptick. Short-term working capital borrowings have also fluctuated but have shown a general downward trend from FY 2022-2023 peaks.
Goodwill and Intangibles: Information regarding goodwill, intangible assets, impairment testing, or purchase price allocations is not present in the provided context.
4. Related Party Transaction Review
Demerger and Capital Allocation: The demerger of the Greentech business represents a substantial related party transaction involving the LNJ Bhilwara Group. While the objective is to enhance shareholder value by separating businesses with different growth profiles and valuations, several aspects require scrutiny:
Significant Capital Transfer: A large portion of the company’s treasury, INR 830 crores out of an approximate INR 1,200 crores, has been allocated to the new Greentech entity (TACC) (Q2 FY26 concall). This is a substantial transfer of capital from the established, profitable graphite electrode business to a new entity with long gestation periods and largely nascent revenue streams. This allocation, even if supported by independent valuations, requires careful consideration by investors to ensure it is in the best long-term interest of all HEG shareholders.
Valuation Discrepancies: There have been inconsistent fair valuation figures cited for the demerged entity. Management referred to an “asset value of INR 1,100 crores and a fair valuation of INR 2,200 crores” (Q4 FY24 concall), while another instance mentioned a “fair valuation estimated at INR 3,200 crores” (Q3 FY25 concall). This INR 1,000 crore discrepancy in fair valuation requires clear reconciliation to assure investors of the deal’s transparency and fairness.
Independent Advice: The company engaged EY LLP as tax and regulatory advisors, Khaitan & Co as legal counsel, PWC Business Consulting Services LLP for valuation, and ICICI Securities Limited for a fairness opinion (Q4 FY24 Investor Presentation). The involvement of these advisors suggests a structured process, but the ultimate financial implications for shareholders warrant thorough evaluation. The share exchange ratio is 1:1, with promoters contributing additional shares.
5. Disclosure Quality Evaluation
MD&A and Concall Transparency: Management’s commentary in concalls is generally transparent, explaining complex accounting treatments like MTM adjustments and providing context on market conditions and future outlook. They have also expressed willingness to provide more operational metrics like utilization or volume numbers in presentations (Manish Gulati, Q4 FY24 concall).
Regulatory Compliance: The company received a minor fine of Rs. 1,01,480 from BSE and NSE for alleged non-compliance with Regulation 17(1A) of SEBI LODR Regulations, 2015 (May 2025 company update). While the company disputes the allegation and has filed a waiver application, this highlights a minor lapse in regulatory adherence.
Auditor Information: Jain Viney & Associates, Company Secretaries, perform secretarial compliance, reporting “no non-compliance observed” generally, but the primary statutory auditor information and any changes in audit opinions are not present in the provided context.
Red Flags Identified
Earnings Volatility from Mark-to-Market Adjustments: The significant and frequent impact of MTM gains/losses on investment in GrafTech on reported PBT and PAT consistently distorts operational earnings, requiring management’s ongoing clarifications and making true underlying performance difficult to ascertain.
Sustained Higher-than-Normal Finished Goods Inventory: While management provides a strategic rationale, consistent finished goods inventory levels at 2.5 months of production (compared to a 1-month norm) could signal demand softness or aggressive production, requiring close monitoring.
Complex Related Party Demerger with Valuation Inconsistencies and Significant Capital Allocation: The demerger, involving substantial capital transfer (INR 830 crores) to a new, largely pre-revenue Greentech entity, coupled with unreconciled fair valuation figures (INR 2,200 crores vs. INR 3,200 crores), raises concerns about transparency and the protection of minority shareholder interests, despite independent valuation reports.
Minor Regulatory Non-Compliance and Fine: A small fine from stock exchanges for alleged non-compliance with SEBI LODR regulations indicates a minor regulatory lapse, even if disputed by the company.
Conclusion
HEG Ltd demonstrates commendable transparency in explaining its financial performance, market dynamics, and accounting complexities, especially during concalls. Its debt-free status is a strong indicator of financial health. However, the recurring impact of non-operational mark-to-market adjustments on reported earnings significantly hampers the clarity of financial results. Furthermore, the substantial capital allocation to a new related-party entity as part of the demerger, coupled with inconsistencies in the stated valuations for this demerged entity, introduces material concerns regarding related-party transactions and potential shareholder value dilution. These issues, though partially addressed by management, collectively point towards areas where financial reporting could be improved for greater clarity and investor confidence.
Management Responses Check - HEG
Average
Management and Credibility Assessment: HEG Ltd
HEG Ltd’s management demonstrates a generally transparent approach to operational reporting and maintains a consistent long-term vision, yet exhibits some inconsistencies in communication, particularly regarding investment risks and specific future guidance.
1. Consistency of Tone & Sentiment
Management generally maintains a cautious but optimistic long-term outlook across quarters, acknowledging near-term market pressures while highlighting future growth drivers.
Consistent Cautious Tone on Near-Term: In Q1 FY 2025-2026, management stated that operational EBITDA would be “very similar in the last 2 quarters and are likely to stay that way in the July to September quarter as well,” attributing fluctuations to mark-to-market. This aligns with earlier statements in Q4 FY 2024-2025 where Chairman Ravi Jhunjhunwala noted, “The next 2, 3 quarters may see margins remaining under some pressure.” Similarly, in Q2 FY 2025-2026, they reiterated, “For Q3, since half the order book is already executed, no margin improvement is expected, and margins should be similar to the last two quarters.”
Consistent Long-Term Optimism: Throughout the periods, management expresses confidence in the long-term demand for graphite electrodes due to the growth of electric arc furnaces (EAFs). For instance, in Q2 FY 2025-2026, they were “bullish on the electrode industry due to expected demand increases from new Electric Arc Furnaces (EAFs), which should firm up prices.” This sentiment is echoed in Q3 FY 2024-2025, highlighting “significant growth in electric arc furnace capacity (90 million tons announced, with ongoing increases), leading to substantial future demand.”
Operational Transparency: Management provides specific operational metrics like capacity utilization. For Q1 FY 2025-2026, Executive Director Manish Gulati stated utilization was “90% plus,” and expected it to be “around 85% for the balance three quarters.” In Q2 FY 2025-2026, they reported “Q2 utilization was slightly above 90% and expects to sustain utilization close to 90% by the end of the fiscal year, showing an improvement from the 80% utilization seen in FY24-’25.” Chairman Ravi Jhunjhunwala also provided specific operational EBITDA margins: “28% (FY22-23), ‘23-’24 was 21%, which dropped down to 17% in ‘24-’25. So immediate previous year was 17%, and this quarter was about 23%.” (Q1 FY25-26 concall).
Contradictory Statement: A notable contradiction occurred in Q2 FY 2023-2024, where Chairman Ravi Jhunjhunwala stated, “In conclusion, our second quarter of 2023-’24 has been satisfactory given the tough market. Our second quarter 2023-’24 is going to be a tough quarter given the market conditions.” This internal inconsistency raises concerns about clarity in communication.
GrafTech Investment Handling: In Q1 FY 2024-2025, CSO Puneet Anand confidently stated, “We don’t foresee any kind of challenge today with our investment in GrafTech,” despite an analyst’s concern about potential delisting. However, in Q4 FY 2024-2025, HEG reported a negative EBITDA of -5 crores, directly attributed to “a loss on the fair value of investment in GrafTech.” While management later acknowledged “the risks involved” in Q1 FY 2025-2026, the prior dismissal of challenges and subsequent significant loss indicates a potential lack of foresight or an overly optimistic stance on this particular investment.
2. Q&A Insights
Management provides quantifiable answers for operational metrics but often gives vague or deflective responses when pressed for specific forward-looking financial guidance, such as future margins or pricing.
Vague/Deflective Responses:
Future Margins: In Q4 FY 2024-2025, when asked about the sustainability of a 21% margin, Chairman Ravi Jhunjhunwala responded, “See, it will all depend on the pricing. I mean what can I tell you? I mean, I can’t pinpoint the number of 20%, 22%. We will keep on reporting to you whatever happened in the last quarter.” This response avoids committing to a future margin outlook. Similarly, for FY26 guidance in Q2 FY 2024-2025, he stated, “Very difficult to put a number. I mean basically if I were to guide it, I would say more or less similar numbers.”
Specific Pricing/Spreads: In Q3 FY 2023-2024, an analyst inquired about “spread in dollar terms.” Executive Director Manish Gulati declined to provide a specific number, stating, “Dollar terms will become a very specific answer to be given in public domain, but if you just take our results, I think you can make a very good guess yourself about how our spreads have fared between the three quarters. They have been coming down.” While acknowledging the trend, the refusal to quantify is a point of caution.
US Tariffs Impact: In Q2 FY 2025-2026, regarding realization gaps between US and non-US markets due to potential tariffs, management stated they “cannot comment...stating they will ‘cross that bridge when they come to it.’”
Quantified & Direct Responses (when possible):
Anode Price Revision: In Q1 FY 2024-2025, management provided a revised guidance on anode prices from “USD 10,000 per ton to USD 7,000-8,000 per ton,” demonstrating a willingness to update figures based on market conditions.
Debt Status: Management consistently affirms the company’s “long-term debt-free” status in various concalls (e.g., Q1 FY 2023-2024, Q2 FY 2024-2025, Q2 FY 2025-2026).
3. Frequent Leadership Turnover
There appears to be some fluidity in the CFO role, which could be a minor concern if not clearly articulated.
CFO Role Changes: Gulshan Kumar Sakhuja served as CFO in FY 2022-2023 and FY 2023-2024. In Q1 FY 2024-2025, Ravi Tripathi was introduced as “General Manager Finance,” while Mr. Om Prakash Ajmera was Group CFO. By Q2 FY 2024-2025, Mr. Ravi Tripathi was identified as CFO. However, in Q1 FY 2025-2026, the Investor Presentation lists Mr. Gulshan Kr. Sakhuja as CFO in the contact information, while the concall transcript refers to Mr. Ravi Tripathi as “General Manager Finance.” This suggests a recent change or reversion in the CFO role from Ravi Tripathi back to Gulshan Sakhuja, with Ravi Tripathi assuming a different finance leadership position. No specific reasons for these changes have been provided in the commentary.
Overall Assessment
HEG Ltd’s management generally operates with a reasonable degree of transparency regarding historical performance and operational metrics. They consistently articulate a strategic long-term vision, particularly for the growth of EAF steelmaking and the emerging anode business, and are candid about challenging market conditions. However, the contradictory statement in Q2 FY 2023-2024, the initially dismissive stance followed by a significant loss on the GrafTech investment, and the tendency for vague or deflective answers regarding specific future financial guidance prevent a higher rating. The observed shifts in the CFO role, while not necessarily alarming, add a layer of ambiguity if not thoroughly explained. The company provides substantial data in its investor presentations, which aids in analysis despite some verbal ambiguities.
Considering these factors, management’s credibility falls into the Average category.
Capital Allocation Strategies - HEG
Average
HEG Ltd demonstrates a mixed financial picture, with a fundamentally strong balance sheet and strategic long-term growth initiatives, but also exhibits notable red flags concerning capital allocation transparency and investment choices.
1. Capital Allocation & Return on Investment (ROI)
HEG Ltd has actively pursued a dual strategy of strengthening its core graphite electrode business while venturing into new-age green technologies, particularly graphite anodes.
Core Business Expansion (Graphite Electrodes): The company successfully completed the expansion of its graphite electrode plant to 100,000 tons by Q3 FY 2023-2024, making it the largest single-location plant in the Western world. This expansion, costing approximately INR 1,200 crores (with around INR 900 crores spent by Q1 FY 2022-2023 and the remaining by March 2023), positions the company to capitalize on the increasing demand from electric arc furnaces (EAFs) driven by global decarbonization efforts. This appears to be a well-timed and strategically sound capital deployment.
Graphite Anode (TACC) Project: HEG plans a significant capital expenditure of INR 1,800-1,900 crores (later refined to INR 1,700-1,750 crores) for a 20,000-ton anode expansion over the next 2-3 years, with commissioning targeted for April 2027.
Funding Strategy: The funding is planned as a mix of internal accruals and debt. Approximately INR 750 crores will be funded through equity from the HEG Graphite company’s balance sheet, INR 200-300 crores from Bhilwara Energy dividends, and the remaining INR 400-500 crores through debt. The management states this funding plan is “conservative” (Concall Q4 FY 2023-2024).
ROI Metrics: Management has provided clear ROI targets for this new venture, projecting an EBITDA margin of 30% (with a range of 25%-35%) and a payback period of 6 years with state subsidies (9-10 years without), which implies a return on equities greater than 20% (Concall Q2 FY 2024-2025). This level of detail in projected returns is positive.
GrafTech International Investment: The company invested INR 282 crores to acquire a 9.98% stake in GrafTech, a competitor, at an average price of $1.32 per share (Concall Q4 FY 2024-2025). Management justified this by stating, “if we are sitting on cash and making 7%, 8% returns, and if we believe in this business, and... their prices are likely to shoot up much more than ours” (Concall Q3 FY 2024-2025).
Red Flag: This investment proved highly risky, leading to a mark-to-market (MTM) loss of INR 160 crores in Q4 FY 2024-2025 and INR 80 crores for the full year FY 2024-2025 due to the share price declining to $0.87 (Concall Q4 FY 2024-2025). Analysts raised concerns about GrafTech’s operating cash loss of approximately INR 100 crore ($90-100 million) and its liquidity position (Concall Q1 FY 2025-2026). While management expressed optimism for a turnaround, the substantial MTM loss on a competitor investment, acquired for “investment purposes,” indicates a potentially speculative capital allocation that has negatively impacted recent profitability.
Dividends: HEG has maintained a commitment to shareholder returns, recommending a 425% final dividend (INR 42.50 per share) for FY 2022-2023 and a 90% final dividend (INR 1.80 per share) for FY 2024-2025.
2. Balance Sheet Health & Leverage
HEG has historically maintained a strong balance sheet, characterized by a long-term debt-free status and a healthy treasury.
Debt-Free Status & Treasury: The company has consistently affirmed its position as “long-term debt-free” across multiple quarters and fiscal years (e.g., Q1 FY 2022-2023, Q4 FY 2024-2025, Q2 FY 2025-2026). It also holds a substantial treasury, fluctuating between INR 875 crores (Q4 FY 2024-2025) and INR 1,250 crores (Q2 FY 2022-2023). As of Q2 FY 2025-2026, the total treasury size was approximately INR 1,200 crores, with INR 830 crores allocated to the Greentech entity (Concall Q2 FY 2025-2026).
Short-term Borrowings: Short-term working capital borrowings have fluctuated, ranging from a low of INR 494 crores (Q3 FY 2024-2025) to a high of INR 756 crores (Q2 FY 2022-2023). These borrowings are primarily for working capital and appear manageable given the company’s strong liquidity. As of Q2 FY 2025-2026, short-term borrowings stood at INR 586 crores.
Future Debt Plans - Major Red Flag: There is a significant inconsistency in management’s communication regarding future debt.
For the anode project, management explicitly stated the funding would be a “mix of debt and equity” (Concall Q4 FY 2024-2025) and that “INR 400-500 crores will be your debt portion” (Concall Q4 FY 2023-2024). Additionally, they mentioned taking on “interim debt” to bridge the gap between cash flow and capex needs (Concall Q1 FY 2025-2026).
However, in the Q2 FY 2025-2026 concall, the CFO stated, “we are long-term debt free, and we are not going to add any debt in future also.” (Ravi Tripathi, Concall Q2 FY 2025-2026). This directly contradicts earlier, more specific statements about the anode project’s funding structure. This lack of clarity and contradictory messaging from management on a significant capital expenditure’s financing is a serious red flag regarding financial transparency and investor confidence.
3. Cash Flow Dynamics & Working Capital
The company’s cash flow dynamics have been impacted by market conditions and non-operating factors.
Profitability Trends: HEG experienced a declining trend in revenue and EBITDA from FY 2022-2023 to FY 2024-2025, with standalone PAT dropping from INR 456 crores in FY 2022-2023 to INR 101 crores in FY 2024-2025. This decline was particularly steep in Q1 FY 2024-2025, with standalone EBITDA at INR 59 crores and a PAT margin of only 0.44%. Q4 FY 2024-2025 saw a consolidated loss before tax of INR 84.60 crores and a net loss of INR 73.67 crores, largely due to the INR 160 crore MTM loss on GrafTech investment.
However, the company showed a strong recovery in Q1 FY 2025-2026, reporting a consolidated profit before tax of INR 127.46 crores and a profit for the period of INR 104.83 crores. This positive trend continued into Q2 FY 2025-2026, with consolidated profit before tax reaching INR 175.23 crores and profit for the period at INR 143.33 crores, driven by higher volumes as prices remained flat (Concall Q2 FY 2025-2026).
Impact of Non-Operating Income: Mark-to-market gains and losses on treasury investments (like GrafTech) have significantly influenced reported quarterly profits, creating volatility and making it challenging to assess underlying operational performance. Management acknowledged that operationally, Q4 FY 2024-2025 was their “best performing quarter” if the MTM loss was excluded (Concall Q4 FY 2024-2025).
Inventory Management: In Q1 and Q2 FY 2023-2024, finished goods inventory levels were elevated at 2.5 months of production (compared to a normal 1-1.5 months). Management explained this as a strategic decision to convert pre-purchased needle coke into electrodes, which was more cost-effective than holding raw materials, anticipating a market rebound (Concall Q3 FY 2022-2023, Q1 FY 2023-2024).
4. Frequent/Emergency Fundraising
The provided context does not indicate any instances of frequent or emergency fundraising. The funding plan for the anode project is a structured mix of internal accruals, dividends, and a planned debt component, rather than an emergency capital raise.
Overall Financial Stability and Red Flags
HEG Ltd possesses a strong foundation with a debt-free balance sheet, significant treasury, and a completed capacity expansion in its core business. The new graphite anode project presents a promising long-term growth avenue with clearly articulated ROI targets. The recent operational performance (Q1 & Q2 FY 2025-2026) shows a strong recovery after a challenging FY 2024-2025.
However, two significant red flags dampen the overall assessment:
Risky Investment in GrafTech: The substantial MTM losses incurred on the GrafTech investment suggest an aggressive treasury management strategy that carries considerable risk, especially in a struggling competitor.
Inconsistent Debt Communication: The direct contradiction in management’s statements regarding future debt for the anode project is a serious concern. While previous calls detailed a debt component, the latest statement denying any future debt raises questions about transparency and consistency in financial planning communication. Investors would require immediate clarification on how the substantial anode project will be fully funded without any debt, if the latest statement is accurate, or why contradictory information was provided.
Despite the strong underlying financial position, these red flags, particularly the conflicting debt statements, introduce uncertainty and necessitate a cautious view of management’s capital allocation and reporting practices.
Operations & Strategies Execution - HEG
Strong
HEG Ltd. has demonstrated a strong operational track record and strategic execution capability, marked by consistent efforts to optimize cost structures, expand core capacity efficiently, and strategically diversify into new growth areas. While facing challenging market conditions and experiencing some delays in new initiatives, the company’s management has maintained high operational efficiency and transparency.
1. Cost Structures & Operational Efficiency
HEG Ltd. consistently highlights its focus on maintaining a competitive cost structure and high operational efficiency.
Capacity Utilization & Production Efficiency:
In Q1 FY 2022-2023, HEG achieved a 92% capacity utilization, the highest in 10-12 quarters, and aimed to maintain 90% for the next 3-4 months. The company’s inventory levels were at record lows, contrasting with higher industry inventory. Exports accounted for approximately 70% of revenue, diversified across 35 countries.
By Q2 FY 2022-2023, while production continued at “90s, early 90s” levels, sales dropped to “early 70s” due to lower offtake, particularly from Europe and Turkey. Despite this, management opted to continue full capacity production, strategically converting pre-purchased needle coke into electrodes, believing it to be more cost-effective than holding raw materials.
In Q3 FY 2022-2023, capacity utilization for sales decreased to approximately 60%, with management expecting around 70% utilization for at least two more quarters. However, for its 80,000-ton capacity, the company was running at 92-94%.
Q4 FY 2022-2023 saw utilization in the “high 70s,” with an expectation of 70% for FY 2023-2024 with the expanded capacity.
In Q1 FY 2023-2024, capacity utilization was “Closer to 90%” (on 80,000 tons), with an outlook of 80-85% for the full year. Finished goods inventory increased to 2.5 months (from a normal 1-1.5 months) but was deemed manageable.
Q2 FY 2023-2024 capacity utilization was “close to 85%,” with an expectation of around 75% for the subsequent two quarters as the expanded capacity fully contributed.
By Q3 FY 2023-2024, management stated they operated at “85% capacity utilization for all the three quarters combined at 80,000 tons capacity,” which they believed was the highest in the industry. They anticipated a “little bit of reduction” when utilization was calculated on the newly expanded 100,000-ton capacity but expected to “climb up on that and... be back at 85% on 100,000 tons also” within a year.
Q1 FY 2024-2025 saw capacity utilization around 80%.
In Q2 FY 2024-2025, HEG reported 80% capacity utilization, which was “the highest globally” for its 100,000-ton capacity, indicating an increase in market share in a challenging environment (”total electrode demand has gone down, total consumption has come down”).
In Q1 FY 2025-2026, capacity utilization was reported as “90% plus,” with an outlook of 85% for the remainder of the year.
Q2 FY 2025-2026 continued this trend, with utilization “slightly above 90%” and an expectation to “sustain utilization close to 90% by the end of the fiscal year.” Management confirmed that revenue growth in Q2 FY26 was “completely due to volume increase only. Prices are flattish.”
Impact on Margins & Cost Initiatives:
Q2 FY 2022-2023: EBITDA margin was reported at 33% (as per IP snapshot), despite lower sales volumes, partly due to rupee depreciation and hydropower income.
Q3 FY 2022-2023: EBITDA margin was 30%. Management noted that “spreads have been coming down,” primarily due to a lag effect where higher-priced needle coke was consumed while electrode prices were falling. However, they aimed to maintain margins by anticipating “some respite from needle coke people also to adjust their pricing a bit.” Power costs remained stable due to long-term contracts.
FY 2023-2024 (Q1 FY 2025-2026 concall): The EBITDA margin experienced a decline from 28% in FY 2022-2023 to 21% in FY 2023-2024, and further to 17% in FY 2024-2025, reflecting the tough market conditions.
Q4 FY 2023-2024: Margins dropped to around 8%, primarily due to “reduction in selling prices” amidst a slowdown in demand. Despite this, the company did not take “any large NRV hits” on inventory, unlike some peers.
Q1 FY 2024-2025: Reported EBITDA margin was 16% (as per concall), impacted by a one-time mark-to-market loss on a treasury investment.
Q2 FY 2024-2025: EBITDA margin was 17%. This quarter saw a PBT increase partly due to a mark-to-market gain on treasury investments.
Q3 FY 2024-2025: Management indicated EBITDA margins were “about 16%, 17%.” They acknowledged competitors’ price hike announcements but stated, “The time will tell, in the next couple of quarters, whether it goes through or it doesn’t go through.”
Q4 FY 2024-2025: Operational performance was strong, with an EBITDA margin as high as 27%. Management stated that “Excluding mark-to-market loss on investments in the shares of GrafTech International, operationally last quarter was our best quarter.” They specifically highlighted a Rs. 160 crore mark-to-market loss on GrafTech investments in Q4 FY25 and Rs. 80 crore for the full year.
Q1 FY 2025-2026: The EBITDA margin recovered to 23%.
Q2 FY 2025-2026: EBITDA margin further improved to 28%. Management stated that “needle coke prices continue to be where they are. They are not increasing nor decreasing.” For Q3 FY26, “we do not see any margin improvement. Q4 order book is under construction.”
Capital Efficiency in Expansion: The 15,000-ton expansion (from 100,000 to 115,000 tons) exhibited “lower capex per ton than previous phases” due to “existing nipple capacity” and synergies with the 100,000-ton plant. Management noted, “at a marginal increase in capital -- in running cost, in production cost, if we are adding more and more capacity, it adds to our competitiveness, it adds to our bottom line.”
2. Strategic Roadmap & New Initiatives
HEG has actively pursued both capacity expansion in its core business and diversification into new areas, though timelines have sometimes shifted.
Graphite Electrode Capacity Expansion:
From FY 2022-2023 onwards, HEG embarked on an expansion project to increase its graphite electrode capacity from 80,000 tons per annum (tpa) to 100,000 tpa. This was successfully completed by Q1 FY 2023-2024, making it “by far the largest [plant] at a single location in the entire Western world.”
Further expansion was noted in Q1 FY 2025-2026 for an additional 15,000 tons (to 115,000 tpa), demonstrating continuous growth and efficiency. This expansion was noted for its “improved capital efficiency” by leveraging existing infrastructure.
Management has consistently emphasized that “no other company in the western world has announced any additional capacity,” reinforcing HEG’s leading position.
Graphite Anode Powder Business (Greentech):
This initiative represents HEG’s key diversification strategy. In Q2 FY 2022-2023, a Rs. 1,000 crore investment was planned for a graphite anode plant, with commercial production anticipated by early 2025. The target addressable market in India was estimated at 50,000 tpa by 2025.
In Q1 FY 2023-2024, the project (TACC) was projected to commence in 2H CY2025, with an estimated cost of Rs. 800 crores for 10,000 tonnes, targeting 25-30% EBITDA margins.
By Q2 FY 2023-2024, the plan included expanding to 20,000 tons, costing “less than double, potentially 10% below INR 2,000 crores,” with an expected payback period of 5-6 years and 25-35% EBITDA margins.
However, the timeline saw significant delays. In Q1 FY 2024-2025, commissioning was “pushed back 1-2 quarters” due to “lower-than-expected lithium-ion battery prices and ongoing negotiations with state governments on power prices.” The plant was then expected to be operational in FY 2026-2027.
As of Q4 FY 2024-2025, the commissioning was further pushed to April 2027, with a total CAPEX of Rs. 1,850 crore, of which over Rs. 100 crore had already been spent.
The delay, while significant, is attributed to external market factors and crucial negotiations, indicating a cautious and prudent approach rather than a failure in execution.
Corporate Restructuring/Demerger:
In Q4 FY 2023-2024, a major restructuring and demerger was announced to separate the graphite business (new HEG Limited) from green technologies (HEG Greentech). This was expected to take 15-18 months.
The process experienced a “delay by about 2 months due to our share split” in Q3 FY 2024-2025. The demerger was subsequently expected to be completed by the end of calendar year 2025 (Q4 FY25 Concall).
In Q2 FY 2025-2026, the management detailed the treasury allocation post-demerger: “out of a total treasury size of approximately INR 1,200 crores, INR 830 crores has been allocated to the TACC (Greentech entity), with the remainder staying with the graphite entity.” This confirms progress on the demerger.
3. Overdependence on a Single Product/Market
HEG Limited’s primary business is graphite electrodes, but the company has actively pursued market diversification and is strategically investing in new product lines.
Market Diversification:
From Q1 FY 2022-2023, HEG emphasized its global diversification, serving “35 countries to mitigate country-specific risks” and exporting “approximately 70% of revenue.”
While certain regions like Europe and Turkey saw reduced demand in Q3 FY 2022-2023, the “US market keep going strong.”
In Q3 FY 2024-2025, regarding the “recent imposition of 10% import duties in the US,” management stated that “given HEG’s very well diversified sales, sales footprint across all major global markets, the overall impact is expected to be limited.” They noted that “our U.S. portion of our sales is only 10% to 12%.”
Product Diversification:
The graphite anode project (Greentech) is a clear strategic move to diversify beyond graphite electrodes. The demerger into “HEG Graphite Limited” and “HEG Greentech Limited” further solidifies this commitment to establishing independent growth paths for both businesses. The Greentech entity will also focus on hydro assets and a battery company, further broadening the portfolio.
4. High Employee or Leadership Turnover
The provided context does not indicate any concerns regarding high employee or leadership turnover, reorgs, or high-profile exits.
The management team, including Chairman, Managing Director & CEO Ravi Jhunjhunwala, Vice Chairman Riju Jhunjhunwala, Executive Director Manish Gulati, CSO Puneet Anand, and CFO Ravi Tripathi/Gulshan Kumar Sakhuja, appears stable and consistently present across various investor interactions.
In Q3 FY 2024-2025, an analyst positively commented on the management: “both Ravi sir and his team has been always not only answering to the question, but leading from forefront in explaining to us all the nitty-gritty.” This reflects positively on management’s engagement and stability.
The demerger process represents a strategic corporate restructuring rather than an issue of leadership turnover, aiming to create focused management for the separate entities.
Conclusion
HEG Ltd.’s management has shown strong operational capabilities, consistently maintaining high capacity utilization and cost-competitiveness in its core graphite electrode business, even amidst market downturns. The strategic roadmap for capacity expansion has been executed efficiently. The diversification into the graphite anode business is a crucial long-term initiative, albeit with delayed timelines, which the management has transparently communicated and provided clear rationale for. The demerger also reflects a proactive strategic vision to unlock value. The absence of significant leadership turnover and consistent communication further reinforce a strong operational and strategic execution capability.
Risk Management & External Factors - HEG
Strong
Risk Management Analysis for HEG Ltd.
1. Identifying Macro & Regulatory Red Flags
HEG Ltd. operates in a cyclical industry highly susceptible to global macroeconomic conditions and geopolitical events. Management has consistently acknowledged these headwinds in their commentary over several quarters, providing a realistic assessment of the operating environment.
Q1 FY 2022-2023: The company initially identified subdued demand for graphite electrodes expected in the subsequent two quarters due to the situation in Europe and the Russia-Ukraine conflict. The investor presentation further highlighted a 5.5% year-on-year decrease in global crude steel output during H1 2022 and rising energy costs and inflationary pressures negatively impacting consumer confidence in the EU. Management acknowledged the outlook was unclear due to these factors, anticipating near-term challenges due to the European energy crisis, leading to subdued volumes.
Q2 FY 2022-2023: Geopolitical developments continued to cause high inflation, high interest rates, and lower demand in developed economies like the US, EU, and Japan. The World Steel Association (WSA) projected a 2.3% contraction in steel demand in 2022, leading to a short-term bearish outlook for the steel industry.
Q3 FY 2022-2023: The geopolitical situation remained worrisome, with EU and Japan particularly hard hit by soaring electricity and energy prices, high inflation, and high interest rates. Global steel production declined by 4.4% in calendar year 2022, and even more steeply at 7% excluding China. The near-term outlook remained bearish due to lower steel demand, expecting 70% capacity utilization for at least two more quarters. Turkish demand also saw a significant decrease, impacting deliverables.
Q4 FY 2022-2023: Management acknowledged potential short-term challenges (6-15 months) and recession fears impacting steel demand. A correction in needle coke prices from $2300 to $1800 was also noted.
Q1 FY 2023-2024: The company continued to face weak market conditions and price pressure on needle coke ($1500-1700/tonne) and graphite electrodes, with management expecting these conditions to persist for the next two quarters.
Q2 FY 2023-2024: High inflation and interest rates globally negatively impacted steel demand, and a slowdown in steel-using sectors persisted in 2023, particularly in the EU and US. Regional conflicts (Russia, Ukraine, Israel, Palestine) posed further downside risks, making the outlook for 2024 uncertain.
Q3 FY 2023-2024: Global crude steel production remained stagnant in 2023. Production outside China was hampered by subdued demand and a surge in steel exports from China (increasing from 67.3 mmt in 2022 to 90.3 mmt in 2023), which led to an oversupply of Chinese electrodes and price decline. China’s EAF transition was stagnating. Management expected margins to remain under pressure for another 2-3 quarters, with graphite electrode demand remaining sluggish.
Q1 FY 2024-2025: An analyst highlighted that industry players were experiencing significant losses, questioning the lack of aggressive price hikes. The company also reported a decrease in anode prices from USD 10,000 to USD 7,000-8,000 per ton, impacting EBITDA margins. Concerns were raised about GrafTech’s stock price dropping below $1, raising potential delisting issues. A GST show-cause notice for INR 282 crores was disclosed, which the company stated was incorrect. The quarter saw a sharp decline in profitability, with profit before tax falling to Rs. 3.16 crore (June 30, 2024) from Rs. 130.10 crore (June 30, 2023), and EPS dropping to Rs. 0.67 from Rs. 25.28 in the prior year. Standalone EBITDA was also the lowest at Rs. 59 crore.
Q2 FY 2024-2025: There was a decline in global crude steel production (-2% in the first nine months of 2024), impacting graphite electrode demand and pricing, with China’s decline and increased exports exacerbating market pressure. Near-term margin pressure continued due to reduced demand and needle coke price corrections. Management anticipated margins would remain under pressure for the next few quarters. EPS for Q2 FY25 was Rs. 3.22, a significant drop from previous years.
Q3 FY 2024-2025: While global competitors indicated price hikes, HEG’s management adopted a “waiting mode” to observe if these increases would be accepted by the market. An analyst questioned the decision to increase investment limits in foreign stocks and potentially raise the stake in GrafTech, given it’s a competitor, instead of buying back its own stock.
Q4 FY 2024-2025: Management addressed the uncertainty regarding US tariffs on graphite electrodes (currently 10%), acknowledging it’s speculative whether they would remain, revert to 0%, or change. An analyst reiterated concerns about unsustainable prices in the industry, significant capacity closures (16-18% ex-China), and potential major write-downs for GrafTech. The company reported a negative EBITDA of Rs. -5 crore and a net loss of Rs. 73.67 crore for the quarter, with EPS falling to Rs. (3.82). Additionally, HEG received a fine of Rs. 1,01,480 (including GST) from BSE and NSE for alleged non-compliance with Regulation 17(1A) of SEBI LODR Regulations, 2015. The full FY25 financial performance showed a notable decline in total income, EBITDA, PAT, and EPS compared to FY24.
Q1 FY 2025-2026: The company observed significant pricing variations across global markets, with the U.S. market benefiting from tariffs. However, HEG did not see the same 10% quarter-on-quarter price increase reported by GrafTech in other regions. Analysts raised concerns about GrafTech’s operating cash loss (INR 100 crore) and liquidity, questioning potential bankruptcy, which management addressed by noting GrafTech’s $300 million liquidity and debt extensions until 2029. Profitability showed a significant recovery with Profit before tax at Rs. 127.46 crore and EPS at Rs. 5.43.
Q2 FY 2025-2026 (Outlook): Management confirmed Q2 revenue growth was entirely volume-driven, with flat graphite electrode prices. They noted the demand turnaround for graphite electrodes was taking longer than anticipated, with Q3 not showing immediate signs of improvement due to geopolitical situations and economic conditions. They stated the entire graphite industry needed a price increase but demand remained subdued.
2. Risk Mitigation Strategies
HEG has consistently articulated and implemented several strategies to mitigate identified risks, demonstrating a proactive approach.
Q1 FY 2022-2023: The company highlighted its global diversification, serving 35 countries to mitigate country-specific risks. It also emphasized its cost competitiveness through large-scale operations and high-quality, ultra-high-powered grade electrodes. A modest capacity expansion of 20,000 tons was completed, expected to be absorbed within a year.
Q2 FY 2022-2023: Management anticipated increased demand and potential market share gains due to GrafTech’s Mexico plant closure, noting that HEG produces its own nipples, a critical component. The company was also expanding into graphite anodes for lithium-ion batteries with a target of 1 lakh tons capacity by Feb-March, with remaining CAPEX of ₹200 crore. Discussions were ongoing for a power purchase agreement with the Madhya Pradesh State Electricity Board.
Q3 FY 2022-2023: The company made a strategic decision to build finished goods inventory due to volatile needle coke prices, finding it more cost-effective to convert stocked raw materials. Maintaining margins was a focus, leveraging the spread between electrode and needle coke prices, with power costs being stable due to long-term contracts. Plans for an additional 20,000 tons of capacity at approximately $8,000 per ton were discussed, with expectations of capturing market share. Financing for the INR 2,000 crore capex for the new anode segment was planned primarily through internal financing, supplemented by bank loans.
Q4 FY 2022-2023: Management pointed to China’s growing EAF capacity and substantial EAF capacity expansion investments ($50-$55 billion) in Europe and America as drivers for new electrode demand. HEG’s recent capacity expansion was deemed timely to capitalize on this, noting the long lead times (2.5-3 years) for competitors to expand. The graphite anode subsidiary, TACC, was progressing towards 10,000 tons by mid-2025.
Q1 FY 2023-2024: The new graphite anode business (TACC), commencing in H2 CY2025, was projected to cost approximately 800 Crores, produce 10,000 tonnes, and achieve 25-30% EBITDA. The company stated it was long-term debt-free with a healthy treasury size of nearly 980 Crores as of June 30, 2023.
Q1 FY 2024-2025: HEG emphasized its position as the lowest-cost producer, maintaining 75-80% capacity utilization, even as competitors faced losses. The investment in GrafTech was termed strategic. To mitigate the impact of lower anode prices, the company aimed for power price reductions and sought direct green power, targeting a 25-26% EBITDA margin. Regarding GrafTech’s delisting concern, management expressed confidence in mitigation strategies like reverse splits.
Q2 FY 2024-2025: The company highlighted its fully operational 100,000-ton capacity at a single location, providing cost advantages. The demerger of HEG Greentech was progressing, expected by Sept/Oct 2025, with an estimated current EBITDA of Rs. 270-300 crores, indicating a strategic move to unlock value and diversify. A mark-to-market gain on treasury investments boosted Q2 profits. HEG maintained 80% capacity utilization, enabling it to increase market share despite overall declining demand.
Q1 FY 2025-2026: HEG is exploring options to mitigate the impact of US import duties by importing raw materials from the U.S. itself. Management stated they prioritize organic expansion over increasing their stake in GrafTech, aligning with their core business. They expressed optimism for GrafTech’s turnaround within 2-3 years, citing its liquidity and debt extensions, and noted that all investments are diligently evaluated from a risk perspective. The company’s short-term working capital borrowings were managed, outstanding at Rs. 586 crore as of June 30, 2025.
Q2 FY 2025-2026 (Outlook): Management expressed hope for US duties to settle at reasonable levels and confirmed their well-diversified sales (10-12% to US, 35 countries) mitigated market concentration risk. They believe the EU’s Carbon Border Adjustment Mechanism (CBAM) could benefit the EU steel industry. Utilization was expected to sustain near 90% by year-end FY26. Management was bullish on the long-term electrode industry outlook due to new EAFs. They reported stable needle coke prices and confirmed being long-term debt-free with no plans to add debt in FY26 or FY27. The demerger debt allocation of INR 830 crores to TACC (Greentech) out of INR 1,200 crores treasury indicated a clear financial strategy for the new entity.
3. Pending Litigation or Investigations
HEG Ltd. has disclosed specific regulatory and compliance issues.
Q1 FY 2024-2025: The company disclosed a GST show-cause notice for INR 282 crores, stating that the demand was incorrect and a response would be filed.
Q4 FY 2024-2025: HEG received a fine of Rs. 1,01,480 (including GST) from BSE and NSE for alleged non-compliance with Regulation 17(1A) of SEBI LODR Regulations, 2015. Management, however, asserted that they had duly complied with the regulation.
4. Consistency in Risk Disclosures
Management has generally been consistent in its disclosures regarding macroeconomic and industry risks, as well as its mitigation strategies.
Market Outlook: From Q1 FY23 to Q2 FY26 (outlook), management consistently highlighted subdued demand, margin pressure, geopolitical uncertainties, and high energy/interest rates. While the specific recovery timeline shifted (from H2 2024 to H2 2025, and then acknowledging longer-than-anticipated turnaround for Q3 FY26), the underlying market challenges were consistently communicated.
GrafTech Investment: The nature of the GrafTech investment was discussed across Q1 FY25, Q3 FY25, and Q1 FY26. While the initial investment was termed “strategic,” later discussions clarified it was for “investment purposes” with regulatory limits (OPI route, 10% stake). Concerns about GrafTech’s financial health and delisting were addressed by management, who maintained optimism about its turnaround and their diligent evaluation process.
US Tariffs: The issue of US tariffs on graphite electrodes was raised in Q4 FY25, with management acknowledging uncertainty. In Q1 FY26, they noted its impact on pricing variations and explored raw material import options. By Q2 FY26 (outlook), they were hopeful for reasonable duty levels but prepared to absorb some impact, emphasizing their diversification. This shows a consistent recognition and evolving strategy around this specific risk.
Capacity Expansion and Debt Status: The company consistently emphasized its capacity expansion (from 80,000 to 100,000 tons) as a competitive advantage and a preparedness measure for future EAF demand. Similarly, its status as a long-term debt-free company and healthy treasury size were consistently reiterated across multiple quarters (Q1 FY24, Q2 FY25, Q2 FY26 outlook).
Regulatory Issues: The GST notice and SEBI fine were disclosed transparently, with management providing their perspective and actions.
Conclusion: Appraisal of Preparedness and Vulnerability
HEG Ltd. operates in an inherently cyclical and geopolitically sensitive industry, making it vulnerable to global steel demand fluctuations, commodity price volatility (needle coke), and international trade policies (tariffs). The significant decline in profitability and negative EBITDA in Q4 FY25, coupled with persistent analyst concerns about the GrafTech investment’s viability, highlight these vulnerabilities. The company also faces regulatory compliance risks, evidenced by the GST notice and the SEBI fine.
However, HEG demonstrates a strong level of preparedness. Management consistently provides realistic assessments of challenges and articulates clear mitigation strategies. Its geographic diversification across 35 countries significantly reduces reliance on any single market, including the US, which accounts for only 8-12% of sales. The company maintains a strong competitive edge as a lowest-cost producer with a large, integrated capacity (100,000 tons, including internal nipple production), enabling it to increase market share even during subdued demand, as seen with 80% utilization in Q2 FY25 compared to competitors’ lower rates.
Crucially, HEG’s strategic diversification into the green energy sector through its graphite anode business (TACC), with substantial internal financing, positions it for long-term growth driven by decarbonization trends. The company’s robust financial health, characterized by being long-term debt-free and maintaining a healthy treasury (e.g., ~Rs. 980 crore in Q1 FY24, ~Rs. 923 crore in Q2 FY25, and a post-demerger allocation of Rs. 830 crore to TACC from Rs. 1,200 crore treasury in Q2 FY26 outlook), provides substantial financial flexibility to navigate downturns and fund growth initiatives. Management’s optimism for a market rebound in the medium to long term, driven by EAF expansion and decarbonization, is well-founded despite the short-term market struggles. The proactive approach to exploring solutions for tariff impacts and maintaining cost discipline showcases a focused risk management framework.
Overall, while external headwinds present ongoing challenges, HEG’s management demonstrates strong capabilities in identifying, assessing, and articulating strategies to mitigate risks, backed by a solid financial position and strategic growth initiatives.