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These top Indian stocks seen extending rally after 400% surge this year

LiveMint logoLiveMint 03-10-2017 Swansy Afonso

Mumbai: For these two Indian companies, the best may well be yet to come.

Graphite India Ltd and HEG Ltd are leading manufacturers of graphite electrodes, an essential component of electric arc furnaces that turn scrap into steel. They’re up more than 400% since the start of January, making them the best performers among global peers and Indian industrial companies.

The firms are riding a wave of demand as world steelmakers ramp up output in response to a slump in Chinese exports of the metal and the highest prices in more than four years. Meanwhile, cuts in electrode capacity have curbed supply, China’s clampdown on pollution has hurt production of electrodes and there’s a shortage of needle coke, the raw material used to make them.

Analysts expect the producers to rally further as earnings surge on increased sales and better prices. Brokerage Anand Rathi Financial Services Ltd raised its 12-month target for Graphite India last month to Rs524, 40% more than the closing price on Friday. Jefferies Group LLC sees HEG rising to Rs1,050 in 12 months from Rs933.20.

“There’s a global shortage of graphite electrodes,” Ravi Jhunjhunwala, HEG’s chairman, said in an interview. “The rest of the world is in better shape today because they are not seeing the dumping of steel from China, so the steel industry is picking up well in the last six months.” Spot electrode prices have risen 10-fold this year, according to research firm Kepler Cheuvreux.

The squeeze on supply has been worsened by cuts of about 20% in production capacity for graphite electrodes in the past four years because of an earlier drop in demand, Jefferies Group estimates. An environmental crackdown in China that is limiting capacity across heavy industries has also caused shortages of electrodes, according to Eurofer, the region’s steel lobby group, in a release last month.

Global peers of the Indian companies have posted healthy gains in 2017. Tokai Carbon Co. has jumped more than 170% in Japan, Showa Denko KK has more than doubled and Nippon Carbon Co. is up over 90%. SGL Carbon SE has climbed 70% in Germany.

Some manufacturers are consolidating. Showa Denko received US anti-trust approval last month to buy SGL Carbon’s global graphite electrode business in exchange for the sale of SGL’s US business to Tokai Carbon, almost a year after the company announced the deal.

Needle coke

European steelmakers say the shortage is threatening output as they’re dependent on imported graphite electrodes, with about 226,000 metric tonnes of them consumed each year in the European Union, according to Eurofer. “With Chinese supplies of needle coke and graphite out of the market, there’s a clear shortage of both materials,” it said. In Japan, Tokyo Steel Manufacturing Co. said higher costs are inevitable in the second half of the financial year.

Suppliers of needle coke, which represents as much as 60% of the cost of the electrodes, are trying to churn out more. C-Chem Co., a unit of Nippon Steel & Sumikin Chemical Co., is producing all it can from domestic coal tar, but is unable to meet demand, according to Hideo Ishii, a spokesman for the parent company. The global shortage has worsened after Hurricane Harvey hurt the operations of a key US supplier, said Jhunjhunwala.

HEG, which says it supplies mills such as ArcelorMittal, Posco and US Steel Corp., expects to operate at 85% capacity in the year through March, up from about 65% in the prior 12 months, said Jhunjhunwala. Any further increase in capacity use will be limited by the needle coke shortage, he said.

Rising prices put at risk annual purchasing contracts in the industry, Jhunjhunwala said. “I don’t think most of the electrode producers will be in a position at all to commit to 12-month contracts because of the needle coke shortages and the cost of raw material going up,” he said. They may move to a mix of spot, quarterly or half yearly deals, he said.

The company’s shares have surged more than 500% in Mumbai this year, and those of Graphite India have rallied over 400%, the top gainers on the 225-member S&P BSE Industrials Index. The gauge is up 20%. Bloomberg

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