HEG Q3 FY26: Graphite Electrode Maker Posts Record Quarterly Profit Amid Strong Demand Recovery

The Madhya Pradesh-based company, which operates the world's largest single-site graphite electrode facility at Mandideep, has demonstrated exceptional operational excellence during the quarter. Revenue from operations stood at ₹656.33 crores in Q3 FY26, marking a 37.20% year-on-year increase, though experiencing a modest 6.13% sequential decline from the previous quarter's ₹699.22 crores. The company's ability to deliver record profitability despite a marginal revenue dip underscores improved operational efficiency and favourable cost dynamics.

However, investor sentiment turned cautious following the results announcement, with the stock declining 5.52% to close at ₹530.20 on February 11, 2026. The market's reaction appears to reflect concerns about valuation—the stock trades at a demanding 42x price-to-earnings ratio—and questions about sustainability of the current margin trajectory. Despite the day's decline, HEG has delivered impressive returns of 48.14% over the past year, significantly outperforming the Sensex's 10.41% gain by 37.73 percentage points.

Financial Performance: Margin Expansion Drives Profitability Surge

HEG's Q3 FY26 results showcase a dramatic improvement in profitability metrics, with the company achieving its highest quarterly operating margin in recent history. Operating profit before depreciation, interest, and tax (excluding other income) surged to ₹142.34 crores, translating to a robust 21.69% margin—the highest in at least eight quarters. This represents a significant 476-basis-point expansion quarter-on-quarter and a 500-basis-point improvement year-on-year, reflecting both pricing power and operational efficiency gains.

The company's profit after tax margin of 31.53% for Q3 FY26 represents an extraordinary achievement, up from 20.50% in Q2 FY26 and 17.43% in the corresponding quarter last year. This 1,103-basis-point year-on-year expansion in PAT margin demonstrates HEG's ability to convert top-line growth into bottom-line performance. The standalone net profit of ₹141.83 crores also marked the highest quarterly profit, with earnings per share reaching ₹10.72—another record for the company.

On a half-yearly basis (H1 FY26), HEG reported net sales of ₹1,355.55 crores, representing a healthy 29.60% growth compared to the corresponding period last year. This sustained revenue momentum across the first half demonstrates the structural recovery in demand for graphite electrodes, driven by increased steel production globally and particularly in India. The company's ability to maintain pricing discipline whilst expanding volumes has been a key driver of the improved financial performance.

However, a notable aspect of the quarterly performance is the elevated contribution of other income, which stood at ₹101.96 crores in Q3 FY26, representing 41.42% of profit before tax. Whilst other income has been consistently strong—averaging over ₹90 crores in recent quarters—this high proportion raises questions about the sustainability of reported profitability purely from core operations. The company's treasury income from its substantial cash reserves and investments of ₹1,013.64 crores as of March 2025 contributes significantly to this line item.

Balance Sheet Strength: Zero-Debt Status Provides Strategic Flexibility

HEG's balance sheet remains a fortress of financial strength, with the company maintaining a zero long-term debt position as of March 2025. With shareholder funds of ₹4,453.77 crores and net cash status (negative net debt-to-equity ratio of -0.03), the company enjoys significant financial flexibility to pursue growth opportunities, weather industry downturns, or return cash to shareholders. The book value per share stands at ₹230.79, providing a solid foundation for the current market price of ₹530.20.

The company's current assets of ₹2,456.55 crores as of March 2025 comfortably exceed current liabilities of ₹1,085.49 crores, resulting in a healthy working capital position. However, one area warranting attention is the decline in debtors turnover ratio to 4.15 times in the half-year period—the lowest in recent years. This suggests either extended credit terms to customers or slower collection cycles, which could impact cash conversion efficiency going forward.

Fixed assets have grown to ₹1,894.33 crores as of March 2025, reflecting the company's continued capital investment in expanding and modernising its manufacturing facilities. HEG operates three power generation facilities with a total capacity of approximately 76.5 MW, which not only supports its manufacturing operations but also provides an additional revenue stream through surplus power sales. This vertical integration enhances operational efficiency and reduces dependence on external power sources.

Steel Industry Recovery: Tailwinds from Robust Demand

The graphite electrode industry's fortunes are intrinsically linked to steel production, particularly electric arc furnace (EAF) steel manufacturing, which uses graphite electrodes as a critical consumable. The strong performance in Q3 FY26 reflects a broader recovery in global steel demand and production, with India's steel sector experiencing robust growth. As the second-largest company in the Electrodes & Refractories sector, HEG is well-positioned to capitalise on this cyclical upturn.

The company's revenue growth of 37.20% year-on-year in Q3 FY26 significantly outpaced the sector's average growth, indicating market share gains or better realisation. The graphite electrode market had experienced severe pricing pressure and demand weakness during FY24 and early FY25, with HEG reporting a loss in Q4 FY25. The sharp recovery since then demonstrates the cyclical nature of the business and the importance of maintaining operational efficiency during downturns.

Looking ahead, several factors support continued demand strength: India's infrastructure push and manufacturing growth under various government initiatives, the global transition towards EAF steelmaking (which is more environmentally friendly than blast furnaces), and China's continued steel production despite economic headwinds. However, the industry remains vulnerable to Chinese competition, raw material price volatility (particularly needle coke), and energy costs—all factors that could impact margins in future quarters.

HEG's peer comparison reveals a mixed competitive picture. The company's P/E ratio of 41.68x sits below the sector average of approximately 52x, suggesting relative value compared to some peers like Raghav Productivity (70.02x) and RHI Magnesita (61.29x). However, HEG's return on equity of 7.68% lags significantly behind peers like Raghav Productivity (19.02%), Vesuvius India (13.93%), and RHI Magnesita (12.71%), indicating lower capital efficiency despite the recent operational improvement.

Valuation Analysis: Premium Pricing Reflects Cyclical Recovery

At the current market price of ₹530.20, HEG trades at a demanding valuation of 42x trailing twelve-month earnings—significantly above the sector median P/E of 12x. The stock's price-to-book value ratio of 2.30x appears reasonable given the zero-debt balance sheet and strong asset base, though it remains below peers like Vesuvius India (6.89x) and Raghav Productivity (16.21x). The enterprise value-to-EBITDA multiple of 42.82x reflects the market's optimism about the company's earnings trajectory following the recent recovery.

The valuation premium can be partially justified by HEG's market leadership position, zero-debt status, and the dramatic improvement in profitability. However, the stock's classification as "Very Expensive" by traditional valuation metrics warrants caution. The PEG ratio of 1.00x suggests the valuation is in line with growth expectations, though investors should note that the 5-year sales CAGR of 12.03% and EBIT CAGR of 15.53% include the highly profitable FY22-FY23 period when graphite electrode prices were at cyclical peaks.

The stock's 52-week range of ₹332.20 to ₹672.20 illustrates the volatility inherent in cyclical businesses. Currently trading 21.12% below its 52-week high and 59.60% above its 52-week low, HEG appears to be consolidating after a strong rally. The dividend yield of just 0.32% (₹1.8 per share) reflects a conservative payout ratio of 6.04%, suggesting management's preference to retain cash for potential expansion or to navigate future downturns.

Based on the company's improved operational performance, zero-debt balance sheet, and favourable industry dynamics, a fair value estimate of approximately ₹620-650 per share appears reasonable, implying 17-23% upside from current levels. This valuation assumes HEG can sustain operating margins in the 18-20% range (below Q3's exceptional 21.69% but above historical averages) and achieve revenue growth of 15-18% over the next 12-18 months.

Shareholding Pattern: Institutional Confidence Building Gradually

The shareholding pattern for Q3 FY26 reveals encouraging signs of institutional interest, with both foreign institutional investors and mutual funds increasing their stakes. Promoter holding rose marginally to 56.13% in December 2025 from 55.78% in the previous quarter, demonstrating continued promoter confidence. The promoter group, led by entities like Redrose Vanijya LLP (29.3%), Norbury Investments Limited (13.9%), and Microlight Investments Ltd. (12.09%), maintains a comfortable majority stake with zero pledging—a positive indicator of financial strength.

Foreign institutional investor holding increased to 8.53% in Q3 FY26 from 7.96% in Q2 FY26, marking the third consecutive quarter of FII accumulation. This steady increase from 7.08% in December 2024 to the current level suggests growing international investor confidence in HEG's recovery story. With 119 FII accounts holding the stock, the shareholder base appears well-diversified, reducing concentration risk.

Mutual fund holding also saw a positive trend, rising to 9.68% in Q3 FY26 from 9.33% in the previous quarter, with 20 mutual fund schemes participating. This reversal from the decline seen in Q4 FY25 (when MF holding dropped to 8.91% from 9.70%) indicates renewed domestic institutional interest. Combined institutional holding of approximately 20.67% provides a stable shareholder base, though the relatively modest level suggests room for further institutional participation as the company's performance stabilises.

Stock Performance: Volatility Reflects Cyclical Nature

HEG's stock performance over various timeframes illustrates the high-beta, cyclical characteristics of the graphite electrode business. Over the past year, the stock has delivered impressive returns of 48.14%, significantly outperforming the Sensex's 10.41% gain with a remarkable alpha of 37.73 percentage points. This outperformance extends to longer periods, with three-year returns of 162.59% dwarfing the Sensex's 38.81% gain—a testament to the company's recovery from the pandemic-era lows and subsequent commodity super-cycle.

However, recent price action reveals mounting pressure, with the stock declining 5.52% on February 11, 2026, following the Q3 results announcement. Short-term performance has been challenging, with the stock down 2.31% over the past week, 7.73% over the past month, and 15.09% year-to-date. This recent weakness, despite strong quarterly results, suggests investors are booking profits after the substantial rally and expressing concerns about valuation sustainability and margin durability.

The stock's beta of 1.25 confirms its high-volatility profile, with price movements amplified relative to the broader market. With a volatility of 39.72% over the past year—more than three times the Sensex's 11.52%—HEG clearly falls into the "high risk, high return" category. The risk-adjusted return of 1.21 over the past year, whilst positive, indicates that investors have been compensated for taking on this additional volatility, though the recent correction may test this relationship.

Investment Thesis: Cyclical Recovery Play with Execution Risks

HEG's investment case rests on several compelling factors: the company's dominant market position as India's largest graphite electrode manufacturer, its zero-debt balance sheet providing financial flexibility, and the recent demonstration of operational excellence with record margins. The structural drivers supporting steel demand—particularly India's infrastructure buildout and the global shift towards electric arc furnace steelmaking—provide a favourable long-term backdrop for graphite electrode demand.

The company's quality assessment of "Average" reflects its mixed financial track record, with return on equity of 7.68% and return on capital employed of 5.66% falling short of excellence despite recent improvements. Whilst the zero-debt status and lack of promoter pledging are significant positives, the modest capital efficiency metrics and high earnings volatility prevent a higher quality rating. The financial trend classification of "Positive" for Q3 FY26 acknowledges the recent improvement, though sustainability remains to be proven.

From a technical perspective, the stock remains in a "Bullish" trend despite recent weakness, with key support at the 52-week low of ₹332.20 and resistance at the 20-day moving average of ₹550.20. The stock's position below multiple moving averages (5-day, 20-day, 50-day, 100-day) following the recent decline suggests near-term technical weakness, though the longer-term uptrend from the 200-day moving average of ₹521.34 remains intact.

Outlook: Monitoring Margin Sustainability and Demand Trajectory

The outlook for HEG hinges critically on the sustainability of the exceptional margins achieved in Q3 FY26 and the continuation of favourable demand dynamics in the steel industry. Management commentary on order book visibility, pricing trends, and capacity utilisation will be crucial indicators to watch in coming quarters. The company's ability to maintain operating margins above 18-20% (below Q3's peak but above historical averages) will determine whether the current valuation premium is justified.

Key monitoring points include raw material cost trends (particularly needle coke and petroleum coke), energy costs given the company's substantial power requirements, and competitive intensity from both domestic peers and Chinese manufacturers. The company's cash deployment strategy will also be important—whether management opts for capacity expansion, debt-free acquisitions, higher dividends, or share buybacks could significantly impact shareholder returns.

For fresh investors, the current juncture presents a dilemma: the company has clearly demonstrated operational excellence and is benefiting from favourable industry dynamics, yet the valuation at 42x earnings leaves limited margin of safety. A more prudent approach would be to wait for a correction towards ₹480-500 levels (approximately 10% below current price) before initiating positions, or to build positions gradually through systematic investment rather than lump-sum deployment.

For existing holders who benefited from the substantial rally over the past year, the Q3 results provide validation of the turnaround thesis. However, with the stock trading at "Very Expensive" valuations and showing technical weakness, booking partial profits (25-30% of holdings) to de-risk positions appears prudent. Remaining holdings can be maintained with a trailing stop-loss around ₹480 to protect gains whilst allowing for potential further upside if margins sustain and demand remains robust.