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

Good afternoon, ladies and gentlemen. I'm Bharti, moderator for the conference call. Welcome to Godawari Power & Ispat Limited Q3 FY '21 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions]. Please note, this conference is recorded. I now like to hand over the floor to Mr. Ankit Toshniwal of Go India Advisors. Thank you, and over to you, sir.

Thank you, Bharti. Good afternoon, everybody, and welcome to Godawari Power & Ispat Limited earnings call to discuss the Q3 FY '21 results. We have on the call Mr. B. L. Agrawal, Managing Director; Mr. Dinesh Agrawal, Executive Director; Mr. Abhishek Agrawal, Executive Director; Mr. Siddharth Agrawal, non-Executive Director; Mr. Sanjay Bothra, CFO; 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 risk 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.

Thank you, Ankit. Good afternoon, ladies and gentlemen. I'm Dinesh Gandhi. I welcome to this conference call of Godawari Power & Ispat Limited to discuss the earnings for Q3 FY '21. At the outset, I'm pleased to report that company has achieved highest ever financial performance during the quarter, driven by strong operating performance and the price realization of iron and iron ore pellet and the steel products. Just to give you some highlights, the highest ever top line company has achieved is INR 1,132 crores, highest ever EBITDA of INR 348 crores on a consolidated basis. Highest ever PAT of INR 203 crores on a stand-alone basis and consolidated bottom line of about INR 166 crores. That is after derecognition of ArdentSteel subsidiary, as you are all aware, we have liquidated our partial stake in that company in the last quarter. EBITDA of the company is up 2.68% on Y-o-Y basis, and PAT is up 5.58%. Company's free cash flow generation is 90% of the EBITDA. And the company has declared the dividend of INR 5 per share after a period of almost 5 years. And company is virtually mostly out of the restructuring now, and that has been brought down to a considerably lower level. The company -- the strong performance -- financial performance resulted into robust FCF generation, which we used mainly towards deleveraging, the company has repaid INR 667 crore of long-term debt in the current financial year as against full year repayment of INR 238 crore in last year. The -- our interest cost on the base -- as we have been guiding has now been reduced to average 9% against 11% earlier. The long-term debt of the company now stands at INR 873 crores, which includes INR 500 crore for the Ardent Steel business and close to about INR 370 crore for our solar power our business, which is on a stand-alone basis is self sustaining, generating almost about INR 90 crore EBITDA on an annual basis. The net debt to EBITDA, now we -- in a longer-term basis, we target to below 0.5x, our aim to become debt free continues. As you are aware, we had liquidated almost about 50% of our stakes in Ardent Steel in the last quarter. The transaction has been completed and the funds realized has been utilized towards the repayment of debt. As you have seen, the induction of partner has resulted into sourcing -- the iron ore sourcing benefit to the company, which is quite visible as per the performance reported by the Ardent team. Godawari Power continues to actively participate into operational management of the company being a leading partner. Coming on the future growth, we are looking to, in a fresh manner the investment, which is a natural transition to value addition on the iron ore pellet going forward. This growth will be attained mainly through the internal accruals based on the future cash flow generation. The -- as I said, this CapEx will be continue to be funded by the internal accrual. The company is also looking to be carbon neutral and aim to shift to renewal energy where -- renewal energy for captive requirement, where the cost has considerably gone down as compared with the grid power cost and power generation -- coal gas power generation in the old turbine. As you are aware, the prices of iron ore pellets, we have realized these average about INR 9,000 a tonne in the last quarter. The current prices are closer to about 10 year high, which is really at about INR 11,500 to INR 12,000 a tonne in domestic market. International prices on explant basically is also closer to the same level. The performance in the Q4, we expect it to be much better than Q3. The outlook on the business continues to remain robust. We continue to maintain the 90% plus plant efficiency utilization. We continue to leverage our portfolio to maximize the profitability. And production capacities, as guided in the earlier conference call, is set to increase in next financial year. About 20% capacity increases through debottlenecking is already planned in sponge iron and growth of about 10% -- 10% to 12% in the pellet from 12 -- 2.1 million to 2.4 million tonne. We expect the final stage of the regulatory approval to be received by the end of the current financial year. With this, we now open the floor for question/answers. We'll be happy to answer all your questions. Thank you very much.

[Operator Instructions]. First question comes from Amit Dixit from Edelweiss.

Congratulations for good set of numbers. I have 2 questions. The first 1 relates to the overall demand scenario for rebars in the secondary market. How do you see it panning out in Q4?

I would like Mr. Agrawal to answer this question. B. L., sir, over to you. Hello? Hello, Abhishek?

Hello. Yes, Abhishek?

Hello?

Very much here.

Hello. You will in the second position to answer this question.

Can you just please repeat the question once again, please?

Yes. Yes, sure. So my question was that how do you see the demand scenario of rebars in secondary market panning out in Q4, given that we have seen a lot of price erosion recently?

Yes. So see, to be very honest, definitely, demand has been erased out in last 2 or 3 weeks or so, I would say, especially after the New Year. See, everybody was expecting a price correction thinking the market has gone too high. And so there was a price correction, but the demand was there. But then this budget thing came up and everybody was expecting the -- let's wait for the budget the -- like the consumer like they were saying there will be something with the budget. Chaos in budget is over, and everyone knows the budget is more on the economic boost side. So I'm very confident that demand is going to come back. And prices should stabilize at a certain level. I won't say it will probably go up to what the levels they were 4 weeks back, but I'm very confident with the current budget and the sentiments again changing towards economic boost. The demand should come back in the secondary market of rebars.

So if I may add a follow-up question on this. What kind of prices you are seeing now, the spot prices of rebars versus Q3 average?

See, Q3 average the prices actually started going up post Diwali, where there was a drastic increase in the prices of rebar. At the moment, the prices are hovering somewhere around on a basic level, it is around INR 36,000. So compared to Q3, prices have [Audio Gap] Q4.

Sorry, sir, I missed the last bit.

So prices in Q4 are still on the higher side compared to Q3.

Okay. Okay.

Amit, the average of Q3.

Average of...

Yes, sure. Sure. Sure. Sure. No, I got it. I got it. Sir, the second question is on the iron ore situation in Odisha. So recently, we have been hearing that the iron ore supplies are increasing, the production is increasing however, we have also heard that Odisha government is acting on certain minors who are not within their either environmental norms or something. So -- and the production is mostly ramping up from JSW and all while they might sell something in captive market, but there is always -- while they might sell something in merchant market, but they always have very big capital requirements. So in light of these how do you see iron ore supply in Odisha panning out?

See, iron ore supply in Odisha, I would say, see to be very honest, there was never a shortage of iron ore supply, se -- per se, Odisha probably at a kind of country level. See, the prices were going up because there was demand. And at the same time, the finish prices were going up. So the prices kept going up, people kept buying at higher levels because at the same time, finish was supporting them. So Odisha government has been very proactive. The couple of big mines, which were not in operation by the new lessees, they have handed over the mines to OMC now. So those mines should be in production and should be in the market for merchant sale, I think, by end of this financial year, probably by end of March or early April. So which is a very positive sign. Sale has been allowed to sell 25% of its captive resources. So on an average sale is doing almost a sale of 1 million tonne every month at pan India levels, whether it's Jharkand, Odisha, even Chhattisgarh. So sale has been very proactive. So they realized there needs to be more supply of iron ore to control the prices. So sale has been doing that. Odisha government has been very proactive. OMC, for example, they've been taking out auctions of 1 million tonne every month, so 1 million tonne is lump and 1 million tonne is the fines. So per se, I don't think so there is shortage of iron in the country. It's only the prices which people have been highlighting time and again. So at the bottom line, there is no shortage of iron ore fines in the country at the moment. And you cannot rule out -- you cannot just separate India from the global market. So globally, iron ore has been on the uptrend since pandemic. So eventually, things get tested on its own demand and supply. So internationally, the price are getting tested. So eventually in India, prices also started going down now because finish [indiscernible]. So both have a direct link. Demand and supply, as well as the prices.

Okay. One last question, if I may, push it. What is the decrease in secondary rebar prices from the peak that you have seen? And do you think that we are at a level, given where primary rebars are that we are very -- we are closer to bottom? Or do you see a further scope of price decline in secondary market?

See if you talk about the peak, then I would say the prices corrected almost by close to 15% from its peak level. Primary producers, there still, the prices are pretty much high. The difference between the primary and secondary is still almost a gap of 20% with the new budget and the import duty being reduced, so the country is hoping, since globally the prices are correcting, so eventually, primary producers will be forced to carry their prices in the longer term. There will be demand, but prices -- there will be correction to a certain extent going forward.

But you don't think that secondary rebar market is near its bottom. I mean you still see scope of further price correction?

I think it has reached near its bottom, and I can only see upside going forward.

Next question comes from Gaurav Rateria from Morgan Stanley.

Sir, firstly, I just want to understand that you mentioned the gap between the primary and secondary on Rebars is 20%. Historically, what has been this gap?

10%. On average of 8%, 10%.

Okay. Okay. And...

So for example if I mention it in Indian rupees, so the gap is usually around INR 5,000 a tonne, which is currently around INR 10,000 a tonne.

Okay. So there is an imminent correction of INR 5,000, which is possible, at least by the primary producers?

No, it all depends on the demand supply see because primary producers are mainly supplying to the government projects because they qualify at the BS norms. The good thing which has happened recently is the Government of India has approved a new policy where they have allowed the recyclers and the secondary producers who can comply to the BS norms. So they are also eligible to supply to the government projects now. So with that policy in chambers now, so I am confident the gap between primary/secondary will eventually start coming down.

Okay. And secondly...

Secondary should go up and primary should come down to reduce the gap.

Yes. So secondly, I just wanted to understand, what I understand is that there had been a lot of channel restocking around December because the prices are going up too fast. And in January, when the demand did not stay -- did not come, that kind of created a panic in the market. So at what point in time the channel destocking will be fully over and there will be no excess inventory in the system, which will kind of help in the stability in the prices?

I think the destocking process has already started. That's why suddenly the demand has disappeared. Once the destocking levels are almost back to nil until the demand will come back. And it can happen very soon.

Like this should be a month phenomenon in the February month itself?

Yes, I think the process can start very soon. I'm very confident about it. Because everybody who started -- who had over inventories thinking the market is going up, going up. So now everybody's decided let's destock our inventory levels. And when market normalizes, we will start buying again. So that process is -- I think, will start very soon.

Okay. Sir, last question from me. Given the supplies have increased in iron ore, and you mentioned there's no shortage what we are hearing is that there has been some correction in the iron ore prices in the Odisha by the -- some of the merchant miners, do you think the prices are likely to cool off anytime soon because supplies are increasing?

Yes. See, see prices have already started coming down. And as I said earlier, eventually, everything plays out on demand and supply. And since the finish prices have corrected. So eventually, the price of raw material has to get corrected. It cannot be the iron can be at the same level and the finish is going to go down. Eventually, it will become unsustainable for the buyers. So I'm sure that the miners also realize the same fact, and they've already -- the prices have already started cooling down in Odisha. For example, there was a option of lump yesterday from OMC. So from the last auction, the prices have gone down from almost by 15%. And the auction was of 1 million tonnes, which is for a small quantity.

Right, right, right. So basically, this also settles down at the time when the steel prices kind of bottom out, even iron ore prices will bottom out you mean?

Definitely, definitely. Yes definitely.

Next question comes from Vikash Singh from PhillipCapital.

Congratulations on good set of numbers. Sir, I just want to understand this 2.5% to 5% kind of the import duty correction. So given the secondary players also relies on the spot and scrap mix. So how do you see change in their cost of production and how would it get reflected in the prices? Or how you feel that already the price has already been spread far so low that it won't matter too much?

No. See, eventually India is part of global steel market. So by government has reduced the import duty on certain products, that is because they have realized there is a correction happening in the national market. And domestic prices are still on the higher side when it comes to the primary side. So once the import starts happening in India, so eventually, domestic players will also match the prices with the import levels. So it will be playing level field, whether for a steel manufacturer or for a consumer. So that is the whole -- I would -- the idea behind reducing this import duty on the sea license.

So just to follow-up, so what kind of follow-up of price correction you expect as a set correction because of this versus you said that this...

With the reduction of 5% import duty, it comes to roundabout INR 2,500 a tonne on the rebars, right? So for example, if domestic prices are INR 53,000 so automatically, the prices are now at INR 50,500 levels. And globally, the prices have been in a directional mode. So eventually, if the moment import starts happening in India, which I don't think is going to happen so soon. But in the longer run, if imports are happening, so the domestic producers will be posed to match the prices with the import prices.

Understood, sir. Understood. Sir, second question pertains to, sir, there was an issue about who is signing an MoU worth INR 2,300 crores with the Chhattisgarh government. I want to understand at what level of debt once you come in, you would be comfortable to start this CapEx? If you could share some time lines regarding the same?

See, in any greenfield project, right? I mean, it takes almost -- you have to acquire the land, then apply for the EC and then plan a project, start activity. So at least take 4 to 5 years minimum for any greenfield project to come to production. So we are very clear as a company. Management is very clear. We will only start doing any new CapEx once the company is debt-free. We will not invest a single penny in any new project till the company is not debt free. So debt levels are already turned around to INR 500 crores levels. So with the current market, we are confident by end of this financial year, we should be debt free.

So -- okay. So in all a sustaining but from next year, probably some CapEx will start regarding the new CapEx?

Yes. But only after we are debt free nothing before that.

And sir, what would be your short-term impact? So sir basically, I just wanted to understand your total net debt at this moment, including steel business and the Godawari Green Energy?

I'll answer.

Dinesh, you please take it up, yes.

Yes. See I already said the debt figure in my opening remarks, it is close to about INR 875 crores. That is the debt, which remains as of the date. And out of that, about close to about INR 370 crore is for the solar business, which is separately self sustaining. At a stand alone level, we have a debt of close to about INR 500 crore. That is long-term debt. Besides working capital limit of close to about INR 100 crore, INR 150 crore, which normally it remains almost 70%, 80% unutilized. So that is the debt position. At the stand alone level, we are aiming at debt free. As Abhishek said this quarter, it is the calendar 2022, let me correct it. Rather than the current quarter itself. Current quarters, there may be some debt remaining at the end of the quarter. And hopefully, the way daily prices are ruling, meeting of the current financial year -- current calendar year, we should be able to be debt free.

Understood, sir. So basically, currently, it's roughly INR 960 crore, INR 970 crore which of the total net debt out of which we would come down to INR 300 crores or only the green energy debt would be remaining by next calendar year.

See you have to keep working capital debt separately because that is -- without the limit, you can't operate the plant, number one. Number two, solar debt, you have to keep it separately. Solar is a self sustaining. Separately is a debt which will be repaid over a period of time before the maturity or maybe we'll prepone it by say 3, 4 year. So that INR 200 crores, INR 300 crores of debt does not matter for us at the solar level.

Understood, sir. Sir, just 1 last question regarding your Ari Dongri mine expansion. So if you could explain that at what stage we are right now and when we can expect the incremental produce to start coming in?

See, the public hearing has already taken place for the environmental approval. And we are auditing the final approval by end of this financial year. Or maybe next quarter of next financial year -- no, first quarter of next financial year.

[Operator Instructions] Next question comes from Reena Shah from Ashika Stock Broking.

Congratulations on good set of numbers. Sir my question is I wanted to understand your domestic and export pellet sales mix sir in this particular quarter.

See, we have been partially selling it in the international market debating about the demand. And partially into the domestic market, and this mix will continue -- will remain more or less same.

Let's say actually you can -- last quarter you had provided a...

Maybe slowness about half so less about 50%, sorry?

Okay.

Sorry?

You had provided sir...

No but that depends upon the -- that depends on purely demand supply in domestic and the international market. So it's is very difficult to guide on that basis. But for us, the realization is important.

Sir, I am not asking about sir...

And if I'm getting a good realization in -- sorry?

I'm asking about third quarter pellet sales mix of domestic and export.

No, that I don't have readily. I'll give you that one separately.

So okay. Reena, so I'll tell you, in the third quarter, I would say sort of the entire production, close to 20%, 25% was of our exports and rest for [Audio Gap] consumption and domestic market.

Okay, okay. That helps. And sir, another question that I have is with your pellet realizations. It seems that you have a forward-looking. So how the things are shaping up in Q4? Is the pellet for whole March month is also booked? And what is the price that you are looking at in Q4 in terms of realization?

See in Q4, see, we usually have book order of 30 days to 40 days. So more or less, we have covered till Feb end. For March, since everybody was waiting for the budget and since budget and the main -- I would say, the main barrier of whether there'll be duty on pellets or not. So now since it's evident there will be no duty on iron ore pellets. So we are very much open depending on the realization, whether we are open to exports or we're open to domestic market. But since we still have book orders till Feb end, so we are in -- there is no panic situation.

Yes. But anything like since you are doing a forward booking? So any rough number on how pellet realization and sales number would be going forward in Q4?

See Q4 is -- I think it should end somewhere probably somewhere around INR 11,500 to INR 12,000 on an average basis.

Next question comes from Bhavesh Chauhan from IDBI Capital.

Congratulation on a great set of numbers. Sir, when are we likely to formalize any dividend policy?

Bhavesh, we are working on it currently. We will finalize it. We'll try and finalize it by next Board meeting that is for the full year audited result or near about that time.

Right. Sir, and what about our brownfield expansion plan that we had announced, we were expanding billet by -- from 4 lakh to 7 lakh and even some expansion wire orders. So when is that likely to come up?

No. The brownfield expansion, as I said in my opening remarks, we are looking at expansion in sponge iron capacity from 500,000 to 600,000 tonnes and pellet capacity from 2.1 million to 2.4 million tonne, that -- the final level of the approval is expected by the current financial year, end of current financial year. And we are likely to operate the higher capacities in the next financial year.

Okay, sir. And sir, lastly, we have already given that for mining expansion plans, we are -- I mean something that you mentioned that, that will happen in 1Q EC clearance. But what is the likelihood of starting it in next financial year are...

Next financial year. Next financial year.

Yes. Yes. And then it is going from 1.8 million to I believe 2.8 million tonne.

No. 1.4 -- 1 mine capacity expansion plan is underway, 1.4 million to 2.3 million tonne in Ari Dongri mines. And the other mine continues at 0.6 million tonnes.

Next question comes from [ Trish Kumar Gupta from Nirmal Bang ].

I have one query, like you mentioned that you will be debt free in this financial year. So you are referring financial year '21 or '22?

No, no, we meant calendar '22.

Okay. Calendar year '22. Okay.

No, sorry, calendar year '21, sorry, calendar '21.

Okay. Okay. Okay. So okay. Yes. And how much our revenue is from iron ore? And how much revenue is from steel?

Iron ore pellets -- we don't sell iron ore. We sell iron ore pellet. And iron ore pellet revenue is closer to about 50% to 60%, depending on the price mix.

And the remaining 40% comes from steel?

From the finished steel business. That is from sponge iron to finished steel wire rod.

Okay. So that 40% is sponge iron plus steel related, right?

Yes.

And okay. So raw material in our steel plants is from our mines only. We don't import? We don't...

Prominently around 80% from the captive mines, 20%, we are subject to the market availability sourcing from the local market.

Next question comes from Ayush Mittal from MAPL Value Investing Fund.

Congrats sir on a great performance and substantial debt reduction. Sir, you had mentioned about this mine expansion from 1.4 million tonnes to 2.3 million tonne. Is this the right number?

Yes, yes, yes. Ari Dongri mine expansion.

Yes. So -- Yes. Yes. So what is the status of this expansion? Like what is the -- where are we at the stage of this?

Polishing and gearing is required...

Dinesh, I'll take this.

Okay, you take it, Abhishek.

So public hearing has already been connected, which was very successful. So the next stage is filing of EIA. So we are very confident, probably in next 3 to 4 months, we will get the new and until EC and so from next financial year, we will ramp up the production accordingly.

No, I couldn't get it. Like if you will be filing the EIA, then how much process does it take after that?

That's what I'm saying, after filing of EIA, it will take another 3 to 4 months till receiving of new EC. And once that is received, so we will ramp up the production. So I'm expecting we will ramp up the production in next financial year that is '21, '22, from April 2021, yes.

So anticipating that we'll get the approval, you will start ramping up the production starting next financial year. Is that right?

No, we will only ramp up the production once we get the desired approvals.

Okay. Okay. But these approvals can take very long, like, in some cases, they take multiple years also.

See, that was earlier case, I would say, Government of India has been very, very proactive. They have been trying to simplify all the compliances and the EC rules. So with the current process, they are doing right now. We are confident we should get the new EC in the next 3 to 4 months.

Okay. Great. Second, sir, about the brownfield expansions that we are doing, like we are integrating, putting up more of billet capacity and wire rod. What is the status of this?

See, we are not see both -- what we're doing basically is, as you know, technology keeps evolving. So what are we doing is, basically, we're replacing old induction furnaces by the new technology ones. So that process has already begun they've already completed 30% of our, I would say, moderation. And rest, we will take it in a phased manner. So by end of financial year 2021, we should be able to ramp up the production to our desired level. It will take another 1 year from now.

This will effectively increase your end product capacity of steel billet HB wire rod and these products which you had mentioned earlier?

Exactly. So our sponge iron consumption will be 100% captive. We will not be selling any more sponge iron in domestic market. It will be used for making steel billets and further end products.

Okay. Great. Sir, given that we have seen that there is so much volatility in the pellet prices, and it makes much more sense for us to keep integrating forward into higher value-added products like billets, et cetera. How much scope do we have further to do brownfield expansion and increase these capacities at our current locations as we plan to move forward?

Okay. No, there is no further scope of expansion because as per MoEF, Raipur and especially the premises we operate from is defined in the critically polluted area. So we are not allowed to expand in any coal-based industry. So unfortunately, we cannot do any further expansions. So the current expansion, which we're doing is the maximum limit, which we can do in this premises.

Okay. Got it. So sir, given that we have been having very good times as of now, what is the management planning to make a -- capture a part of this profitability as a long-term sustainable thing. How do you think we can get to capture these kind of profitability going forward? Any thoughts on that?

See, the long-term profitability, as you are aware, Ardent Steel is in a cyclical industry. So the volatility is going to be there. And you have seen it in the past that we have been good for last 3 years, on an average barring current financial year, I'm not talking about it. We have been doing an EBITDA of close to about INR 600 crore to INR 650 crore. And on a longer-term basis, this number is likely to increase going forward as we are increasing our mining capacity from 1.4 million to 2.3 million tonnes. Further, we are increasing our sponge iron capacity by 20%, 15% pellet capacity and steel billet capacity as well. So the growth number would start partially start reflecting in the next financial year and thereafter, which will definitely aid to long-term sustainable level, but it is very difficult to pinpoint on a particular number that gives you the long-term sustainable because of the volatile nature of the industry.

Next question comes from A. M. Lodha from Sanmati Consultants.

Yes, I wanted to know how much is remaining -- this FY '21 in 2 months, how much company is planning to repay the loans, long-term loans?

Another INR 200 crores to INR 300 crores.

In 2 months, February and March?

Yes.

So then in that case you should give -- as a long term loan, this company should be debt free by June itself, sir, in my view.

Also this is the case, we...

June '21, sir, June '21.

Yes. Possible sir, possible.

Okay sir. Then you have signed for an MoU with Chhattisgarh government for INR 1,400 CapEx. Any -- can you throw some light on this, sir?

No, this CapEx is a medium-term plan for the company, which will be spread over a period of 4 to 5 years, and that will be mainly done through the internal approval. But even before we start the CapEx implementation on this project, we'll need about 1.5 to 2 years to get the land acquisition with the government approvals, et cetera, et cetera. And then only the CapEx, we'll start investing the money in the new project.

Okay. My last question is...

Yes. Go ahead, sir.

Yes. Yes sir, yes sir, tell sir, tell sir.