HEG Says Volumes Unchanged Despite Middle East War

HEG Limited — Q1 FY27 Earnings Call (held July 24, 2026)

1. Overall Tone of Management: Optimistic

• Management repeatedly emphasizes structural tailwinds for graphite electrodes (EAF transition, CBAM) and confidence in long-term demand.
• They highlight strong profitability improvement despite “marginal decline in volumes” and reiterate high utilization (“more than 90%” and “expect to continue”).
• Even when discussing risks (Middle East disruptions, US CVD/ADD), responses are framed as manageable and temporary (“postponements”, “we will see”, “well diversified”).

2. Key Themes from Management Commentary

• Macro/industry backdrop: Middle East war raised energy and freight costs, disrupting trade/shipping; global steel shows “gradual stabilization” and demand “beginning to find its floor.”
• China export pressure + trade measures: Elevated Chinese exports continue to drive defensive trade actions (antidumping/safeguards across US/EU/India), creating pricing volatility.
• Structural demand for electrodes remains strong: Decarbonization + CBAM accelerating shift from blast furnace to EAF, with “~71 million tons” of new EAF capacity planned by end-2028.
• Capacity expansion as a competitive moat: Expansion from 80k → 100k tons already operational; further expansion to 115k tons “on track” for early 2028.
• Operational execution: Plant operated at >90% capacity utilization; management expects to sustain >90%.
• Financial strength: Debt-free balance sheet; treasury ~INR858 crores (as of 30 June 2026).
• Demerger progress (HEG Advanced Materials): Composite scheme progressing; NCLT order reserved, awaiting pronouncement; timeline update promised.

3. Q&A Analysis

Theme A: Revenue mix, Middle East disruption, and volume diversion

• Core questions:
• What is Middle East share in Q1 and where were volumes diverted due to war?
• Did they lose volumes in Q1?
• Management response:
• Middle East share “around 20%” historically; “hardly matters” due to diversification across “30 countries.”
• “No, no. We didn’t lose any volume,” and they still operated “in excess of 91%.”
• For diversion details, they refused to provide granular numbers (competitor sensitivity).
• Evasive/partial elements:
• They did not quantify Middle East volume de-growth or specific destination markets.
• They used a “not the right forum” stance and emphasized exports being stable historically.

Theme B: Price realization timing vs bookings (electrode and needle coke)

• Core questions:
• When will recent price hikes flow into earnings?
• How much price increase vs cost increase can be expected?
• Management response:
• Electrode pricing is typically booked 3–4 months ahead; price hikes announced now show up from October onwards (because commitments run through Sep).
• New business booked at “higher prices,” while costs (needle coke, freight, input costs) are rising.
• They cited competitor price intents (e.g., “$600 to $1,200… $930”) and said they will “follow suit.”
• Evasive/partial elements:
• They avoided giving a net EBITDA spread or explicit %/$/ton guidance.
• They repeatedly framed near-term impact as limited due to booking coverage.

Theme C: US regulatory actions (CVD/ADD) and volume exposure

• Core questions:
• Exposure to US volumes and how to derisk if ADD/CVD is imposed.
• Timing of preliminary/final results and implications for volumes/pricing.
• Management response:
• US exposure stated as <10% (correcting earlier “20%” confusion).
• They argued they can absorb volume elsewhere due to global presence.
• They said CVD by end July and dumping by end September; “we’ll see what comes.”
• Notable strength:
• Clear stance that they are “not going to leave that country” even if market share shifts.

Theme D: Needle coke cost pass-through and timing

• Core questions:
• Needle coke price increase magnitude and when it hits P&L.
• Expected spread per ton / cost impact timing.
• Management response:
• Needle coke cost of making electrodes expected to rise 10–15%; needle coke itself rising more.
• Impact starts “towards the end of the year” due to long process cycle and inventory/coverage.
• They said they are covered on needle coke purchases/shipments until September.
• Evasive/partial elements:
• They did not provide a per-ton spread; they gave timing and qualitative pass-through logic.

Theme E: EAF capacity commissioning and electrode demand outlook

• Core questions:
• How much of the global EAF commissioning is already underway (CY’26 numbers).
• Whether demand forecasts remain valid.
• Management response:
• They said much of the 25–30m tons is already in operation; remaining in “next 2–3 quarters.”
• They reiterated that their earlier EAF commissioning pipeline remains broadly on track (with ±10–20% variability).
• Credibility note:
• They provided more concrete ranges and acknowledged variability.

Theme F: Greentech / TACC demerger economics and debt

• Core questions:
• Contracting status for anode volumes (Greentech/TACC).
• Debt levels and whether debt transfers to graphite entity post-demerger.
• Revenue/EBITDA potential for anode + energy businesses.
• Management response:
• Anode contracts: “~70% of capacity” in advanced stages; “70%… closed by next 1–1.5 months.”
• Debt: HEG standalone debt-free; for Greentech they indicated ~INR1,500 crores gross debt expected on completion (and clarified TACC debt specifics).
• Revenue/EBITDA targets (explicit):
  • Anode: commercial production Q1 next year, ramp to INR600–700 cr (Y1), >INR1,200 cr (Y2), ~INR1,500–1,600 cr (Y3); EBITDA margin “~35%.”
  • Energy (Bhilwara Energy): free cash flow INR320–350 cr/year; additional hydro + solar to add “~INR200 cr EBITDA”; by 2030 target “4-digit EBITDA” across Greentech businesses.
• Strong specificity:
• Unlike electrode pricing, Greentech economics were given with quantitative targets.

4. Guidance / Outlook

Explicit guidance (quantitative)

• Capacity utilization: Operate at >90% in forthcoming quarters; closing FY expected between 90% to 95%.
• Expansion commissioning: 115,000 tons “on track” for early 2028.
• Needle coke cost timing: cost rise “towards the end of the year” (qualitative timing, not $/ton).
• Greentech (TACC anode) economics:
• Commercial production: Q1 of next year
• Revenue targets: INR600–700 cr (Y1) → >INR1,200 cr (Y2) → INR1,500–1,600 cr (Y3)
• EBITDA margin: ~35%
• Greentech energy economics:
• Hydro free cash flow: INR320–350 cr/year
• Additional projects: add “~INR200 cr EBITDA”
• By 2030: “4-digit EBITDA” across businesses combined

Implicit signals (qualitative)

• Near-term electrode margin support: Management expects margin maintenance because:
• price hikes are booked ahead (impact from Oct onwards),
• costs are rising but they will raise prices “gradually,”
• they believe they can maintain “margins that we are now talking about” and “higher margin than anybody else.”
• US regulatory impact manageable: US is “hardly 10%” and they can reroute volumes globally.
• EAF demand pipeline intact: They repeatedly reaffirm the structural demand narrative and commissioning schedule.

5. Standout Statements (direct / highly revealing)

• On volumes despite war: “No, no. We didn’t lose any volume.”
• On pricing timing: “…price hike… will only happen October onwards” because commitments run through September.
• On margin stance: “…we’ll be able to maintain the margins that we are now talking about. And we will have a higher margin than anybody else.”
• On needle coke coverage: “…covered… until September” (purchases/shipments and processing cycle logic).
• On US exposure: “Hardly… less than about 10%” of business.
• On Greentech targets: “…by the year 2030… aim at a 4-digit EBITDA between all the businesses combined.”
• On expansion: 115,000 tons “on track and should be in operation by early 2028.”
• On EAF demand confidence: “…medium- to long-term outlook… highly positive” and EAF capacity additions validate electrode demand.

6. Red Flags / Positive Signals

Red flags
– Limited transparency on key sensitivities: Refusal to disclose Middle East volume de-growth and diversion destinations (“not the right forum… should not be divulging these kinds of numbers”).
– Pricing guidance remains non-quantitative: They avoid giving explicit net spread ($/ton or % margin impact) despite repeated questions.
– Competitor-driven assumptions: They rely on competitor price intents and “follow suit,” which may not translate 1:1 to realized pricing.

Positive signals
– Operational credibility: Consistent emphasis on >90% utilization and sequential recovery from Q4 FY26 losses.
– Balance sheet strength: “debt-free” and strong treasury (~INR858 cr).
– Greentech provides concrete targets (revenue/EBITDA/margins and timing), suggesting stronger internal visibility than in electrode pricing.

7. Historical Comparison & Consistency Analysis (vs prior calls)

a. Change in Tone Over Time

• Current (Q1 FY27): Optimistic—management is confident on long-term demand and highlights margin expansion.
• Prior (Q4 FY26, May 2026): Tone was also constructive, but more focused on mixed near-term conditions and “price increase needed” with less certainty on timing.
• Prior (Q3 FY26, Feb 2026): More cautious on near-term demand (“muted,” “pricing pressure”), with reliance on structural shift and utilization strength.

Shift classification: More Optimistic
– Evidence: stronger confidence language in Q1 FY27 (“remain confident,” “highly positive,” “higher margin than anybody else”) and more operational certainty (“expect to continue operating at more than 90%”).

b. Tracking Past Commitments vs Outcomes

• NCLT scheme approval timing (from Q3 FY26 call):
• Prior statement: scheme “approved by NCLT by Q1 FY27.”
• Current: NCLT reserved order; awaiting pronouncement; “update shortly on timeline.”
• Assessment: ⏳ Delayed / not fully delivered yet (still pending pronouncement; approval not confirmed).
• Electrode price increase expectation (from Q4 FY26 call):
• Prior: aim for price increase in H2; booked up to September; “towards H2… price increase.”
• Current: reiterates price hikes show up October onwards due to booking coverage.
• Assessment: ✅ Consistent with timing logic (no contradiction; still aligns with “after Sep”).
• EAF commissioning pipeline (repeated across calls):
• Prior: 20m already commissioned (2024–25) + 60m by 2026–28.
• Current: confirms “25–30m” already in operation and remaining in next 2–3 quarters; broadly consistent.
• Assessment: ✅ On track / consistent ranges.

c. Narrative Shifts

• From “pricing pressure” to “margin maintenance confidence”:
• Earlier calls emphasized muted demand and pricing pressure; now they more assertively claim they can maintain margins and be higher margin than peers.
• Greentech emphasis increased with quantified targets:
• Earlier calls discussed demerger and commissioning broadly; current call provides explicit revenue/EBITDA ramp and debt structure.
• US regulatory risk framed as manageable:
• Earlier: legal/regulatory uncertainty acknowledged; current: exposure quantified (<10%) and rerouting confidence emphasized.

d. Consistency & Credibility Signals

• Credibility: Medium to High
• Strength: consistent operational metrics (utilization >90%), consistent structural thesis (EAF transition), and consistent booking-cycle explanation for pricing timing.
• Weakness: continued non-quantification of key market outcomes (Middle East volume impact, net price-cost spread), and demerger timeline still not fully closed.

e. Evolution of Key Themes

• Demand / EAF transition: Improving/stable narrative—pipeline reaffirmed; more concrete commissioning status in Q1 FY27.
• Margins: Improving—Q1 FY27 shows strong EBITDA margin expansion (29% stand-alone; 27% consolidated) and management confidence in sustaining.
• Risks (Middle East, US duties): Still present but increasingly treated as contained via diversification and rerouting.

f. Additional Insights (cross-period intelligence)

• Defensiveness in Q&A increased on regional volume details (Middle East diversion) compared with earlier calls where they were more willing to discuss booking coverage and general impacts.
• Near-term profitability is being supported by realization/mix and inventory effects, while management avoids giving a forward net spread—suggesting they may be confident operationally but cautious about pricing pass-through variability.
• Greentech narrative is now “investment-grade” in specificity, contrasting with electrode pricing uncertainty—implying management has higher visibility on the new business economics than on near-term electrode pricing.