HEG share price: HEG rallies 20%; BofAML sees 100% upside

NEW DELHI: Shares of HEG rallied 20 per cent after BofA Merrill Lynch initiated coverage on the company with a ‘Buy’ rating and price objective of Rs 6,700, indicating an upside of over 100 per cent against previous close of Rs 3,225.90.

The scrip jumped 20 per cent to Rs 3,871.05 in Wednesday’s trade.

The global brokerage firm added that HEG’s balance sheet is strengthening rapidly with net cash/book equity seen reaching 50 per cent by FY21E. It has announced its intention to expand its plant (already the world’s largest outside China) from 80K tpa to 100K for a maximum Rs 700 crore.

“We expect it to maintain its 30-40 per cent payout ratio implying an 8.5 per cent dividend yield. Investing in related industries is possible, but we see limited options and instead look for further potential shareholder payouts,” said BofA Merrill Lynch in a report on Wednesday.

The stock is trading at 3.8 times P/E and 2 times EV/EBITDA on FY20E – well below peers in Japan and China. “We attribute this to the current weakness of Indian equities and investors’ lack of conviction in the extent and longevity of the cycle. Our price objective is set at average prior cycle peak earnings/trough level multiples of 7.5 times P/E and 5.2 times EV/EBITDA for FY20E,” said BofA Merrill Lynch.

Easing of China’s antipollution efforts, faster capacity additions and a weaker US dollar are key risks for HEG stock price.

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