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BofA’s call sends Graphite India, HEG to upper circuit

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The financial services giant has expanded its research coverage of the graphite electrode sector to the Asia-Pacific region.
MUMBAI: Indian graphite electrode makers offer the purest play in the sector, said Bank of America Merrill Lynch (BofAML) in a note on Wednesday, initiating coverage on HEG and Graphite India with ‘buy’ ratings.

Stocks of both compenies ended up at their daily upper circuit levels following the report.

Shares of HEG ended up 20 per cent at Rs 3,871.05 while that of Graphite India ended up 5 per cent at Rs 829.20 on the BSE.

Shares of HEG have surged 2,580 per cent in the last three years and Graphite India has gained 1,056 per cent during the same period.

“HEG and Graphite India offer the purest play on the sector with over 95 per cent of their revenue derived from electrodes — the majority exported to global customers. They trade at the lowest multiples globally and offer the most upside to price objectives,” said BofAML.

These stocks are also likely to benefit from the rupee as US dollar exports are 70 per cent of sales, said BofAML.

The financial services giant has expanded its research coverage of the graphite electrode sector to the Asia-Pacific region.

BofAML said HEG is the purest play on the sector gkobally with 99 per cent of its revenue from graphite electrode and 75 per cent being exported to international markets on short term contracts. BofAML has initiated coverage on the stock with a target price of Rs 6,700.

“The stock is trading at 3.8 times P/E and 2 times EV/EBITDA on FY20 estimates — well below peers in Japan and China,” said BofAML.

The bank has set a target price of Rs 1,550 on Graphite India.

The stock is trading at 3.9 times one-year forward price-to-earnings, which makes it the cheapest graphite electrode producer globally, said BofAML.

“We see a multi-year earnings driven by a supercycle in graphite electrodes used for EAF (electric arc furnaces) steel making...Its valuation does not appear to have correctly priced the strength and longevity of this cycle,” the bank said.
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