Fitch Ratings has today assigned a 'AA-(ind)' (AA minus(ind)) rating to India's HEG Limited's (HEG) proposed INR750m Non-Convertible Debenture (NCD) programme. Simultaneously, agency has affirmed HEG's National Long-term rating at 'AA-(ind)' (AA minus(ind)), with a Stable Outlook, and its INR300m NCD programme at 'AA-(ind)'(AA minus(ind)). Fitch has also affirmed the ratings of HEG's bank loans as follows:
The ratings continue to reflect HEG's position as one of the leading Indian players in the technology-intensive graphite electrode (GE) industry and its improving profitability over last three years. After the divesture of its loss-making steel business in FY08, the company has been focusing on its core business of GE manufacturing. The ratings also take into account the increase in HEG's capacity once the proposed capex plans are completed. However, Fitch notes that the company may phase its expansion plans due to the current slowdown in global steel production. The company's proposed INR750.0m non-convertible debenture programme is to meet its long term working capital requirement.
The key concerns for the ratings emanate from the limited availability and high prices of the main raw material, needle coke, as it is produced by few manufacturers globally. However, higher than anticipated softening of crude oil prices in recent times and reduction in steel production by major steel producers across the globe, will impact the demand for GE and needle coke in short-to-medium term; which may result in some softening of needle coke prices. The industry also remains exposed to anti dumping issues.
HEG is in the process of setting up a 32MW power plant and expanding its GE capacity to 80,000 metric tonnes per annum (MTPA) for a total estimated cost of INR2.8bn. These expansion plans are expected to be completed by FY09 and FY10, respectively. Any large debt-funded capex plan or significant fall in profitability, putting pressure on the credit profile, would act as a negative rating trigger. Positive rating factors include greater stability in HEG's profit margins with significantly increased size and consistent improvement in its financial leverage.
Founded in 1977, HEG has an existing GE capacity of 60,000 MTPA. The company has achieved net sales of INR5326.8m in H1FY09 with an EBITDA margin of 36.6% and its net profit and net margin for H1FY09 stood at INR610.0m and 11.5%, respectively. HEG's net margin has dropped from the H1FY08 level (14.6%) due to forex losses. In FY08, it reported net sales of INR9459.7m with an operating EBITDA of 28.9% (FY07: 21.3%) and a net profit margin of 15.5%. The improvement in its financial performance was primarily a result of better realisations and higher volumes from expanded capacities in the GE business.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
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