Grasim Industries, flagship company of the AV Birla group, has agreed to sell its sponge iron business, Vikram Ispat, to Welspun Power and Steel for around Rs1,030 crore.

Under a court approved scheme of arrangement, Grasim would transfer its sponge iron business, Vikram Ispat, into a new special purpose vehicle (SPV), to be formed as a subsidiary of Grasim. The SPV, which would be funded by Welspun Power and Steel through a mix of equity investment and debt, would then acquire the sponge iron business, Grasim said in a statement.

Welspun would make the payments to Grasim using funds from the SPV and the transaction is expected to be completed within the next six months, the statement added.

Grasim plans to use the proceedings from the sale to boost its core businesses of viscose-staple fibre and cement.
 
The sponge iron business, which generated revenues of Rs950 crore for Grasim, was considered a non-core business while VSF and cement were its key growth drivers.

Sponge is used by many Indian steel companies as a substitute for scrap iron for making steel. At current prices, sponge iron producers sell at a margin of around 13-15 per cent, depending upon the cost of iron ore and coal supplies.

Grasim's plant does not have steel-making capacity and no regular gas supply.

Set up at Raigad, in Maharashtra in 1993, the 9,00,000 tpa Vikram Ispat is the largest merchant producer of sponge iron in India. The unit can produce both HBI (hot briquetted iron) and DRI (directly reduced iron) from the same . Vikram Ispat generated sales of Rs50 crore during FY08. 

The capital employed in the sponge iron business has came down from Rs552 crore in 2006-07 to Rs459 crore in fiscal 2008. Output also declined 18 per cent to 1.4 lakh tonne during the fourth quarter of 2007-08.

Welspun Power and Steel is a Gujarat-based closely-held company. It manufactures sponge iron at its plant at Anjar, Gujarat.