HEG Confident on EAF Demand as Pricing Lag Drives Volatility

HEG Limited — Q4 FY26 Earnings Call (held May 04, 2026)

1. Overall Tone of Management: Optimistic

• Management repeatedly emphasizes structural tailwinds and “remain confident” on long-term demand for electrodes.
• Strong confidence in EAF-driven growth: “structural and positive change” and “very well positioned”.
• Even while acknowledging near-term “mixed” conditions, they frame them as temporary and manageable (e.g., pricing lag, order postponements, unrealized FX/mark-to-market losses).

2. Key Themes from Management Commentary

• Structural demand growth from EAF steelmaking + decarbonization
• CBAM/trade protection expected to favor electric arc furnace (EAF) steel, supporting graphite electrode demand.
• Management cites a pipeline: “~60 million tons” EAF capacity by 2028 and “~30 million tons” by 2030 (ex-China), implying “incremental electrode demand of around 200,000 tons by 2030”.
• HEG’s operational strength
• “Healthy utilization… averaging more than 90% for the whole year” and “highest all over the world” (utilization narrative).
• Expansion progress: 100k tons already operational; next expansion to 115k tons targeted for early 2028.
• Near-term volatility explained as mix/FX/mark-to-market rather than core weakness
• Q4 reported loss attributed to unrealized FX + fair value impacts; “Excluding the unrealized losses, our operating margins… intact”.
• GrafTech investment stance reaffirmed
• “position remains unchanged” and they remain committed to long-term value creation despite cyclical volatility.
• Risk framing: Middle East disruption and logistics
• Middle East orders postponed due to regional disruption; management expects normalization and shipment resumption once conditions improve.

3. Q&A Analysis

Theme A: Pricing actions, contract timing, and cost pass-through

• Core questions
• How much price hike is planned (starting FY26/H2) and whether needle coke costs rise similarly.
• Whether price increases will fully reflect by FY28 volumes.
• Management response
• Orders booked up to ~September; for unbooked volumes they are “definitely looking at price increase” but quantum varies by region.
• They expect price increases “towards H2” to protect/improve margins.
• Needle coke: they are covered until September on purchases/shipments (contractual coverage window), but energy/other inputs aren’t fully protected.
• On FY28: they emphasize order-booking lead times (2–2.5 months min production; up to 4–5 months; export transit 40–45 days) and time lag between announcement and realization.
• Evasive/partial/strong elements
• Avoided quantifying the exact $/ton price hike (“300, 400, 500… difficult to say”).
• Strong emphasis on process-driven lag, which partially limits the usefulness of “FY28 full hike” assumptions.

Theme B: Greentech / TACC ramp-up and qualification bottlenecks

• Core questions
• Status of customer qualification, remaining technology bottlenecks, and ramp-up speed post-commissioning.
• Management response
• Pilot sampling progress with “leading OEMs across the world”.
• No change in plant commissioning date from April.
• Target: first-year utilization “40% to 60%” driven by customer acquisitions.
• Explicitly: “no issues on technology”.
• Strong elements
• Clear operational milestone language (commissioning date unchanged; utilization target range).

Theme C: Quarterly volume/mix drivers and logistics disruption

• Core questions
• Why Q4 revenue/volume differs from Q3 (realizations vs tons).
• How much volume was impacted by logistics/order postponements.
• Management response
• Q4 volume down by ~1,000 tons; price drag due to regional/order mix, not broad market price collapse.
• Middle East: ~20% annual sales; orders from Kuwait/Saudi postponed; will ship once Hormuz normalizes.
• Logistics impact described as mostly diversion/postponement, not permanent loss.
• Strong/credible elements
• Reconciliation attempt: production utilization ~95% vs sales utilization slightly lower; sales volume down ~1,000 tons.

Theme D: FX, unrealized losses, and “other expenses”

• Core questions
• Quantify FX loss and fair value impacts; whether shipping cost hit exists.
• Whether force majeure exists in fixed-price contracts.
• Management response
• FX unrealized loss quantified: INR 35–40 crores in the quarter.
• “Other expenses” higher due to fair valuation losses and exchange gain/loss from rupee depreciation.
• Force majeure: they issued letters where impacted (Middle East freight spike from ~$20–30 to >$300); customers pay extra freight on FOB Mumbai.
• For fixed-price contracts: they generally don’t renegotiate unless “something goes really wrong”; small cost movements (±5%) expected.
• Notable elements
• Quantification provided for FX loss (more transparent than pricing).

Theme E: Needle coke supply constraints and battery-grade substitution risk

• Core questions
• How will HEG fulfill incremental needle coke demand given global constraints and lack of new capacity?
• If battery demand grows, could needle coke scarcity emerge and affect decarbonization/EV supply?
• Management response
• Needle coke capacity is constrained; they argue no new greenfield needle coke plants for ~70–80 years and only a few suppliers.
• They justify GrafTech investment by pointing to GrafTech’s ~75% backward integration (captive needle coke).
• They argue battery makers can substitute needle coke with other inputs, while electrode production cannot.
• Strong elements
• Clear structural claim: “no new Greenfield needle coke plant… in last 78 years” (very strong assertion).
• They also claim HEG’s own utilization is >90%, contrasting with peers’ lower utilization.

Theme F: Trade protection / CBAM certainty and EAF economics

• Core questions
• Whether energy price rises derail EAF economics.
• Whether CBAM is “on track” and how Europe will respond.
• Management response
• Energy mix matters by region; they downplay direct impact on EAF economics.
• CBAM already applied; expects reduced EU imports and higher electrode demand.
• Strong claim: Europe has “no option” due to carbon intensity differences and upcoming duties; EAF share expected to rise.
• Strong elements
• Very assertive language (“no way they can pay…”, “no option”).

4. Guidance / Outlook

Explicit guidance (quantitative)

• Expansion completion
• Additional 15,000 tons expansion to 115,000 tons: “target completion by early 2028”.
• Utilization
• Company utilization: “averaging more than 90% for the whole year” and “past three, four immediate quarters”.
• Greentech (TACC) ramp
• First-year utilization target: “40% to 60%”.
• EBITDA margin outlook (FY27 near-term)
• For next two quarters (April–June and July–Sept): EBITDA range “around 20%”.
• For FY27: “more than 20%” (i.e., (+20%)).

Implicit signals (qualitative)

• Pricing
• Price increases are expected for uncommitted volumes, especially towards H2, but quantum is uncertain and region-dependent.
• They repeatedly stress order-booking lag (announced price ≠ immediate realization).
• Demand
• Structural confidence in EAF-driven electrode demand growth through 2030.
• Risk
• Near-term conditions “mixed” and freight/logistics disruptions are acknowledged as temporary.

5. Standout Statements (direct / revealing)

• Structural demand thesis
• “structural and positive change in electric arc furnace steel production… supports long-term demand growth of graphite electrodes.”
• EAF capacity pipeline
• “additional 60 million tons… should be in production by 2028, and another about 30 million tons by 2030.”
• Utilization leadership
• “averaging more than 90% for the whole year” and “probably the highest all over the world.”
• GrafTech stance
• “position remains unchanged… conviction… anchored in structural foundations… not near term market movements.”
• Near-term margin framing
• Q4 loss is attributed to unrealized items: “entirely unrealized losses… Excluding the unrealized losses, our operating margins… intact.”
• Needle coke structural constraint
• “no new Greenfield needle coke plant… in the last 78 years.”
• Pricing quantification avoidance
• “300, 400, 500 is very difficult to say at this stage.”
• CBAM certainty
• “Europe… basically have no option… they will have to shift from blast furnaces to electric arc furnaces.”

6. Red Flags / Positive Signals

Red flags
– Limited pricing quantification despite multiple questions (quantum of hike not provided).
– Heavy reliance on “structural” narratives while near-term outcomes depend on execution, order mix, and geopolitical/logistics normalization.
– Unrealized losses drive headline loss: while explained, it can still signal volatility in mark-to-market/FX exposure.

Positive signals
– Clear EBITDA margin guidance for next two quarters (~20%) and FY27 (>20%).
– Operational metrics confidence (utilization >90% for year; production utilization ~95% in quarter).
– TACC ramp plan with utilization target range and “no technology bottlenecks”.
– Needle coke supply logic is consistent with their GrafTech investment rationale (backward integration).

7. Historical Comparison & Consistency Analysis

a. Change in Tone Over Time

• Current (Q4 FY26): Optimistic with more emphasis on structural EAF pipeline and margin guidance for near quarters.
• Prior (Q3 FY26, Feb 2026): also optimistic, but more focused on industry weakness + transition support and less on near-term margin “range” specificity.
• Shift classification: No Change / More Optimistic
• Management now provides explicit EBITDA range for next two quarters and FY27 (>20%).
• They also more directly address pricing mechanics (booked till September; H2 increases) and FX quantification.

b. Tracking Past Commitments vs Outcomes

• NCLT scheme approval timing
• Prior (Q3 FY26): expected NCLT approval by Q1 FY27 (and earlier described reserved order and process steps).
• Current (Q4 FY26): says NCLT meetings scheduled May 5 and anticipates scheme approval in second quarter of this financial year.
• Assessment: ⏳ Delayed / shifted (from Q1 FY27 expectation to “second quarter”).
• Expansion completion
• Prior: announced expansion progress and target completion by early 2028.
• Current: reiterates “target completion by early 2028” (no change).
• Assessment: ✅ Consistent / Delivered on timeline narrative.
• EBITDA sustainability
• Prior (Q3 FY26): management indicated resilience and discussed margins but did not lock a specific forward range for the next two quarters in the same way.
• Current: explicitly guides EBITDA ~20% for next two quarters and (+20%) for FY27.
• Assessment: ✅ More concrete guidance now (not a “miss”, but increased specificity).

c. Narrative Shifts

• From “pricing won’t move soon” → “H2 price increase for uncommitted volumes”
• In Q3 (Feb 2026), they often said pricing uptick was hoped for but not guaranteed.
• In Q4, they state price increases are “very necessary” and aim for H2.
• Middle East disruption becomes a more explicit near-term driver
• Q4 introduces concrete operational disruption (Middle East orders postponed; 20% annual sales).
• GrafTech rationale becomes more defensive/structured
• Q4 includes a longer explanation of why GrafTech’s backward integration matters and reaffirms “position unchanged.”

d. Consistency & Credibility Signals

• Credibility: Medium to High
• Strengths: consistent utilization leadership claims; consistent EAF structural thesis; improved transparency on FX loss quantification.
• Weakness: scheme approval timing appears to have moved (Q1 FY27 → second quarter), and pricing quantification remains consistently avoided.

e. Evolution of Key Themes

• Demand / EAF transition: Improving/stable (becoming more assertive; more capacity pipeline detail).
• Margins: Mixed near-term (Q4 headline loss) but improving operationally; now guided to stabilize around ~20%.
• Risks (FX/mark-to-market): Persisting; management continues to attribute losses to unrealized accounting impacts.
• Trade protection: Stable and increasingly used as a certainty argument (“no option” language).

f. Additional Insights (Cross-Period Intelligence)

• Accounting volatility is becoming a recurring narrative driver:
• Q3 already referenced MTM impacts; Q4 again highlights unrealized FX/fair value losses as the reason for headline loss.
• Pricing confidence is increasing but remains conditional:
• They guide EBITDA and expect H2 price increases, yet repeatedly emphasize region-by-region variability and order-booking lags—suggesting confidence is real but not fully controllable.
• Scheme timeline slippage may indicate execution friction:
• The shift from Q1 FY27 to “second quarter” is a subtle but important credibility datapoint.