HEG Limited (HEG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to HEG Limited Q3 and FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agrawal, Head, Institutional Equities at SKB Securities Limited. Thank you, and over to you, Mr. Agrawal.

Good afternoon, ladies and gentlemen. On behalf of all of us at SKP Securities, it is my great pleasure and privilege to welcome you to this financial results conference call with the leadership team at HEG Limited. We have with us Mr. Manish Gulati, Executive Director; along with his colleagues, Mr. Om Prakash Ajmera, group CFO; and Mr. Gulshan Kumar Sakhuja, CFO. We will have the opening remarks from Mr. Gulati, followed by a question-and-answer session. Over to you, Mr. Gulati, for your opening remarks.

Good afternoon, friends, and welcome to our Q3 FY 2021 con call. In comparison with the first 2 quarter results, HEG's third quarter performance was stronger, supported by improving global market conditions, global steel sector growth, rise in steel prices, capacity utilizations, et cetera. As per the recent data released by World Steel Association, global crude steel production reached 1,864 million tonnes for the calendar year '20, down by 0.9% compared to 2019. Steel production ex China was down by 7.7%, which is an improvement over previous expectations when COVID started. China's steel production increased by 5.2% compared to 2019, with increased China's share of global crude steel production from 53.3% in 2019 to 56.5% in 2020. China's electrical arc furnace steel production growth remained strong, in line with the government's push to replace polluting steel capacities and now comprises 12% of their steel production, up from 6% in 2016, and is expected to touch 20% in the next 3, 4 years. China's export of steel continue to decline this year also. After declining about 30% in 2017, it continued to decline by another 8% in 2018 and was down 17% in calendar year '20 compared to calendar year '19, helping the rest of the world produce more steel. Now coming to India. As per WSA, Indian crude steel production registered a decline of 10.6% compared to preceding year. India continued to maintain its position as the second largest steel producer in the world after China. Indian steel industry's capacity utilization started to improve from about September-October of '20 onwards along with price increases and boosting profits of steel mills in the last 2 quarters. Steel prices in India and worldwide, as you would know, have shown marked improvements since last 3 to 4 months. The steel mills globally who had increased their electrode inventory due to panic buying in the years of 2017, '18 and a part of 2019, have now liquidated their electrode inventories, and at present, most of the mills are working at the normal inventory levels for electrodes. Thus, the increasing level of steel production is translating to increasing demand for electrodes. Going forward, we expect our capacity utilization to be around 80% for the next year and electrode prices to start improving from next quarter onwards, resulting in improving margins for our industry. We have put our expansion from 80,000 tonnes to 100,000 tonnes on hold for about 6 months when COVID started, which we have resumed, and we expect to complete the project by end of 2022. I would now hand over the floor to our group CFO, Shri O.P. Ajmera; and our CFO, Shri Gulshan Sakhuja, to take you through the financial numbers. And then together, we'll be very happy to answer any queries you may have. Over to Mr. Sakhuja.

Yes. Thank you. Good afternoon, ladies and gentlemen. I will now briefly taking you through the company's operating and financial performance for the quarter under review. The third quarter started on a positive note, revival in demand aided by higher steel production and reduced inventory levels. For the quarter ended December 2020, HEG registered revenue from operations of INR 319.59 crores as against INR 322.88 crores in the previous quarter and INR 393.69 crores in the corresponding quarter of last financial year. EBITDA including other income stood at INR 24.08 crores in Q3 FY '21 versus a negative of INR 25.45 crores in the previous quarter and INR 32.02 crores in the corresponding quarter of the last financial year. The company reported a net profit of INR 4.68 crores in Q3 FY '21 as against a net loss of INR 33.91 crores in the previous quarter. The company's capacity utilization stood at 75% in Q3 FY '21 as compared to 74% in the previous quarter. The performance was encouraged by the improvement in business activity, which was offset by lower realization as pricing continued to remain under pressure. Only our balance sheet remains robust with a treasury size of about INR 1,450 crores at the end of December 2020. The company has made a detailed assessment of its liquidity position and the recoverability and carrying value of its assets, comprising property, plant and equipment, intangible assets, right-of-use asset, investments and inventory and trade receivables. Based on the current indicators of future economic conditions, the company expects to recover the carrying amount of these assets. The company is operating its business by optimal utilization of available financial resources and also implemented stringent cost control measures across the organization to conserve cash. The company is long-term debt free and having a treasury size of nearly INR 1,450 crores, yielding an average return of approximately 6.5%. In Power segment, during 9 months ended 30 December 2020, the company has utilized this thermal power capacity in order to liquidate this coal inventory, which in turn has provided additional liquidity to the company. Our working capital is in line with the historical cycle with customers paying us as per the terms. We continue to make payments to our vendors as part our obligation to make sure that they are supported at this hour of need. All statutory dues were being paid on respective due dates, hence, there is no liquidity concern. Now we would like to address any question or queries you may have in your mind. Thank you.

[Operator Instructions] The first question is from the line of Sonali from Jefferies India.

Sir, my first question is regarding the demand scenario in terms of both domestic as well as export markets. You did highlight some comments about the demand in your opening scenario, but any further details on that would be helpful, sir.

Okay. So you see if -- our markets are basically rest of the world, excluding China, and the good thing is that the capacity utilization of the rest of the world, we have seen a marked improvement in last 2 quarters, and they have come up in a very good way. The capacity utilizations have increased from a level of, let's say, 55% to 60% to now 70% to 75% globally if you just exclude China. So that is where our demand is coming from. In India also, you have -- I'm sure you've noticed the kind of capacity utilization they're having now. They're operating almost at 85% capacity as a total. And the prices -- it's well-known the way the prices are increasing in the last 3, 4 months. So that way, the profitability of Indian steel companies is getting a boost, even global companies are getting a boost. The impact of COVID, which was more predominant earlier, is now lesser felt as the steel production gets back to where it was during the pre-COVID times. So that is the healthy part. And the other thing where the demand is coming from is that the inventories which were excess in the market and every customer was holding 4 to 6 months of inventory and also, they were having contracts, commitments. So all that has about got over now. So whatever steel production is happening now, it's translating into real demand, which is what we are observing. And our capacity utilization is also going up. Next year, certainly, we expect much better capacity utilizations compared to this year.

Understand, sir. Sir, I in fact, my question was on the capacity utilization as well. For example, Europe is the main EAF, one of the EAF producing nations. So is it really back on track, like on the pre-COVID levels, especially because 70% of our mix is exports and we are enjoying such good capacity utilizations at 75%, hence the question, sir.

See, right now, if you still look at European countries and you just compare calendar year '20 with '19, they're still down. What I'm trying to say is that in the last quarter, it's a much improvement over the preceding quarter. So if you look at the main countries like Germany, France, Italy, they're still down compared to that 2019 level. But they have climbed up in the previous quarter. I mean just to give you a figure -- just to put a figure on it, let's say, in April to June, the rest of the world made 167 million tonnes of steel per quarter, I mean, April to June. July to September, it climbed up to 189 million. And October to December, it climbed to 208 million. So it is just a shade below the level of 210 million, which was when the COVID started, Jan to March. So it is now coming back to that level of quarterly steel production. So there's an improvement, no doubt. But if you add up the year and compare year-on-year, they're still down. But if you compare quarter to a quarter, let's say, if I compare October to December quarter of steel production in rest of the world compared with Jan to March, it's almost there. I mean they've reached as far as the quarter is concerned.

Right, sir. Sir, my second question is on the electrode pricing trend directionally. Now in your opening remarks, you did mention that you are expecting the electrode pricing to increase from the next quarter. I believe you were talking about Q1 FY '22. Sir, what could be the key drivers, which helps you to, say, envisage this kind of increase, especially given the backdrop that electrode prices have been weakening for the past 2, 3 years?

Yes, true. So that was -- if you compare with the boom time when electrode prices shot up to as high as $15,000, definitely, they were in excess of $10,000 for a few quarters. So that was a very unique situation. And there was a rapid correction after that to the extent that you have seen our results that we -- most of the industry -- most of the companies in our industry had to take a big write-downs on inventory. And now they have reached a level where, what I was saying, the enabling factors that steel production is going up, steel company's profitability is going up, excess electrode inventories are out of the system. And we have to earn margins. I mean so it's -- you always have a lag kind of effect with steel industry. So when they go up, a quarter later, you will see the electrode prices also start firming up. I mean today's prices are not remunerable at all. I mean they have to start firming up now. So whatever that suffering part was there in the last year, so that is, I believe, now behind us. And -- I mean the supply chain is lean. There are no excess inventories anywhere. And I'm very hopeful, very confident that prices will start firming up from next quarter onwards.

Right, sir. Sir, when you say the supply chain is lean, you are mentioning for both domestic as well as exports, right?

Yes, yes. More for exports than domestic. Because in India, you'll still see that our electric arc furnace is still 30%. The 70% is still either a blast furnace-based operation or induction furnace-based operation. I'm talking about more for global. I mean, in India, yes, companies did have inventories more than normal, but they were not of the type that global companies had gathered because the Indian companies always knew that the 2 electrode -- big electronic companies are there in India. So they didn't buy 6 months' worth of electrode to store, but there are companies in the world in the Middle East and in Southeast Asia, even in U.S., they bought a lot of electrodes. They thought electrode prices are going up, okay, let's buy, buy, buy and buy whatever price, because for them, it was 3% to 4% of the cost. So they overbought. So that overbought thing could have corrected even 2 quarters earlier, but then COVID happened and all these things happened. So even steel production went down in the COVID times. And by now, we can -- we have a sense, we can feel that then customers come and ask for electrodes, we know what kind of deliveries they are talking about. So -- and in any way, we are in touch with all the companies. So we know that excess inventory is now flushed out of their system, and they are at normal working inventory levels, depending upon where they are situated. If anybody was working with 1 month, he's now working with 1 month, not 6 months.

Understand. Sir, what will be the normal inventory cycle, about 2 to 3 months or lower than that?

Depends. Actually, it depends geographically where you are. Like, for example, a company in Middle East would like to keep 2 months. A company in India would like to keep 15 days, not a month. Very rare, you'll see a company who'll buy for a month because the 2 companies are here. So depending upon country to country, where you are -- I mean, a company in Southeast Asia would like to keep 1.5 months or something. Depends on the lead times, et cetera, and the safety stock. So everybody who was -- had that sense that electrode prices are -- electrodes are becoming short and prices are going up and most of the companies overbought. So that situation is corrected. So now we are -- now this is a normal market situation. If there's more steel production, there is going to be more of electrode demand.

Understand, sir. Sir, my next question is on the needle coke trend. I think last quarter also you mentioned that needle coke pricing was weak. Just wanted an update on that aspect, sir. Where are the needle coke prices? And how do you foresee them to pan out? I know it's difficult considering it's a bulk commodity, but directionally, if you could give us some sense, that would be helpful, sir?

Okay. So let me put it this way that the whole of the calendar year '20, we had excess of needle coke inventories. So whatever happened in this year, the prices did go down for needle coke, but we didn't get benefited because we were not buying anyway. We just bought a little quantity which was required for a particular grade or particular size. So that's what we bought, minimal buying we did. So prices did touch a rock bottom in the middle of 2020. And then -- now when customers like us are back in the market, the needle coke prices are going up. So as I said, we didn't buy much in 2020, but now we are buying. So they have definitely more than the rock bottom, they had reached. Please do not ask me to put a number on it because that becomes quite sensitive, competitively sensitive. But they are definitely on their way up. And it's just like we are a lag to steel industry, the needle coke supply is also lag to us. So I mean -- maybe their prices might start firming up.

Okay. Sorry, you mentioned needle coke is at a lag to electrode pricing?

Yes, yes. For our electrode market, electrode demand, I mean. See, last year, the unique situation was that most of the electrode companies in the world already had enough of coke. So nobody bought their coke. So they tried hard. They brought down the prices, just to boost up a little bit of their sales. But nothing much happened. And now when the steel industry is looking up, more or less all the inventories are out, maybe for us, for sure, for other companies also, we feel. And now we are back in the market to buy needle coke. So then they are -- their prices will also start to firm up. That's how it gets.

Understand. Sir, the next question is on the CapEx outlay. You did mention that you are now resuming the CapEx capacity expansion of 20,000 metric tonnes. And we expect to commission that in the next 18 to 24 months. Sir, what will be the total outlay? And how much of that would you have -- would have been spent already?

See, it was INR 1,200 crores as a total, about INR 450 crores is already spent, about INR 650-odd crores would be spent in '21-'22, and the balance would be probably in the -- will get spilled over to next year. Depends when our payments become due and -- for all these equipments together eventually shipped and LCs charged that way.

Understand. Sir, but what about the China excess capacity of electrode? Is it also now getting captively utilized? Or any sense you could just help us with in terms of the excess supply of electrode in China, which had come up about 2, 3 years back?

Yes, that was a pain, actually. You see their electric arc furnace steel, the projections not go as they had planned. If you remember or if you were tracking us earlier, they were talking about reaching 20% of their steel production by electric arc furnace route in 2020. And they are not there. I mean they're still at 110. So no doubt, they have come up from a level of 6% to 12%, but they're still much short of 20%. So had that materialize -- they did put up electric arc furnace mills, but still some of their costing from blast furnaces are still proving to be cheaper. So -- but they are definitely on that path. I mean the year has moved forward. So we were expecting them to be making 200 million tonnes in 2020. And as it was publicly declaring also, but probably that will take another 3 years to happen. So that will soak in a lot of excess electrode demand -- excess electrode production happening in China. So -- but you see, we have to look at it as a qualitative point of view that still in the ultra-high power grade segment, we do not really see them as a credible challenge. But in the lower grade, yes, they are and they -- for, let's say, 25%, 30% portion of our business, yes, we compete with Chinese. But for the UHP, still, we believe that we have an edge -- qualitative edge on that. So whatever excess capacities are there in China, they're more geared for the small sizes or medium-range sizes, and we'll be very happy if electric arc furnaces come up soon that excess production, which they are exporting, might get consumed within China itself, a large part of it at least.

Understand. Understand. Sir, and just last question, what was the capacity utilization in Q3 FY '20? This quarter, you mentioned it was 75%. But Q3 FY '20, correct me if I'm wrong, was it 50%?

No, Q1 -- no, Q3 was 75%, that's what we said. And Q1 was a little less than 50% because of that COVID thing. And Q2 was, again, in 70%. Now Q3 is 75%. Q4 again would be in 75% or even 80% if I can talk about sales utilization also instead of the production based. So that will be -- it will be -- Q4, we expect it to be 80%. And next full year, we again expect it to be around 80%.

Right. Sir, I was actually checking on last year same quarter, Q3 FY '20, sir?

Oh, Q3 FY '20 was very less. Actually, it was 50%.

I understand, sir. That's it from my side.

Yes, yes, yes.

Yes. It's 50%, sir.

Yes. Yes.

60%?

50, 50, 5-0.

5-0.

The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

Sir, I wanted to know what is now the incremental spreads that we earn on electrodes, which is electrode price minus the needle coke?

See, right now, it is all mixed up because we have taken that NRV hit also. So we have a certain needle coke in our system, in our WIP and FDs which are valued at a certain price. So once all these inventories are out of the system, maybe from next quarter onward, we can have a spread between the electrode prices of the day and the needle coke prices of the day. But right now, in our system, we still have inventories which were written down at a particular price. So it is difficult to talk about spread today, but we will see in next quarter onwards, then we will not have this inventory issue to talk about.

[Technical Difficulty] inventory issue. As on date, the needle coke price and the graphite electrode price, what spread do they lead for us?

That I would not like to disclose -- or not like to put a number on it, actually.

Sir, sorry to interrupt you. Pritesh Chheda, may I request you to mute your line from your side, please?

Okay. And sir, with this 20,000 tonnes capacity addition, we go to 120,000 as our capacity, right?

No, no. 100,000 -- to 100,000, 100,000. From 80,000 to 100,000.

And this 80,000 tonnes, can you operate theoretically at 100% or lesser?

Almost. You see, we actually -- this is -- when we calculate this capacity, I mean product mix plays a big role. Even if you look at others capacities also, I mean, if you're -- let's say, if you are at 80,000, probably, I would say, sure. I mean if you have the right -- the ideal product mix, sure, it is very much possible. But with an imperfect product mix, the product mix not of your choice, it actually should be around, let's say, 75,000 or 76,000 tonnes.

[Operator Instructions] The next question is from the line of Bhavin Chheda from Enam Holdings.

Sir, in the last month presentation, you had said that globally, 20 plants were operating now as compared to 24, 2 years back, and there were 4 plants closed down, which had a total capacity of 60,000. So can you update now whether those 4 plants have restarted or they are still in a shutdown condition?

No. They are still in shutdown. You see, I think we talked about 2 plants in Europe with Showa Denko shutdown, 1 was in Austria, Steeg, and 1 was in Meitingen, Germany. So they are permanently shut down. There's no way they would come back up again. Because that's a strategic call those companies have taken. Basically, these are age-old plants. And once -- they are not efficient anyway. So once they are out of the system, normally, you wouldn't see those very plants come back, maybe capacity gets added here and there when the demand picks up, but normally such plants which were made in 1960s or something, once those companies decide to close them down, they usually don't bring them up as such. They would like -- if the demand goes up, they would like to add here and there, but this capacity is permanently out of the system.

Okay. So ex China and Russia, roughly, that table showed capacity of 724,000, which stands and which you're saying currently would be the demand ex China, Russia, those would be operating at roughly 80-odd percent now?

You mean the capacity -- their capacity utilization?

Overall industry, I'm saying roughly, or you can give us on the demand. So roughly ex China, Russia, the capacity was, I think, around 724,000 tonnes. So the 724,000 tonnes would be operating at, what, 70%, 75%, 80% or whatever number you can share or...

See, from this -- from this 724,000, I think you're referring to a table which we have shown earlier. So that is now further down with these 2 latest plant closures, that should be around 650,000 or something. I can check and revert to you because that 724,000 was including the 2 plants which were shut later.

Okay. Because I just said that number which you had shared in the December, so -- which had a total of 20 plants, I think SDK and GTI, both were at 200,000 tonnes. Tokai was at 96,000, HEG 80,000, Graphite India at 85,000 and CK at 32,000 and SCC at 27,000. That's how 724,000 was the total. So you are saying over and above that, 2 more plants have closed down?

Yes. You have to take another -- take off about 40,000 out of this and also the Graphite India's Bangalore plant is also shutdown.

I think Graphite India was already deducted. Graphite capacity was in that table shown at 85,000, 3 plants.

See, I have the table in front of me, which you are referring to, which is adding to 725,000. So that 725,000 did include Bangalore and did include those 2 plants I'm talking about of Showa Denkos, which was shutdown. So I can see that this figure was shared with you last time.

So this 724,000 is down to, you're saying, around 650,000?