HEG

Dear Shareholder,
 
 Indias economic development has brought tremendous success for the
 country in terms of a better global image.The eight per cent growth
 rate of Indias national income for three consecutive years is a true
 indication of its growth trajectory. Going forward, I expect the
 outlook on the economy to remain optimistic as it has many strong
 development indicators. Though the present level of inflation is
 considered a challenge to the growing potential of the Indian economy,
 the Reserve Bank of India has given top priority for maintaining price
 stability and for sustaining rate of growth.
 
 Both the savings and investment rates in the country are experiencing a
 faster rate of growth recently.  Policy measures undertaken in India
 recently have helped a lot in the economic progress. Some of the
 challenges being faced by the economy, such as infrastructure related
 problems are also being remedied through public, private and foreign
 investments.
 
 Coming to the business of graphite electrodes, demand for graphite
 electrodes in the Electric Arc Furnace (EAF) route of steel production
 has continued to grow. The EAF method of producing steel is growing at
 about 4 per cent every year. Since the business of manufacturing is a
 highly technology-driven process, there have been no new entrants in
 this industry ever since the past decade and hence the demand-supply
 situation remains favourable for graphite electrode manufacturers, in
 terms of volumes and realizations.
 
 The supply of graphite electrodes from Asian countries has shown an
 increasing trend because of efficient operations and modern facilities.
 HEGs position in this scenario is particularly strong as it operates a
 modern, technologically-advanced operation. HEG is known to produce
 superior quality of UHP-grade graphite electrodes. Its cost of
 production averages amongst the lowest in the world. The Company has
 thus been able to capitalize on a large percentage of this growing
 demand. Further, HEG has undertaken additional capacity expansion.
 
 Our earlier capex initiative of Rs. 35 crore towards de-bottlenecking
 in the graphite electrode operations has been successfully
 completed.The expansion in capacity has been done in the re-baking
 division of the graphite electrode plant. This expansion increases our
 total graphite electrode capacity to 60,000 MT. During FY 2008,
 capacity utilization at our graphite plant was close to an optimal
 level. In fact, we were able to enhance our annual production run rate
 in one of the months at 60,000 TPA level on a trial basis, by way of
 efficiently increasing the monthly production run rate.
 
 Given the robust demand prospects for graphite electrodes, we have
 recently announced further expansion of our graphite plant at
 Mandideep, increasing the production capacity to 80,000 TPA. This will
 have a contained capex of Rs. 190 crore, which is about 40 per cent
 less than HEGs expansion undertaken two years ago. This expansion
 positions HEG as the single largest site manufacturer of graphite
 electrodes in the world, which is a very significant achievement for
 the Company. The capacity expansion will be done by way of brown field
 expansion and de-bottlenecking of the existing capacities.
 
 At an expanded capacity of 80,000 TPA, we intend to optimize our
 product mix across key categories of graphite electrodes, with a
 continued focus on high-grade, value-added Ultra High Power products.
 In order to further support increases in graphite capacity, we are
 already in the process of implementing the expansion plan of captive
 power by 33 MW, at an investment of Rs. 90 crore, which is likely to be
 commissioned by March 2009, taking the total capacity to approximately
 77 MW.
 
 We took a strategic decision to hive-off our fully integrated steel
 business during the year. This business was running at sub-optimal
 levels and has found a more focused investor in the form of Jai Balaji
 Industries Limited (JBIL) of Kolkatta. The steel unit includes sponge
 iron, steel billets with a capacity of 100,000 MT and a 13 MW WHRS
 power plant. It was sold at a consideration of Rs. 88.5 crore for the
 fixed assets.The net current assets have been paid for separately on
 the date of effective transfer, i.e. 1st August, 2007.
 
 During FY2008, HEG revenues grew by 16 per cent to Rs. 946 crore
 against Rs. 818 crore in the previous year.  Exports grew by 48 per
 cent to Rs. 727 crore against Rs. 492 crore last year. PBT, for the
 first time, crossed the Rs. 200 crore mark, doubling to Rs. 207 crore
 from Rs. 100 crore in the earlier fiscal. Net profit shot up by 98 per
 cent to Rs. 146 crore against Rs. 74 crore in the previous year.
 
 The outlook for FY2009 remains buoyant as we expect to see the full
 benefits of the expanded capacities in the graphite segment resulting
 in higher volumes and increased realizations. Prices for needle coke,
 which is a key input in the production of graphite electrodes have also
 increased. However, we should be able to cover raw material costs and
 protect our margins, as we have already booked most of our capacities
 for calendar year (CY) 2008 at considerably higher prices. We are also
 actively sourcing additional needle coke supplies for our additional
 capacities. We remain largely self-sufficient in power, having access
 to a 30 MW thermal plant and another 13.5 MW hydroelectric plant.Our
 power business remains strong and will continue to deliver strong
 revenue and earnings performance.
 
 We are well-recognized in international markets for supplying best
 quality products, and have some of the largest and most respected
 brands in the steel industry as our customers. It will always be our
 endeavour to maintain the high quality standards that we are known for
 within the industry.
 
 With a view to sharing our growth performance with our shareholders,
 the Board of Directors is pleased to recommended a dividend of 100 per
 cent (Rs. 10 per share) for the current fiscal as against 50 per cent
 (Rs. 5 per share) in the previous year.This will amountto a total
 payout of Rs. 51 crore, which includes dividend tax.
 
 On behalf of the Board of Directors, I take this opportunity to express
 gratitude to all our customers, suppliers, employees, lenders and
 shareholders who have supported us in our work over the past years.
 
                                                       Ravi Jhunjhunwala
                                          Chairman and Managing Director