Godawari Power & Ispat Limited (GPIL) Earnings Call Transcript & Summary

Hi, everybody, and welcome to Godawari Power & Ispat earnings call to discuss the Q3 and 9-month FY '20 results. We have on the call Mr. B.L. Agrawal, Managing Director; Mr. Abhishek Agrawal, Executive Director; Mr. Siddharth Agrawal, Non-Executive Director; Mr. Sanjay Bothra, Chief Financial Officer; and Mr. Dinesh Gandhi, Director. We must remind you that the discussion on today's call may include certain forward-looking statements and must be therefore viewed in conjunction with the risks that the company faces. May I now request Mr. Dinesh Gandhi to take us through the company's business outlook and financial highlights, subsequent to which, we will open the floor for Q&A. Thank you, and over to you, sir.

Okay. Thank you. Good morning, everyone. I welcome you all to this conference call of Godawari Power & Ispat Limited to discuss the results for the quarter ended 31st of December 2019 and the future outlook of the company. I have with me Mr. B.L. Agrawal, Managing Director of the company; Mr. Siddharth Agrawal, Director -- Managing Director, Godawari Green Energy; Mr. Abhishek Agrawal, Executive Director; and Mr. Sanjay Bothra, CFO of the company. I trust that you have had a look at the earning results and quarterly presentation uploaded on the exchange and company's website. We are pleased to inform you that we have delivered a strong operating performance during the quarter under review with higher capacity utilization across the value chain despite headwinds in the market. This has helped us partially mitigate the sharp decline in the commodity prices, which declined approximately 15% to 20% Y-o-Y across the product range. The company has generated robust free cash flow, which has been mainly utilized towards long-term debt repayment. We continue to make significant progress in our stated objective of delivering an asset -- deleveraging and asset optimization. Some of the key highlights of the quarter were -- to start with, I'm happy to report that we have achieved 100% captive utilization of iron ore for our Chhattisgarh operations. The iron ore production was higher, 16% Y-o-Y. And overall, there was 10% to 15% increase in production across the value chain. This has resulted into the higher profitability. During the quarter, we have received environmental clearance for commencement of -- to production in rolling mill and 1 million tonne capacity of iron ore beneficiation plant, which will help us produce the high-grade pellet and other value-added products like wire rods, et cetera. We are progressing well towards increasing proportion of value-added product. Our -- during the current quarter, our rolling mill was commissioned. And subsequently, the -- subsequently, trial production has started. We expect to commence the commercial production within the next couple of days. On the deleveraging front, I'm happy to report that in Q3 we have repaid long-term debt of close to INR 60 crores, taking the total long-term repayment debt to about INR 1.6 billion during 9-month period ended December 2019. This is against our scheduled repayment debt of INR 1.03 billion. Consequently, our net debt-to-equity now has reduced to 1.1x against 3x at the close of FY '17 when the company's debt was restructured. Going forward, the company will continue the efforts towards the long-term value creation. Some of the key initiatives which the company is working towards are -- we have announced merger of Jagdamba Power. This will help us integrate our operations and rationalize operating costs, mainly the power cost. We are aiming towards the 100% utilization of the sponge iron for increased production of steel billets going forward and produce further value-added wire rods. Accordingly, we expect to save about INR 1,000 a tonne incremental production of rolled products once the commercial production is started. We will have an update on the high-grade pellet strategy, which the company has been discussing over the last couple of months in coming few months, once we are able to finalize the sales contract with the consumer in the Middle East and other markets. Talking about the industry scenario. Steel prices had corrected sharply in Q3 and over a period of last day about 12 months to a low of USD 420, and which has signed a sharp recovery by end of December, and it has closed almost to about USD 540 in the industrial markets. The short-term price outlook will be determined on how the China reacts on opening up the market. Any sharp increase in the export will cause steel prices to come under pressure. The short-term prices will further be determined by the outbreak of the coronavirus and the near-term prices will definitely be determined by that. As regards to the iron ore mining. We expect the domestic iron ore prices to remain firm in view of the closure of substantial mining leases in March '20 with the production of close to about 40% of Odisha's production, which is close to about 40 million, 50 million tonnes. The auction has started, and this has witnessed a very aggressive pricing. The bidding price ranges between 85% to 145% over the IBM-determined price. Despite the downturn in the industry, we will be well above our sustainable EBITDA guidance. Given the aggressive bidding witnessed in the auction of our Odisha iron ore, we expect the near-term iron ore prices to remain at an elevated level. Long-term prices will definitely be determined by the domestic and the international demand supply scenario and the prices prevailing in domestic and international market. Going forward, we are confident of delivering operating -- strong operating numbers baked by our integrated operations and captive iron ore mines. We are now open for the Q&A session.

[Operator Instructions] First question comes from Parthiv Shah Tracom Private Limited.

Congratulations for a decent set of numbers. Sir, my question is I was looking at your pellet production figures, both consolidated and stand-alone. And what I see is that stand-alone this particular quarter, if I annualize the numbers, you've done at a capacity of 2.3 mtpa vis-?-vis our rated capacity of 2.1. So I was just trying to understand that -- is it possible that going ahead, we can take some sort of clearances and achieve higher production rates from the existing plant without any CapEx? Is that a possibility?

Yes. Definitely, there is a possibility towards that. We are working on an approval for higher -- permission from the environmental ministry to produce the higher quantity of pellet, looking at the stable level of operations and better capacity utilization without any substantial CapEx in the existing pellet plant in Orissa as well as in Chhattisgarh. In fact, Orissa, we have already applied and the permission is awaited any time within a couple of days. And Chhattisgarh also, we expect to get an production approval for higher capacity. Abhishek, how much are we targeting there?

That is 2.4 million.

2.4 million tonne in Orissa. And how soon you expect this to target?

No, no, no. So in Orissa, we have -- we'll get the approval of 6.9 million -- 0.69 million tonnes against 0.6 million tonnes. And in Raipur, we have applied for an additional capacity of 0.3. So with the current capacity of 2.1, the new capacity, once the approval has been granted, will be 2.4.

2.4 million tonnes.

Yes. And for this, there will be no CapEx required. We will be achieving that rated capacity only by improving our operational efficiencies.

Efficiencies?

Yes.

I was just coming to that like a little positively surprised that this additional capacity comes from the same plant. So is it like the better quality ore or some coal adjustments that you're doing which is -- that debottlenecking is helping you to achieve this higher...

No -- so yes. So the main reason is -- I would say the main factor behind the additional capacity or even the current enhancement in the production is mainly due to the iron ore mining because building on that on the high-grade side, that's specifically improving on the production side as well as reducing our cost. That is the main reason.

I just wanted to understand our credit rating despite being so much of debt still lies at BBB+. So what are the prospects for the credit rating improvement? And along with that, reduction in our interest cost?

Regarding interest cost, we had already informed the -- earlier also that our long-term debt and working capital cost is expected to get reduced by 1% by end of March on our stand-alone as well as on our pellet plant operations. As regards to Odisha, the cost has already been reduced by 1.35% in the current financial year starting from April and which is quite reflected in our numbers also. Our interest cost is gradually going down. It is a combination of both the debt repayment as well as the reduction in the overall pricing for the debt that we have been discussing with the lender. We hope to achieve on our entire steel business debt by end of this March 2020. All the banks will approve and reduce the cost. So April already it will start reflecting. As regards to the credit rating, we have been discussing with the rating agencies but looking at the current industry scenario and a lot of volatilities. Rating in the agencies are not very much enthused about further upgrading at this point of time. Maybe the review will take -- detailed review will take place after the 31st of March after the audited numbers, and then only we expect some improvement in our ratings going forward further.

Sir, I also wanted to understand our high-grade pellets, which you are planning to have long-term exports. Do you think if that gets delayed, is it a possibility that we can still produce these high-grade pellets, which could be fed captively into our blast furnace and thereby reducing our cost and improving efficiency? Is that also a possibility?

Let me first clarify we don't have the blast furnace. Our capacities are all DRI linked. Further, Abhishek, you will take up this question, please?

Yes. So as Dinesh earlier pointed out, we don't have a blast furnace. So all our steelmaking is through induction furnace route. And yes, there is definitely a possibility going forward where we probably end up using the high-grade pellets and improve our efficiency on the steelmaking side and improve our cost when it comes to steelmaking. But that is a possibility we are already exploring on that front, but we have to probably -- we have to do some more analysis to come to a final conclusion.

I want to add further on this. Once we start using this high-grade pellet, we are -- not only on the pellet side, on the sponge iron side also. We are -- we have sought for an additional approval within the existing capacity by about 90,000 tonnes approximately of additional production over and above the 495,000 approved capacity currently. And the steel billet capacity also, we are taking the higher approval so that later on, we do not find any difficulty with regard to the capacity. And all these will be done with -- majorly through the operating efficiencies only.

Fantastic. And sir, just a final word on domestic as well as export demand scenario for pellets. I recollect you had some export orders in pellets. But now after the Chinese scenario with the coronavirus, how has the dynamics of the pellet industry changed for you?

I would request each participant to limit their questions. Let the other participants also -- give an opportunity to them. As regards to the exports, I would just like to say that because of this coronavirus, the market condition is currently uncertain. There are definitely delayed -- requests for the delayed shipment for the orders which has already been booked, and further orders are mostly on an extended steel side only. Limited number of orders are getting executed, which are mainly where the material is available on the port. So we have to wait and watch for the further clarity on this when the market clearly opens in China.

Next question comes from Niteen Dharmawat from Aurum Capital.

Sir, just wanted to know. What is the total net consolidated debt? And what is the guidance for the debt for next quarter and next year?

Our consolidated debt -- long-term debt is close to about INR 1,600 crores on the entire consolidated balance sheet. And next quarter, we aim to reduce our -- for the full year, our guidance was about INR 200 crores to INR 225 crores. And we will definitely be able to reach within that band, depending upon how the cash flows are there during the current quarter.

Okay. For the next quarter, how much will be the debt reduction? How much have you already reduced in the last 3 quarters?

No. Last 3 quarters, we have reduced about INR 1.7 billion, about INR 170 crores in the current year.

Yes. So maybe around INR 30 crores to INR 50 crores is what you have...

Yes, yes, yes. So that INR 30 crores to INR 50 crores ratio will depend upon what is the cash flow and how the situation emerges going forward.

Okay. And the next question is -- I think you have already answered part of it in the commentary. What is the impact this year of Orissa mining on iron ore prices? Are you considering...

Can you please come again? I'm not able to hear you properly.

Okay. Am I audible now?

Yes, yes.

Okay. So my next question you partly already answered in your commentary. It's related to the impact of Orissa mining auction, which is currently going on, on iron ore prices, especially considering the fact that not only exclusivity is happening but there is another scenario where the mines are getting acquired for the captive use. So they may not be available for merchant mining usage. So how will it impact the industry as a whole and the prices as such? Will there be any impact on GPIL, considering that 25% is still procured from the market? So I just wanted to...

Yes. Yes, sure. Like as regards to the Orissa mining auction and the near-term and long-term pricing outlook, near term will definitely be dependent on, say, near term meaning more close to next 6 months. So it will depend upon the current market conditions like looking at the current pricing, which is close to about INR 2,400 a tonne in Orissa for iron ore. And that is the [indiscernible] about it, diesel and transport costs, et cetera. And the long-term prices will definitely be determined that because of this premium, what is the long-term average selling price in the market, in the domestic market, plus the IBM -- royalty on IBM price plus the premium on iron ore. So we do expect that there will be an -- the prices will be higher, but it is very difficult to say it because market participants maybe have a different view what the prices will be eventually with the increase in supply will go down. So let's wait and watch for the market to determine as to how the pricing. But we still believe that the prices are likely to remain at an elevated level, looking at the kind of premium which is being paid. And India's 40% or 50% production is from the small companies and all of which are not going to get the mines in the auction. So the major companies are participating aggressively, and smaller companies will continue to depend on the merchant iron ore. So -- and Chhattisgarh. We have now covered almost 100% captive requirement from our mines. Orissa will continue to depend on the merchant purchases. But there, we are very close to the OMC. And we are competitively priced in some parts of the market with regard to our iron ore cost for Orissa pellet plant. And if the iron ore prices increase, the pellet prices is bound to increase. So we will be able to pass on the increased iron ore prices in case the prices increase further.

Next question comes from [ Shrimant Bhadoria ] from [ Unified Capital ].

Firstly, on the high-grade pellet. Given that the long-term contracts should have been initiated starting the calendar year and we are still working on that, what areas are there further left? Is that the gap between -- the conventional hybrid pellet is narrowed. That's why we are keeping it on hold. Are there any other area -- any other issues because of which we are not going ahead?

I will request our MD, Mr. B.L. Agrawal, to take up this question about the high-grade pellet. Hello?

Regarding the high-grade pellet, that is environmental clearance in the district of our beneficiation plant. In the next couple of days, we'll start producing the high-grade pellets. Initially, we consume the high-grade pellets now. And maybe after this financial year, starting April and March, we will negotiate with the overseas buyer. Currently, in the next 6 months, we'll be polishing about 1/3 the high-grade pellet and 2/3 the normal-grade pellet. But maybe September or October next year -- sorry, this current year, we will shift entire production to high-grade pellet only. The impact, 2.1 million tonnes or maybe 2.4 million tonnes. The differential in price between the low-grade and the high-grade pellet will generate -- with an income target [indiscernible] tonnes, but we are already negotiating with the buyers. We've already sent them the sample for approval. The sample has already been approved. Now we are waiting for the Vale to decide on the annual pellet premium high grade. Once the Vale decides to clear the annual premium, then we will find a contact with the overseas buyers.

Okay. When does usually Vale decides on the premium, sir? Like is it...

Generally, Vale decides every year in the month of January. But because we have policies in this market, the Vale has not declared the annual pricing, but they have declared the pricing only for the first quarter. I hope that by March or April, they will declare the interest rates.

Sure. So globally, where the shipments have been happening in the first few months in the calendar year '20, they're happening at the previous year's premium? Or any changes have happened?

No. Pellet premium was -- in fact, last 1 month, the pellet premium has also gone up. [indiscernible] has also gone up. Our international pricing for pellets is going up day by day. But ultimately, everybody, we are waiting for this, for the effect of the coronavirus, if it's controlled maybe, say next couple of weeks, when the market's really stable once again. But that will depend on the coronavirus impact on China.

My second question was on our export opportunity. In the recent past, we have benefited a lot because of the high-grade pellets that we export to the Chinese market. So in terms of shipments currently, are they still happening or it's on hold? Or are we looking to divert in the domestic markets? How is the scenario now?

Currently, the ongoing sequence, the buyer will tell you he will sell the [indiscernible] for about 10 to 15 days. And if that is a long-term buyer, so we agreed to [indiscernible]. In the future [indiscernible] and that will happen only after the holiday is over in China. That will be by -- maybe in a week's time, maybe 2 weeks, but everything depends on the coronavirus condition in China.

Sure. And how is the situation in the domestic market, sir? Is there enough demand for the offtake of the latest products that we make?

Yes. We generally keep at least 1 month of domestic orders in hand. And currently, we are maintaining the same. We don't feel any demand going down in the domestic market because the [indiscernible] are going up. The capacity utilization [indiscernible] is going up. The demand capability is also going up. With [indiscernible] how much it will take the supply in the commercial market will determine the future fair price in the country. With regards to the number of mines have been won by the bidder was actually convenient. So there's a possibility that our commercial market, that there may be a little bit of disruption in the setup of iron ore. If that happens, then definitely the fair price will go up drastically.

So I just wanted to have a little more on this point from the Orissa auction because there are multiple points that are kind of -- to be considered here. One is of course, the higher premium that we're seeing in the auction. Secondly, Mr. Gandhi also mentioned about the higher supply that could come and that could bring down the price. And with the government saying that they don't want any disruption to happen, so there could be -- I think at least the easy transfer is likely to happen on a smoother basis. But what is your feeling, sir? Does the -- best case, should the prices go up in the domestic market because of the much higher premium being paid for such a large capacity that are being auctioned? Should permanently the base price move up in the domestic market, sir? Should one look in that manner? Or are there any other points to be considered?

We have a total of about 80 million tonnes. Iron ore mines are going to be auctioned. Our most equitable mine has already been auctioned. And looking to the premium, which is starting 95% to -- and went up to 142% also. The best premium will have to be about 300% to 320%. If you look at the quantity, has been bought by 1 [ DFW ] and 2 [indiscernible]. These are not -- there will be more clearly located iron ore facilities if [indiscernible] exist in Gujarat and those [indiscernible] exist in Maharashtra and of course in Karnataka. So the efficiency of iron ore from Orissa to the port and then from port via sea, they will reach to the destination. We think it's higher premium if we have already got the [indiscernible] pipeline already laid in Orissa, but that will entail more than [indiscernible] on transportation of iron ore. And part of that, we are ready to compensate for the higher premium maybe INR 300, INR 400. You still [indiscernible] a tonne on account of transportation of iron ore through the pipeline. Same thing will happen with [ DFW ] also. They will take 2, 3 years to lay out the pipeline, but I'm sure their thought process would have been the same if they were to give this transportation cost to the port, then they will compensate the higher premium being quoted by then. And definitely regarding any long-term player like the foreign [ DFW ] [indiscernible] got a capacity of 10 million tonnes and [ DFW ] has already a capacity of 18 million tonnes and going total, there'll be clearing capacity of 30 million tonnes in total. So they will try to [indiscernible] though they have been permitted to fill 25% in the open market, but they may not do so. And in this case, there may be scarcity in the setup availability on the commercial iron ore. Coupled with that, there is going to be a little disruption in the [indiscernible] environment clearance and the forest clearance. This will create minimum 6 months to -- minimum 3 months to 6 months. Now this 3-month disruption in mining in Odisha will disrupt almost 20 million tonnes of iron ore. I don't know where from this 20 million tonne disruption [indiscernible] is going to be met. I think at this moment it is very difficult to say anything, but there's likely -- very likely to be a slight disruption in the initial phase. I mean there are some -- it will depend on how the demand in the domestic market and how the demand in the China market is there.

Right, right. Okay. So -- but for the little disruption that you're envisaging, isn't that there is enough inventory in the system that people are keeping to account for this?

Where the high-grade iron ore is being used, mainly plus 60 to 80. The inventory are plus 60 to 80 [indiscernible] marketed very little, maybe 3 million to 4 million tonnes only. The major inventory line in the mine feed is low grade, which is currently nothing huge in the country and is mainly imported. You see, in the current year until now, we have already exported about 20 million tonnes to China and that is all low grade. If we are going to use the low-grade iron ore in the country, there is no technology available.

Next question comes from Govind Saboo from IndiaNivesh.

Sir, a couple of questions. One is regarding your Jagdamba Power merger. So what kind of cost savings should we expect from this merger?

Jagdamba has the capacity of 20-megawatt power -- 25-megawatt power generation. And this should result -- if I compare with the grid pricing, which is currently at about INR 6.5 per unit. And as compared to the cost in Jagdamba, which is close to about -- between INR 3.75 per unit, including operating and fuel cost to INR 4 per unit, there is a substantial saving which is envisaged. But over and above that, there are other strategic reasons for the merger of Jagdamba. One, if we want to increase the production of steel billet and other value-added products, we need additional power. And at the location of our power plant in Chhattisgarh, the further permission to set up in coal-based power plant is not available. And therefore, there is no other alternative then to source the power from a long-term consistent source, which is at a much economical price so that you can derive the other additional benefit like the rolling mill which we are commissioning. This cannot be run without the additional power. Rolling mill itself is going to save us not less than INR 1,000 per tonne in production of my rolled product. Over and above this is helping me in operating efficiencies and overall cost reduction in steel billet. If I'm producing 200,000 tonnes of billet and if I'm producing 400,000 tonnes of billet in any year, my operating efficiencies lead to substantial reduction in cost. So there are also -- there are other operating benefits of that integrating the Jagdamba with Godawari Power & Ispat. And mind you, this company has been connected with Godawari after an effort of almost 5 or 6 years. We had taken an initial 26% stake in the company in 2013 with an aim to connect their power plant with our end state. It took 6 years in permitting this, and we only got this approval in last year, October. So this is a long-term strategic asset for Godawari Power & Ispat. And I would -- I'm not looking this only from the power cost saving in the company. I'm looking at the substantial value-accretive opportunity because of this particular availability of plant in the vicinity of our own plant in that industrial area.

Understood, sir. Understood. So the only limited question was that the power which we are going to consume from Jagdamba, will it replace the grid power? Or we were...

It will -- no, no.

And it is mined from Jagdamba?

We have been buying the limited amount of power from grid, about 4 megawatt or so. Over and above this, our requirement has increased because we have increased the production in the steel billet by additional 200,000 tonnes annually. We were earlier producing hardly 50,000 tonnes a quarter. We have now started producing more than 90,000 tonnes a quarter. Rolling mill needs additional, I think, 7 or 8 megawatt of power. We are increasing the production in pellet plant. We are increasing the production in steel. So everywhere, there is an additional power requirement.

Okay. So currently, we were not buying any power from Jagdamba?

No. We are buying from since last year, ever since this plant has been connected. But there isn't a profit element which is given to Jagdamba in this. Currently, we have short-term [ PPA ] until the merger is completed. Then I will have some saving on the fuel cost -- GST on fuel cost. GST on fuel cost in an independent power plant is not allowed as an input cost setup because there's no tax on the output product. As well, this is integrated with GPIL. The taxation saving will also emerge because of this.

Okay, okay, okay. Sir, my next question is regarding the new approvals which we have got, environmental approvals which we have got. So what would be the -- what is the capacity of rolling mill approval?

It is 400,000 tonnes, 400,000 tonnes.

So earlier, it was 200,000 tonnes. Now it has been...

Yes. We had envisaged that we had 200,000 tonnes depending upon 2 shifts of operations. But if you run this plant for continuously on a 3-shift basis and with less -- some modification in equipment, we finally decided to go for 400,000 tonnes of capacity and which has already been commissioned.

So it is in a sense...

And there is no additional CapEx because of this. We have completed this project within our guided CapEx of about INR 60 crores.

Sir, is it additional 400,000?

No, no, no. This is -- no, 200,000 tonnes, we have at a different location currently, which is about 10 kilometers from our plant. In that, we've transferred the billet from our plant in Siltara to plant in [ Urla ] about 10 kilometers away. But this rolling mill will be a whole-size rolling mill. Our billets directly from the steel melting shop after casting will straight go to the rolling mill for producing the rolled product. So there will be energy-saving cost on this.

No. So the question still remains that additional approval of 200,000 or additional approval for 40,000?

No, for -- we have a separate approval for our existing 200,000 tonnes rolling mill. This is additional 400,000 tonnes.

And for beneficiation, what is the capacity we have for the...

1 million tonne, 1 million tonne.

1 million tonne. Okay. So we will have to enhance this capacity if we have to achieve the 100% high-grade pellet plan of -- which we want to execute later in the year.

We have already applied for additional capacity.

No, no, no.

Yes, yes, yes. We have already applied for additional capacity.

No, no, no. Abhishek, you have -- please reply. Yes, yes.

Yes, yes, yes. So for the beneficiation thing, we currently have an approval of 1 million tonne annually. And we've already applied for an additional capacity to 3.2 million tonnes.

Yes, yes, yes. Then only we will be able to convert...

Yes, exactly. Right. Yes, yes. So we have already applied for addition of 3.2 million tonnes, exactly.

Next question comes from Vikash Singh from PhillipCapital.

Sir, I just want to understand that despite our iron ore capacity being over 2 million tonnes, why we have not been able to achieve that run rate yet.

No. Abhishek, how much you have produced 400-and-something thousand tonnes. We are gradually increasing the production in mine.

So Ari Dongri has been achieved full or is the problem is with Ari Dongri or Boria Tibu?

No. Production is lower in Boria Tibu, Ari Dongri is operating at full capacity.

Okay. So might we expect Boria Tibu to also ramp up to its full capacity?

Boria Tibu will take time.

Okay. And sir, this 2.4 in Raipur, which we have proposed to increase. So that 0.3 additional, we would continue to buy iron ore from outside. Is that correct assumption?

Hopefully, by that time, we should be able to integrate with existing production. In fact, we are taking the additional permission for our Ari Dongri mine also. And this question was addressed by Mr. B.L. Agrawal in the last con call also in detail.

Okay. And sir, in terms of this high-grade pellet, you have told us about the premium differential. But how much of the cost side increase we can expect?

No. That is what the market will determine because the mining cost will not be more than maybe INR 200, INR 300 a tonne. And this is all logistics plus royalty plus premium...