ICICI Direct Research has reiterated its BUY recommendation on HEG Ltd, setting a 12-month target price of Rs 635 against the current market price of Rs 550, implying an upside potential of 15%. Backed by structural global shifts toward Electric Arc Furnace (EAF) steelmaking and a decisive foray into green technology, ICICI Direct maintains a BUY rating with a Rs 635 target. The company reported strong Q3FY26 results, reflecting operational discipline and margin expansion despite a muted pricing environment. Capacity utilization is trending upward, and a 15,000-ton expansion is underway. Simultaneously, the demerger into HEG Graphite and HEG Greentech aims to unlock value, particularly through a Rs 2,250 crore anode material venture. The medium-term outlook remains constructive, anchored in structural demand tailwinds and disciplined capital allocation.

Structural Tailwinds: EAF Transition Reshaping Electrode Demand

Decarbonization is no longer optional—it is structural. Global steelmakers are accelerating the transition toward Electric Arc Furnace production, which emits nearly 75% less carbon than conventional blast furnaces. Industry projections indicate approximately 110 million tonnes of incremental EAF capacity addition globally (excluding China) by FY30.

This translates into incremental graphite electrode demand of nearly 2 lakh tonnes, over a current global base of roughly 6.3 lakh tonnes. Even amid near-term headwinds such as flat steel output and stable electrode pricing, the medium-term demand trajectory appears structurally supported.

Moreover, permanent shutdowns of roughly 1.2 lakh tonnes of graphite electrode capacity—around 16% of global capacity ex-China and Russia—have rationalized supply dynamics. HEG, already among the top five global producers, stands well positioned to benefit.

Q3FY26 Performance: Margins Rebound on Cost Discipline

The December quarter underscored operational resilience.

Revenue stood at Rs 656 crore, up 37% year-on-year. While sequentially softer by 6%, the topline strength reflects improved volumes and export traction. Capacity utilization reached 85% during the quarter, signaling steady demand recovery.

EBITDA surged to Rs 143 crore, with margins expanding to 21.8%. That marks a sharp 480-basis-point improvement quarter-on-quarter, driven by improved cost efficiencies and gross margin expansion of approximately 240 basis points.

Reported profit after tax stood at Rs 141 crore, aided by a one-time mark-to-market investment gain of Rs 63 crore.

Pricing remains steady, with management indicating no significant electrode price hikes expected before Q2FY27. Notably, 50%–60% of FY27 estimated volumes are already contracted at prevailing prices—providing revenue visibility.

Capacity Expansion: Scaling to 1.15 Lakh Tonnes

HEG is progressing toward expanding its graphite electrode capacity from 1,00,000 tonnes to 1,15,000 tonnes by end-2027. The expansion entails a capital outlay of approximately Rs 650 crore.

Utilization is projected at 89% in FY26, rising to 94% in FY27 and 96% in FY28.

Production trends illustrate this ramp-up:

This expansion positions HEG to capture incremental global demand while maintaining operational leverage.

Demerger Strategy: Unlocking Green-Tech Valuation

In a transformative move, HEG is separating into two listed entities:

HEG Graphite – Core electrode business

HEG Greentech – Clean energy and battery ventures

HEG Greentech will house Bhilwara Energy and the TACC graphite anode initiative.

The anode plant—designed for 20,000 tonnes capacity—entails Rs 2,250 crore investment and is expected to commission in Q1FY28. India’s lithium-ion battery demand is projected to reach 120–140 GWh by 2030, implying nearly 1.4 lakh tonnes of anode material demand.

Projected EBITDA margins exceed 25%, with ROCE above 20%.

Additionally, Battery Energy Storage Solutions (BESS) capacity is scaling from 1 GWh to 6 GWh by Q1FY27. Renewable power generation capacity is targeted at 0.8 GWp solar plus 2.2 GWh BESS by FY27.

Total cumulative capex across ventures stands at approximately Rs 7,700 crore through FY30, funded via a 30:70 equity-debt mix. A Rs 500 crore strategic investment from Singularity AMC further strengthens capital backing.

Financial Outlook: Earnings Acceleration Through FY28

HEG’s earnings trajectory reflects meaningful recovery:

EBITDA is expected to grow at a 33% CAGR over FY25–28E.
PAT is projected to grow at a 59% CAGR over the same period.

Margins are forecast to expand steadily from 16.3% in FY25 to 23.9% in FY28E.

Return ratios, though currently moderate, are expected to strengthen, with RoCE rising toward 8.4% by FY28E.

Valuation Framework and Target Price

ICICI Direct values HEG on a Sum-of-the-Parts basis:

10x EV/EBITDA on core electrode business

2x P/B on Bhilwara Energy equity

2x P/B on other long-term investments

2x capex valuation for the anode business

This yields an implied equity valuation of Rs 12,254 crore and a target price of Rs 635 per share, implying 15% upside from current levels. At FY28E, HEG trades at approximately 26x earnings and 14.7x EV/EBITDA—reasonable given the structural growth visibility and green transition optionality.

Risks to Monitor

1. Slower-than-expected EAF adoption. Any delay in global capacity migration could dampen electrode demand.

2. Raw material volatility. A sharp increase in needle coke prices could compress margins.

3. Execution risk in green ventures. The anode project and BESS scaling involve capital intensity and technological complexity.

Investment View: Structural Play with Optionality

HEG today is not merely a graphite electrode manufacturer; it is evolving into a materials-plus-energy platform aligned with decarbonization megatrends. The electrode business provides cash-flow stability, while HEG Greentech introduces structural growth and valuation re-rating potential.

With capacity utilization climbing, margins recovering, and green-tech investments accelerating, HEG appears positioned for steady medium-term expansion.

ICICI Direct’s BUY call with a Rs 635 target reflects confidence in both cyclical recovery and structural transformation.