HEG to hive-off steel operations for Rs 88.5cr

HEG Ltd has announced that the Company's Board has approved the sale of its fully integrated steel business (including sponge iron, steel billets and a 13 MW waste heat recovery power system power plant) to Jai Balaji Industries Ltd of Kolkatta. The Company will transfer the ownership of the unit for a total consideration of Rs 88.5 crore for fixed assets. Net current assets would be transferred on a mutually agreed price on August 01, 2007.

Being a non-core business, the Durg steel unit will be de-merged from the Company with effect from August 01, 2007. Post the de-merger the Company will emerge as a focused graphite electrodes Company where it enjoys a well-established global position as a manufacturer of world-class graphite electrodes. The Company has a number of respected steel manufacturers - Arcelor Mittal, POSCO, Krupp Thyssen, US Steel, Nucor, and Usinor in its customer portfolio.

Commenting on the transaction, Mr. Ravi Jhunjhunwala, Chairman and Managing Director of the Company said:

"The decision to hive-off the steel business stemmed from our strong belier that HEG's core graphite electrodes business addresses a growing global market where HEG is already an established player that is well regarded for the quality of its products and commitment to its clients. I believe that driven by a greater focus on its core business operations, following the divestment in the steel business, HEG will be able to further strengthen its balance sheet and leverage its global market position and deliver progressive performance in the future."

Rationale for the transaction :

The divestment will allow the Company to focus on its core competence of graphite electrode production and power generation businesses. The key benefits of the transaction to the Company are:

- Complete focus on the graphite electrodes business, which has robust prospects. This will also assist the Company to strengthen its position as a dominant player in the graphite electrodes business with outstanding cost and quality advantages accruing from efficient processes and captive power generation.

- Reduction in debt will result in strengthening of the Balance Sheet as the Company intends to use proceeds from sale to retire debt. This will also reduce the Company's interest costs which will benefit net earnings going forward.

- Improvement in margins as the steel business was a low margin operation, which burdened the strong margin performance of the graphite electrode business at the corporate level.

- No further exposure to volatility of steel prices which is primarily market determined and is difficult to estimate future performance.

The steel business in Durg contributed Rs 197.0 crore to the Company's domestic sales in FY2007 and hence the Company's domestic sales are expected to decline adjusting to the sale of the unit. However, the Durg steel unit's profitability had been under pressure, with the unit registering a loss of Rs 4.21 crore at the PBIT level in FY2007. Therefore, from the earnings viewpoint, the Company's profitability and margins are likely to show significant improvement as those will now be driven by the robust performance of its core business operations.

The Company's core business operations include graphite electrodes and power. The products manufactured by the Company's graphite electrodes division find usage primarily in the steel industry, as electrodes in Electric Arc Furnaces (EAF) used in steel plants to melt steel scrap.

To further enhance its graphite electrode business, the Company recently announced that it will be investing Rs 35 crore towards de-bottle necking in its graphite electrode plant. This will increase the Company's total graphite electrode production capacity to 57,000 MT from 52,000 MT. The expansion is expected to be completed by Q4FY08.

The Company's power division is a strategic asset that lowers the cost profile of its graphite electrode production operations. Its output is intended primarily for internal consumption, providing the Company a competitive advantage against other players in the graphite electrode sector by the way of economical and reliable electric power supply - electric power is a key input in the manufacturing process of graphite electrodes.

During the last quarter the Company announced that it will set-up a second 33 MW thermal power plant at an investment of Rs 80 crore. The power plant will benefit from the current power situation in the Country and also sometime in the future if HEG goes in for another capacity expansion for its graphite electrodes, the power plant can meet the additional power need for these expanded capacities. The Company expects to commission the power plant by the first quarter of next financial year.

Details of the transaction :

The Durg steel facility will be sold with effect from August 01, 2007 to Jai Balaji Industries Ltd, of Kolkatta.

As per the hive off scheme and based on an independent valuation report, the fixed assets of the steel business have been valued at Rs 88.5 crore towards fixed assets, the net current assets would be transferred separately on the effective date of the transaction (August 01, 2007). Jai Balaji Industries will make cash payment to the Company towards consideration for the Durg unit.

M/s S S Kothari Mehta & Co, Chartered Accountants, were the advisors to the Company for this transaction. The transaction is subject to High Court and necessary statutory approvals that may be required by the Company and Jai Balaji Industries Ltd.