HEG to Demerge Graphite Business Amid Low Margins, Stock Falls 7%

HEG Announces Demerger of Graphite Business; Stock Plummets on Margin Concerns

HEG Ltd., a leading graphite electrode manufacturer, has announced the demerger of its graphite business into a new company and the merger of Bhilwara Energy with itself. This strategic move aims to unlock value for shareholders but has led to a significant drop in the company’s stock price.

Stock Market Reaction

Following the announcement, HEG’s stock fell by 7%, reaching a day’s low of ₹2,509.20. Despite a 60% rally over the past six months, the news of the spin-off led to traders offloading their shares, influenced by the company’s three-year low margins.

Business Demerger Details

The graphite business, which constituted 94.41% of HEG’s total turnover in FY24, will be spun off into a separate entity. This transition is expected to be completed by 2025. The new entity’s equity shares will be listed on both the BSE and the NSE.

Strategic Shift

Post-demerger, the existing company will pivot towards green energy, focusing on hydro and wind energy, advanced carbon business, and other new-age opportunities. This transformation is part of HEG’s strategy to create a platform for sustainable energy initiatives.

Share Swap Ratio

The demerger will involve a share swap ratio of 1:1. For the merger with Bhilwara Energy, the company has announced, “8 fully paid-up equity shares of ₹10 each of the transferee company for every 35 equity shares of ₹10 each of the transferor company.”

Management’s Perspective

Ravi Jhunjhunwala, Chairman and Managing Director of HEG Ltd., stated that this strategic segregation will provide shareholders with greater flexibility to align their investments according to their risk preferences. He emphasized that the demerger will de-risk the graphite business and enable both entities to pursue independent growth strategies.

“The existing company and the new company will script new paths as two independent, publicly listed companies. The underlying growth drivers, risk profile, and capital allocation requirements are fundamentally different in the graphite business compared to the green energy business,” Jhunjhunwala explained.

Shareholder Benefits

The demerger is designed to offer shareholders the opportunity to invest in businesses with varying risk and return profiles. This approach aims to maximize shareholder value by providing focused management and allowing each business to pursue its strategic goals independently.

Conclusion

While the market reacted negatively to the announcement due to current low margins, the strategic move is expected to position HEG favorably for long-term growth. The demerger will create specialized entities that can focus on their respective business domains, thereby enhancing overall shareholder value.

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