HEG Limited's Q1 FY26: Is This Graphite Giant's Turnaround Fueled by Steel's Green Revolution?

After navigating a challenging period, HEG Limited has delivered a strong performance in Q1 FY26, signaling a potential turnaround and setting a positive tone for the financial year ahead. As a key player in the graphite electrode (GE) market, a critical component for Electric Arc Furnace (EAF) steelmaking, HEG’s trajectory is deeply intertwined with global steel trends and the broader push towards decarbonization.

Let’s dive into the numbers and strategic moves that defined this quarter.

Riding the EAF Wave: A Look at the Industry and HEG’s Position

The global steel industry witnessed mixed signals in H1 2025. Overall crude steel production saw a modest 1.9% decline year-on-year, primarily dragged down by weaker output in China (-2.4%). What’s particularly noteworthy is China’s increased finished steel exports, which continue to flood global markets, putting pressure on both steel and electrode prices. Outside China, production also saw a marginal dip of 1.2%.

However, India stands out as a beacon of growth, reporting a robust 9.2% increase in steel production, buoyed by strong infrastructure spending and a thriving automotive sector. This domestic strength provides a crucial buffer for Indian manufacturers like HEG.

Despite the short-term demand softness and “unviable” spot market prices for graphite electrodes, the long-term outlook remains compelling. The global transition towards lower-emission EAF steelmaking, driven by stringent decarbonization targets, is a significant tailwind. Over the next five years and beyond, this shift is projected to create substantial incremental demand for graphite electrodes – an estimated 150,000 to 200,000 tons annually by 2030, excluding China. HEG is actively positioning itself to capitalize on this megatrend.

Sales Performance: A Q1 Rebound

After a soft Q4 FY25, HEG’s revenue from operations showed a welcome bounce in Q1 FY26.

Standalone revenue surged to ₹612.78 crores in Q1 FY26, marking a healthy 14.2% increase quarter-on-quarter (QoQ) from ₹536.58 crores in Q4 FY25. On a year-on-year (YoY) basis, revenue also saw a respectable 7.2% growth from ₹571.46 crores in Q1 FY25. This uptick is largely attributable to the company maintaining high capacity utilization, operating at over 90% of its newly expanded 100,000-ton capacity.

While management noted that graphite electrode prices remain challenged and “unviable” at current levels, the strong volume off-take at high utilization indicates resilient demand for HEG’s products, suggesting that volume growth is currently the primary driver of sales rather than price appreciation. The company expects capacity utilization to be around 85% for the remaining three quarters of the fiscal year, which implies sustained, albeit slightly moderated, sales volumes.

Unpacking the Profitability Surge: More Than Meets the Eye?

This quarter’s earnings performance is arguably the most striking highlight.

HEG swung from a standalone Profit Before Tax (PBT) loss of ₹71.60 crores in Q4 FY25 to a robust profit of ₹92.42 crores in Q1 FY26. Similarly, Profit After Tax (PAT) witnessed a dramatic turnaround from a loss of ₹61.68 crores to a profit of ₹71.80 crores. This translates into a basic EPS of ₹3.72, a significant recovery from the negative EPS of the previous quarter.

The substantial improvement in profitability is largely due to the absence of the “loss on fair value of investment in GrafTech” that weighed down Q4 FY25’s EBITDA. When we look at operational EBITDA, which strips out such one-off impacts, the picture is clearer: Q1 FY26 reported an impressive 23% operational EBITDA margin, a strong rebound from the 17% average seen in FY25. This indicates genuine operational efficiency and a better cost structure.

Looking at expenses, “Other expenses” saw a sharp decline from ₹271.27 crores in Q4 FY25 to ₹127.25 crores in Q1 FY26, consistent with the explanation regarding the GrafTech MTM impact. Cost of materials consumed remained relatively stable, while power and fuel costs increased, likely due to higher production volumes. Other income also contributed, increasing from ₹20.44 crores in Q1 FY25 to ₹47.68 crores in Q1 FY26, though it’s not the primary driver of the significant earnings growth.

Given these dynamics, HEG appears to be in a “Turnaround” phase, showing strong recovery from a challenging period, with clear aspirations to be a “Fast Grower” fueled by strategic capacity expansion and diversification into Greentech.

Key Business Metrics & Strategic Moves

HEG’s management is proactively shaping the company’s future, as evidenced by several key metrics and strategic announcements:

• Capacity Expansion: The company recently expanded its graphite electrode capacity from 80,000 to 100,000 tons per annum by November 2023. Not content with this, HEG has announced plans for another expansion, targeting 115,000 tons by January 2028. This additional 15,000 tons will entail a CapEx of approximately ₹650 crores.
• Funding the Future: This growth CapEx is planned to be funded primarily through internal accruals, with debt as required. Management expressed confidence in funding a combined CapEx of around ₹1,000 crores for both GE and the anode plant over FY26 and FY27, showcasing robust financial health.
• Treasury & Borrowings: As of June 30, 2025, HEG maintains a strong treasury size of approximately ₹977 crores (excluding associates and subsidiaries). Critically, the company remains long-term debt-free, with short-term working capital borrowings remaining stable at ₹586 crores. This strong balance sheet provides ample flexibility for future growth initiatives.
• Greentech Diversification: A significant strategic shift is HEG’s foray into Greentech. The anode plant, with a 20,000-ton capacity, is on track to be operational by March 2027, with an estimated CapEx of ₹1,800-1,900 crores, of which HEG has committed ₹750 crores as equity. This move signals a forward-looking approach, diversifying revenue streams and aligning with global decarbonization trends. For FY26, the company expects ₹500-600 crores revenue and ₹200-225 crores EBITDA from its hydro assets and battery company (RePlus).
• GrafTech Investment: HEG’s 10% stake in GrafTech is positioned as a strategic investment for capital appreciation, leveraging GrafTech’s integrated raw material advantage. While GrafTech’s debt is a concern, HEG believes the industry rebound will help mitigate this. This investment is purely financial and separate from HEG’s core operational strategy.

Investment Insight: A Calculated Play in a Cyclical Sector

HEG’s Q1 FY26 results present a compelling narrative of operational resurgence and strategic foresight. The company has demonstrated its ability to rebound from a tough quarter, driven by strong volumes and efficient operations. The long-term demand for graphite electrodes, underpinned by the EAF transition, provides a favorable backdrop, despite current price pressures.

Management’s aggressive CapEx plans, funded primarily by internal accruals and without adding long-term debt, underscore confidence in future demand and financial discipline. The diversification into Greentech, particularly the anode business, is a calculated move to tap into emerging high-growth sectors, promising future revenue and earnings streams beyond traditional graphite electrodes.

While the graphite electrode market remains cyclical and subject to global steel production trends and competitive pricing, HEG’s position as a low-cost producer, coupled with its strategic expansions and foray into Greentech, offers an interesting proposition. Investors should monitor the realization of expected CapEx timelines and the actual firming up of GE prices as global industry utilization improves.

In the context of the Indian economy, which favors domestic-growth themes and infrastructure-led cyclicals, HEG’s alignment with India’s robust steel growth and its strategic shift towards green technologies positions it favorably for future opportunities. The company’s ability to maintain high utilization and strong operational EBITDA amidst challenging market conditions speaks volumes about its resilience and management’s capability to deliver on future growth promises. 🚀

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