Phone: +91-9740523095

Email: service@whitemonk.in
HEG BUY
November 4, 2009
Dominant market share coupled with positive outlook of domestic steel sector makes it an attractive stock
Country INDIA EXECUTIVE SUMMARY
Sector Electric Equipment
Category Large Cap  Electrode and Graphite Sector: Each tonne of steel requires
Market Cap 11443.21M about 2.5 kg of graphite electrodes and thus demand for
Enterprise Value 18129.11M
graphite electrodes depends on steel production. The total size
FY09 Statistics
Revenue 10990.9M of domestic markets is estimated to be 26000-27000Tonnes per
Net Profit 1070M annum. HEG's market share within domestic market is around
Operating Margin 26%
Net Profit Margin 10%
42-43%. The World crude steel production for the month July
ROE 18% 2009 stood at 103.9 million metric tons which is 11% lower
ROA 6% when compared with corresponding period last year. The world
PE 10.88
Sector PE 9.2 crude steel production despite being a lower when compared
P/BV 1.98 with July 2008 figures, was the highest monthly production
52- WEEK RANGE
figure during the calendar year 2009.Overall outlook for steel
High INR284
Low INR94 sector is positive.
Beta .53  Company: HEG (BSE: 509631), is a large cap firms with market
Return Analysis
One Month Return 4.49% cap of 11443.7MN, manufactures graphite electrodes, which are
Three Month Return 20.47% used to produce steel from scrap by electric arc furnace (EAF)
One Year Return 76.46% technology. The Company exports over 80% of its production to
*1 US$ = INR46.52
more than 25 countries worldwide. The Company's operations
are organized into three business segments: graphite,
HEG PERFORMANC CHART (Price, Volume and steel/sponge and power. During the fiscal year ended March 31,
Volatility)
Volume Data
2009 (fiscal 2009), the production of graphite electrodes was
3 – Month Avg. Daily Volume 26087 50,226 million tons. The company has a number of respected
3-Month Avg. Daily Volume(in INR) 7130881 steel manufactures as clients such as ArcelorMittal, POSCO, US
Steel, and Nucor
3-Month Avg. Daily Volume .06%
of total Market Cap  Performance Analysis: Due to global slump and lower demand
for steel resulted in revenue growth of 8%, significantly lower
than FY08 revenue growth of 13%. Its margins has also declined
especially net profit margin from 15% in FY08 to 10% in FY09.
 Valuation Summary: HEG is currently trading at INR 246.9, The
Fair value of the share is INR272, representing a minimum 10%
of upside potential.

Valuation Summary Price Weight

Relative Valuation
P/E 273.644 7.5%
EV/EBITDA 506.77 7.5%
Earning Power Valuation(EPV) 251.3 85.0%
Fair Price 272.22
Equity Structure
Current Share Price 247
Promoters Holding :52.66%
FII :10.45%  Recommendation: We recommend “BUY” at current share price
MF :.2.64%
Public :14.77% of INR247.

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WhiteMonk Company Research Report – HEG

Key Performance Analysis WHY HEG IS A GOOD IN VESTEMENT

Any Loss in last Five Year No

Operating and Profit Good

The company has achieved revenue growth of 8% in
Margins 2009; In last five year overall revenue growth was 22%.
Debt Exposure High, over 50% asset Overall management has efficiently managed working
financed by Debt
capital and increased capital expenditure on a regular
basis for capacity expansion. Its current ratio of Capex
Revenue Growth(5 years) 22%
ROE 18% with respect to revenue is 13% which is highest in last
ROA 6% three years and signifies that firms expect more
Cash in Hand 64MN demand in near term. In latest quarter, Management
was able to drive down the expenses by 1.8% which
Latest Quarter Results VS. resulted in significant PAT growth.
FY08 Quarter
Revenue Growth Decreased by 2.15%
We believe the company has higher financial risk; its
PAT Increased by 41.85%
debt is 50% of total asset and has lower interest
Total Expenses Decreased by 1.8%
coverage of 4.1. It is significantly higher than its peer’s
EPS Increased by 41.94%
leverage ratio which stands at 21.11%. The company‘s
key financial performance is as given below:

2009
Sales Growth 8%
Operating Profit Margin 26%
Net Profit Margin 10%
ROE 18%
ROA 6%
Current Ratio 6.5
D/E 1.5
D/A 0.521
A/R Turnover 3.2
Days of sales outstanding 113.9
Inventory Turnover 1.7
Inventory Turnover days 213.1
Operating Cash Flow growth -24%
Capex as % of Sales 13%
What We liked:
Cash in Hand 6.4
 HEG enjoys significant Market share in Electrode
Debt as % of (Expense + Capex) 91% and Graphite sector along with good client base.
Debt as % of Revenue 80%  Good revenue growth in current economic
Interest Coverage 4.1 downturn
 Management has decreased the expense by 1.8%
resulting in a significant PAT growth of 45%.

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HEG’S PERFORMANCE COMPARISON WITH INDUSTRY

We have compared HEG‘s Return on Deployed Capital, Profitability, Asset Utilization and Financial Leverage with
industry data. We believe HEG has been giving superior returns on Equity and Deployed Capital so far. HEG’s
profitability in latest FY is superior then overall Industry average of profitability metrics. HEG is lagging behind on
Liquidity and Financial leverage front. HEG is more leveraged in comparison with overall Industry.

RETURN ON DEPLOYED CAPITAL PROFITABLITY ANALYSIS

ASSET UTILIZATION FINANCIAL LEVEARGE

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EPS AND DIVIDEND ANALYSIS

In 2009, EPS stood at INR24.04, 23% lower than 2008 EPS which was INR31.34. On an average EPS grew at 24%
per annum in last five year. Due to economic and current slowdown, the company experienced negative growth
in EPS. Following graph depicts EPS growth from 2004-2009.

EPS % Growth(2005-09)
100% 89%
79%
80%

60%

40%

20%

0%
2005 2006
-6% 2007 2008 2009
-20%
-20% -23%
-40%

Company has been paying dividend since 1991. In FY09, management has declared total INR27.43 dividend
which was lower 37% then FY08. Since 2001, Company has proven history of paying regular dividend with CAGR
of 16.54%. The Dividend details are as given below:

Year Dividend- Dividend Yield

End Amount (%)
2009 27.43 6.88
2008 43.75 3.76
2007 20.16 3.01
2006 12.09 1.76
2005 12.09 2.09
2004 12.09 3.33
2003 8.87 8.35
2002 7.26 6.99
2001 8.06 6.78

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LIQUIDITY AND VOLATILITY ANALYSIS

It is a liquid stock. Below is liquidity analysis of the stock for last two years (2007-09)

Total No. of
Open Price High Price Low Price Close Price Volume Trades
Minimum 94.5 97.8 94 94.5 987 13
Average 237.9 245.5 230.5 236.6 40393.9 732.2
Maximum 582.9 609 555.3 575.05 747646 8593

On average over 40 thousands stocks are trading which shows that there is a good market sellers as well as
buyers. The stock’s beta is .53 which makes it a highly stable stock.

VALUATION SUMMARY

We have valued HEG at share price of INR295.9, implying a minimum upside potential of 10% for its current
share price of Rs246 as of on 04 November 2009.The stock value has been arrived based on weighted average of
the price determined through Relative valuation and value investing methodology (Assuming 15% and 85%
weight respectively).

Valuation Summary Price Weight Summary

Relative Valuation
P/E 273.644 7.5% 10% Downside
EV/EBITDA 506.77 7.5% 105% upside
Earning Power Valuation(EPV) 251.4 85.0% 2% Upside
Fair Price 272.22
Current Share Price 247

VALUATION DETAILS

1. Relative Valuation:
Following PE based approach; HEG is valued at INR 273.64, on the basis of 2010 EPS of INR67.4 and PE of
4.06.
%
Forecast Earnings 2009(e) 2010(e) change
Earnings per share (in INR) 48.5 67.4 39%
PE(x) 5.65 4.06 -28%
Dividend per share (in INR) 6.5 10 54%
Dividend Yield 2.37% 3.65%
Source*Reuters

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Relative PE valuation
HEG 2010
EPS 4.06
2010PE(x) 67.4
Target Price 273.644

2. EV/EBITDA Based Valuation

Based on EV/EBITDA approach, we have valued HEG at INR506.77, on the basis of 2010 EBITDA of

INR5972M and EV/EBITDA multiple of 3.04.

%
HEG 2009e 2010e Difference
Net Sales 13,283,000 17,411,000 31.1%
EBITDA 4,606,000 5,972,000 29.7%
EBIT 3,991,000 5,296,000 32.7%
Net Income 2,168,000 3,110,000 43.5%
*Source: Reuter

EV/EBITDA
All figures are in INRM ,except per share data
HEG 2010
EBITDA 5972.00
2010 EV/EBITDA(x) 3.04
EV 18154.88
Net Debt 8820.4
Market Value of Equity 11443.21
Shares 41
Target Price 506.77

3. EPV Valuation

EPV valuation is as given below, Our EPV calculation represent 11% potential upside from its current
share price.
Valuation
Summary
Current Share Price 247
EPV* 312.137
Intrinsic Value 279.30
Entry Price* 251.37
*Please see Exhibit 1 for definitions

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4. Sensitivity Analysis

We did different scenario analysis for various WACC, CA and safety margins. Our selected scenario is in black.

Sensitivity
Table
WACC 9% 10.00% 11.00% 12.00% 12.97% 13.97% 14.97% 15.97%
EPV* 530.5 459.2 400.9 352.2 312.13 276.7 246.1 219.2
Safety Margin* 10% 10% 10% 10% 10% 10% 10% 10%
CA* 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75
Intrinsic Price 497.6 426.3 368.0 319.4 279.3 243.9 213.2 186.4
Entry Price* 447.9 383.7 331.2 287.5 251.4 219.5 191.9 167.8
*Please refer exhibits 1 for definitions

RISK ANALYSIS

 Overall revenue projections, profitability and forecasted EPS would depend upon the sustained
demand from steel sector, Revenue growth may remain modest if economy recovery (growth in
GDP and steel sector growth) is lower than forecasted growth which will result in longer time to
realize upside potential in share price.
 Historically, HEG has managed its debt well and has brought it down from 61% of total assets in
FY07 to 52% of total assets in FY09. At present Indian market is highly liquid but interest rate hikes
are expected in first quarter of FY10 by RBI (Reserve Bank Of India), which may result in added
financial burden to HEG. If we compare D/A ratio with industry average, Industry D/A ratio stands at
21.11% which is significantly lower than HEG’s D/A ratio of 52%.

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RECOMMENDATION

 We recommend HEG to investors as “BUY” at current price of INR247.

 Please consider your position carefully ,once asset price appreciates by 25%-30%
 In case share price falls, Please consider buying more so that your average cost of ownership
goes down.
 Please diversify your portfolio, you may get less return in the short term, but it is always a
better and positive investing strategy to minimize overall market risk and maximize the returns
 Please discuss your investment strategy with your financial advisor before making investment
decisions

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EXHIBITS

EXHIBITS 1: ABBREVIATIONS

Abbreviations & Definitions

It is an estimate of the value of a company from its ongoing

EPV Earning Power Value operations
The intrinsic value (IV) of a potential investment is arrived at by
comparing the results of the Net Asset Value
Intrinsic Value (NAV) and Earnings Power Value (EPV)
Replacement Value of the Assets, taking in to considerations of
tangible and intangible assets such as customer relations,
NAV Net Asset Value product portfolio and licenses.

It is net difference between EPV per share and replacement

CA Competitive Advantage value of asset per share
It is the risk averse strategy in which, investor decides and apply
a specific margin of safety to intrinsic value of the firm. Margin
of safety depends upon firm revenue growth, management
Margin of Safety capability, and market share and risk appetite.

Entry Price It is the intrinsic share value with margin of safety

This captures the income-operating and non operating but
PBT Profit Before Tax before Tax

This captures the income-operating and non operating but after

Tax, Depending upon Industry, Tax Assets or Liability can affect
PAT Profit After Tax overall profitability of the Firm
Operating Margin It’s a ratio of operating income to Sales.
Net Profit Margin It’s a ratio of Net income to Sales.
Beta It's measure of stock volatility against Stock market

Source Wiki:In statistics, regression analysis refers to

techniques for modeling and analyzing several variables, when
the focus is on the relationship between a dependent variable
Regression and one or more independent variables

Volatility It is pace through which stock prices moves up or down

ROE Return on Equity It’s a ratio of net income to Equity of the firm
ROA Return on Asset It’s a ratio of net income divided to Total Asset of the firm

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EXHIBITS 2: RATIO ANALYSIS

2009 2008 2007 2006 2005

Sales Growth 8% 13% 55% 16% 18%
Operating Profit Margin 26% 31% 23% 22% 17%
Net Profit Margin 10% 15% 9% 7% 9%
ROE 18% 27% 21% 12% 14%
ROA 6% 10% 5% 3% 5%
Current Ratio 6.5 6.6 5.9 6.7 3.1
D/E 1.5 1.3 2.5 2.5 1.5
D/A 0.521 0.5 0.6 0.6 0.5
A/R Turnover 3.2 3.4 4.3 4.5 4.5
Days of sales outstanding 113.9 107.5 85.5 80.8 81.3
Inventory Turnover 1.7 2.2 2.1 1.9 3.0
Inventory Turnover days 213.1 167.7 174.1 190.7 120.6
Operating Cash Flow growth -24% 193% -166% -171% -22%
Capex as % of Sales 13% 5% 7% 23% 60%
Cash in Hand 6.4 43.2 103.3 130.5 20.3
Debt as % of (Expense +
Capex) 91% 95% 121% 135% 68%
Debt as % of Revenue 80% 71% 101% 136% 99%
Interest Coverage 4.1 5.7 3.7 4.3 8.1

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EXHIBITS 3: REGRESSION ANALYSIS

HEG VS SENSEX (1 YEAR RETURN ANALYSIS)

Heg Vs. Sensex y = 0.5439x + 0.0016

20% R² = 0.2564

15%

10%

5% Heg

0% Linear (Heg)
-20% -10% 0% 10% 20%
-5%

-10%

-15%

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EXHIBITS 4: INCOME STATEMENT

*All Figures are in INR-M

2009 2008 2007 2006 2005

INCOME :
Sales Turnover 10529.8 9790 8675.3 5604 4818.2
Excise Duty 272.4 321.1 521.5 361.3 262.1
Net Sales 10257.4 9468.9 8153.8 5242.7 4556.1
Other Income 171.5 337.5 281.7 99.1 64
Stock Adjustments 562 251.5 353 565.3 -31.5

Total Income 10990.9 10057.9 8788.5 5907.1 4588.6

EXPENDITURE :
Raw Materials 2686.3 2918.5 3054.2 1959.2 1350
Power & Fuel Cost 1750 1835.4 1769.6 1357.5 1121.7
Employee Cost 370.7 351.8 351.8 326.8 266.3
Other Manufacturing Expenses 940.4 658.3 662.8 419.6 381.8
Selling and Administration Expenses 1235.6 1048.6 883.4 600.6 588.2
Miscellaneous Expenses 1268.9 184.9 49.8 35.8 38.3
Less: Pre-operative Expenses Capitalized 0 0 0 0 0
0 0 0 0 0
Total Expenditure 8251.9 6997.5 6771.6 4699.5 3746.3
0 0 0 0 0
Operating Profit 2739 3060.4 2016.9 1207.6 842.3
Interest 669.6 537.6 540.3 281.9 103.6
Gross Profit 2069.4 2522.8 1476.6 925.7 738.7
Depreciation 455.5 450.9 476.4 396.2 243.2
Profit Before Tax 1613.9 2071.9 1000.2 529.5 495.5
Tax 525.5 702.9 118.5 51.1 61.2
Fringe Benefit tax 4.8 4.3 3.6 7.1 0
Deferred Tax 13.7 -98.9 139.7 82 22.8
Reported Net Profit 1069.9 1463.6 738.4 389.3 411.5

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EXHIBITS 5: BALANCE SHEET

*All Figures are in INR-M

2009 2008 2007 2006 2005

Inventories 409.73 273.38 280.89 214.13 104.35
Sundry Debtors 328.54 288.35 203.13 124.04 107.27
Cash and Bank 6.38 43.19 103.25 130.47 20.32
Loans and Advances 162.69 212.05 131.21 115.7 66.49
Total Current Assets 907.34 816.97 718.48 584.34 298.43
Gross Block 853.46 795.03 917.33 849.18 551.53
Less : Accumulated Depreciation 289.44 246.26 267.49 221.35 184.11
Less: Impairment of Assets
Net Block 564.02 548.77 649.84 627.83 367.42
Capital Work in Progress 134.23 56.47 23.14 35.69 210.8
Investments 83.54 30.32 56.46 30.14 30.14
Miscellaneous Expenses not written off 1.39 2.43 3.47 4.52 0
Deferred Tax Assets 3.75 2.34 3.51 6 3.6
Total Asset 1694.27 1457.3 1454.9 1288.52 910.39
Current Liabilities 89.54 88.89 74.59 65.98 76.12
Provisions 50.43 35.48 47.31 21.51 19.12
Total Current Liabilities 139.97 124.37 121.9 87.49 95.24
Deferred Tax Liability 78.73 75.96 87 75.52 64.92
Secured Loans 664.09 617.45 724.42 669.05 441.7
Unsecured Loans 217.95 94.32 163.4 135.93 13.15
Total Debt 882.04 711.77 887.82 804.98 454.85
Share Capital 42.57 44.32 40.31 40.31 40.31
Reserves Total 533.7 483.44 317.87 280.22 255.07
Equity Share Warrants 17.26 17.44 0 0 0
Total Shareholders Funds 593.53 545.2 358.18 320.53 295.38
Total Liability 1694.27 1457.3 1454.9 1288.52 910.39

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EXHIBITS 6: CASH FLOW

*All Figures are in INR-M

2009 2008 2007 2006 2005

Cash Flow Summary
Cash and Cash Equivalents at Beginning of the year 431.9 1032.5 1304.7 203.2 143.8
Net Cash from Operating Activities 674.9 891.9 304.8 -459.1 643.2
Cash Flow From Operating Activities 0 0 0 0 0
Net Profit before Tax & Extraordinary Items 1613.9 2072 1000.7 530.1 496.1
Adjustment For
Depreciation 455.5 450.9 476.4 396.2 243.2
Interest (Net) 561.2 428.1 386.7 237.6 93.2
Dividend Received -1.8 -0.3 0 -0.3 -1.6
P/L on Sales of Assets -28.1 -137.4 -0.9 -6.2 -0.6
P/L on Sales of Invest 0 0 0 0 0
Prov. & W/O (Net) 10.4 10.4 9.9 7 10.6
P/L in Forex
Fin. Lease & Rental Chrgs
Others 17.8 -0.6 0 0 0
Total Adjustments (PBT & Extraordinary Items) 1015 751.1 872.1 634.3 344.8
Op. Profit before Working Capital Changes 2628.9 2823.1 1872.8 1164.4 840.9
Adjustment For
Trade & 0th receivables -401.9 -852.2 -790.9 -167.7 -111.8
Inventories -1363.4 75.1 -667.6 -1097.8 -100.2
Trade Payables 29.3 146.8 217.9 88.9 98.2
Loans & Advances 312.3 -593.6 -204.8 -388.2 -22.1
Others 0 0 0 0 0
Total (OP before Working Capital Changes) -1423.7 -1223.9 -1445.4 -1564.8 -135.9
Cash Generated from/(used in) Operations 1205.2 1599.2 427.4 -400.4 705
Interest Paid(Net)
Direct Taxes Paid -530.3 -707.3 -122.6 -58.7 -61.8
Advance Tax Paid
Others
Total-others -530.3 -707.3 -122.6 -58.7 -61.8
Cash Flow before Extraordinary Items 674.9 891.9 304.8 -459.1 643.2
Extraordinary Items
Net Cash Used in Investing Activities -1550.2 413.8 -709.1 -1462.5 -2376.1
Net Cash Used in Financing Activities 507.2 -1906.3 132.1 3023.1 1792.3

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DISCLOSURES AND DISC LAIMER

CONFIDENTIALITY

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or
redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient only.

ANALYST CERTIFICATION

The Director of Research and Analysis at White Monk Research & Analysis Private Limited (White Monk), certifies that the views
expressed in this research report accurately reflect his personal views about the subject securities and issuers. No part of White Monk
compensation is or will be directly related to the specific recommendations or views contained in this research report.

LEGAL DISCLAIMER

White Monk provides research and objective analysis of selected companies, industry segments and emerging markets for the
institutional and investment communities. White Monk provides research both on an original basis and sub-contracted basis. White
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The information, opinions, scientific data, quantitative and qualitative statements contained in this report have been obtained from
research, trade and statistical services as well as other sources believed to be reliable. The information, opinions, or recommendations
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Monk, or its representative will not be liable for the recipient’s investment decision based on this report.

White Monk ’s research division does not assume any liabilities for any investment decisions based on this research.

The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are
serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an
opinion on them. The authors also have not conducted a thorough review of the financial statements as defined by standards established
by the AICPA.

White Monk ’s opinions and estimates reflect current judgment; they are neither all-inclusive nor can they be guaranteed to be complete
or accurate. The opinions expressed by our analysis are subject to possible change without notice. This company review contains forward
looking statements, which involve risk and uncertainty. The company review in these pages is not a complete analysis of every material
fact regarding this company, industry, or security. The information in this review is not intended to be used as the primary basis of
investment decisions, and because of individual or investment objectives it should not be construed as advice designated to meet the
particular investment needs of any investor.

White Monk, officers, directors, employees or its affiliates may or may not hold positions in the companies /stocks mentioned herein. We
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payment methods will compromise the objectivity and integrity of any company review or updates produced. Investors are expected to
take full responsibility for any and all of their investment decisions.

The information in this report is not a representation or warrant and is not a solicitation of any offer to buy or sell this security. The
recommendation made herein does not constitute an offer to sell or solicitation to buy any of the securities mentioned. No
representation can be made that recommendation contained herein will be profitable or that they will not result in loss.

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