HEG Demerger: Breaking Up a Cash Cow? Understanding the Stock Split

HEG is not the largest company in the market, but it received a lot of attention recently due to a price surge in its stock. These gains have brought the stock close to its yearly peak.

HEG shares have gained 109% in a year and 27.5% since the beginning of this year.

HEG has now embarked on a strategic shift to maximise shareholder value. On 22 May 2024, the company unveiled its Composite Scheme of Arrangement.

This complex plan involves a demerger and subsequent merger, significant corporate transformation for the graphite giant.

Before delving deep into the demerger plan, here's a brief introduction to HEG.

About HEG

HEG was incorporated in 1972 as Hindustan Electro-Graphites. The company is among the leading graphite electrode manufacturer in India.

The company owns one of the largest integrated graphite electrode plants in South-East Asia that processes sophisticated ultra-high-power electrodes.

HEG is a flagship company of LNJ Bhilwara Group. HEG exports over 80% of its production to more than 25 countries that include the US, Canada, Germany, France, Italy, Australia, and South Korea.

The company has clientele including majors such as ArcelorMittal, Posco, ThyssenKrupp, US Dynamics, Nucor, Severstal, and Usinor to name a few.

Demerger of Graphite Business and a New Merger

The company approved the demerger of its graphite business into a new company. Alongside this, HEG plans to merge Bhilwara Energy into HEG Ltd.

According to an exchange notification on 22 May, the demerger will involve a share swap ratio of 1:1. This means shareholders of HEG Ltd will receive one fully paid-up equity share of Rs 10 each in the resulting graphite business company for every one equity share of Rs 10 each held in HEG Ltd.

For the merger, HEG specified that shareholders of the transferor company will receive eight fully paid-up equity shares with a face value of Rs 10 each in the resulting company (transferee company) for every thirty-five equity shares with a face value of Rs 10 each they hold in the transferor company.

The equity shares of the new resulting company will be listed on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The demerger is expected to be completed by 2025.

Rationale Behind Demerger Move

HEG Limited's demerger and merger strategy is driven by the intention to unlock shareholder value. The existing company aims to become a platform for green energy businesses, including hydro and wind energy, advanced carbon business, and other new-age opportunities.

By segregating businesses with varying risk profiles, HEG seeks to provide shareholders with greater flexibility to align their investment preferences and mitigate risks associated with the graphite business.

Ravi Jhunjhunwala, Chairman and Managing Director, CEO of HEG, highlighted that the growth drivers, risk profiles, and capital allocation requirements differ significantly between the graphite and green energy businesses.

Therefore, splitting the company into two independent, publicly listed entities will enable each to pursue its distinct strategic focus.

Strategic Focus Post Demerger

Riju Jhunjhunwala, Vice-Chairman of HEG Limited, emphasised that this step will result in more agile and competitive entities capable of seizing opportunities in the clean energy space.

Shareholders will benefit from holding shares in two publicly listed companies, each with a sharper strategic focus and enhanced investment profile. The turnover of the graphite business constituted 94.41% of HEG's total turnover in the financial year 2024.

By creating separate entities, HEG anticipates that both companies will be better positioned to achieve their respective growth and operational goals, thereby enhancing overall shareholder value.

HEG's EV Push: A Deep Dive

HEG isn't just riding a wave of financial success; it's making a calculated move to become a key player in the rapidly growing electric vehicle (EV) market.

The company is diversifying by pioneering the domestic production of graphite anode, a crucial component in lithium-ion batteries that power EVs and energy storage systems.

How is HEG Strategically Positioning Itself in the EV Market?

To capitalise on the untapped potential in India's EV sector, HEG has established a wholly-owned subsidiary, TACC, to oversee the construction of the country's first-ever domestic graphite anode manufacturing facility.

The board has approved a substantial budget of Rs 10 billion (bn) for Phase 1, aiming to establish a manufacturing facility with a production capacity of 10,000 tons of anodes per annum, expected to be operational by the second quarter of 2025.

Currently, India relies solely on imports for cells and battery packs used in EVs. HEG anticipates a significant increase in domestic demand for graphite anode as cell manufacturing begins to shift to India. This presents a golden opportunity for the company due to the projected rise in EV production over the next 3-5 years.

Their focus on a critical EV battery component allows them to become a significant player within the EV ecosystem.

How Will HEG's Graphite Unit Demerger Drive EV Market Growth?

The graphite unit is poised for substantial growth. By being the key supplier of graphite anodes, this unit will play a crucial role in the EV market's expansion. It will solidify the company's importance and position it for future advancements.

A Look at its Financials

HEG reported a consolidated revenue of Rs 5.5 bn for the March 2024 quarter, down from Rs 6.2 bn in the same quarter of the previous year. The company's net profit also declined by 67% to Rs 330 million (m) for the March 2024 quarter.

However, looking at the bigger picture, the company has demonstrated revenue growth of 25.2% on a compounded annual growth rate (CAGR) basis over the 2021-23 period. This performance can be credited to increasing sales.

While there was a good increase in revenue, the bottomline of the company also improved from a loss of Rs 0.2 bn in March 2021 to a profit of Rs 5.3 bn in March 2023.

Its net profit margin improved to 7.3% in FY23.

HEG's Financial Snapshot (2021-23)

Particulars	31-Mar-21	31-Mar-22	31-Mar-23
Revenues (bn Rs)	12.6	22	24.7
Revenue Growth (%)	-	74.6	12.2
Net Profit (bn Rs)	-0.2	4.3	5.3
Net Profit Margin (%)	-1.4	19.6	21.6

Data Source: Equitymaster

Moving forward, the company aims to enhance its performance in the upcoming quarters.

Conclusion

India ranks third globally in energy consumption and fourth in installed renewable energy capacity, which includes sources like solar, wind, hydro, and geothermal power.

As of March 2024, India has 190.57 GW of renewable capacity, including 45.88 GW from wind, 81.81 GW from solar, 10.35 GW from co-generation, 5 GW from small hydropower, 0.58 GW from waste to energy, and 46.92 GW from large hydro.

The Indian government, through the Ministry of New and Renewable Energy, aims to reach a renewable energy production capacity of 500 GW by 2030. This initiative is set to boost industry growth and foster increased investment in sustainable energy.

To support this goal, the government has introduced initiatives like the National Green Hydrogen Mission, the Production Linked Incentive Scheme for High-Efficiency Solar PV Modules, and the Carbon Credit Trading Scheme.

In this promising landscape, HEG, post-demerger and with its focus on green energy, is poised for success, aligning with the nation's ambitions for a more sustainable future.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions. Ensure that the investment aligns with your financial objectives and matches your risk tolerance level.

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