HEG Limited (HEG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to HEG Limited Q3 FY '22 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 SKP Securities Ltd. Thank you, and over to you, Mr. Agrawal.

Good afternoon, ladies and gentlemen. It is my pleasure to welcome you on behalf of HEG Limited and SKP Securities to this financial results conference call with the leadership team at HEG Limited. We have with us Mr. Ravi Jhunjhunwala, Chairman, Managing Director and CEO, along with his colleagues, Mr. Manish Gulati, Executive Director; Mr. Om Prakash Ajmera, Group CFO; and Mr. Gulshan Kumar Sakhuja, CFO. We'll have the opening remarks from Mr. Jhunjhunwala, followed by a Q&A session. Over to you, Mr. Jhunjhunwala.

Good afternoon, friends, and welcome to our Q3 '21/'22 con call. In line with the first 2 quarters, our third quarter performance continued to be strong supported by improving worldwide steel market conditions, consequently resulting into strong electrode demand. According to the WSA, the World Steel Association data, global crude steel production for the calendar year showed a 3.7% increase over 2020. But what is more important and positive for us is that the steel production, excluding China, increased by a whopping 13.1% while China reduced by 3%. This gives us a double impetus to the graphite electrode industry. While the world outside of China produces about 47% of its steel through electric arc furnaces resulting into higher electrode demand and the reduced growth in steel in China, obviously reduces steel exports from there to rest of the world. Friends, as steel decarbonization gathers speed all around the world, many projects were converting existing blast furnaces into electric arc furnaces, along with some new greenfield capacities have been announced in very recent past across the world mainly in countries like the U.S., Canada and Europe. American steel companies alone have announced a new capacity of electric arc furnaces to the tune of 20 million tons, all of these are likely to be in production between 2023 and 2025. Similarly, European steel industry has also announced replacing their existing blast furnaces to electric arc furnaces to the tune of 16 million tons, of which about 12 million tons is from ArcelorMittal alone. They should also start going into operation from 2025 onwards. This kind of a 36 million tons of additional EAF capacity, which is now going to go into operations straight away in the next couple of years, ending in 2027, '28. We haven't seen this kind of new capacities of electric arc furnaces being created any time in the past. This will have a significant impact on demand of electrodes of about 50,000 tons per annum. Most of these would be large electric arc furnaces using ultrahigh power electrodes for which we are fully equipped. In China, the government's efforts to replace polluting steel capacities continue, and they're on track to reach 20% production of steel through EAF in the next 3 to 4 years. They've already doubled share of electric arc furnace from about 6% in 2016 to 12% in 2020. And they keep building new electric arc furnaces to reach their capacity of about 20%. Indian crude steel production increased last year by a significant 17.8%, highest growth anywhere in the world. The Indian steel industry is in good shape, supported by strong demand from domestic as well as export consumption. Following us, United States, the world's top user of graphite electrodes, also saw a significant increase of more or less the same size as of India around 17% to 18%. And after India, U.S. happens to be our second largest market for electrodes. The electrode prices for both UHP and non-UHP grade, improved in Q3 versus Q2. And we see this trend continuing in the next quarter -- in the current quarter, as well as the remaining 2, 3 quarters of current calendar year, and we expect the prices to remain fairly strong, excluding the entire 2022. We continue to work at 90% capacity utilization since past 3 quarters. Needle coke prices are also rising in line with electrode prices. We are still contracting for orders quarter-on-quarter as needle coke prices are also being negotiated quarter-on-quarter. We are bolstered by the new EAF capacities announced an EAF long-term growth. So our announced expansion of capacity from 80,000 tons to 100,000 tons seems very timely. As I said, with around 30 million to 40 million tons of new electric arc furnaces on the annual -- in the next few years, and with no new capacity of electrode announced by any other company than us, we don't foresee any problem in finding market for the additional 20,000 tons from next calendar year. Again, friends, at the cost of repeating, carbon emission through every ton of steel produced through electric arc furnace is 1/4 of the same steel produced through blast furnace. So as the carbon emission and the carbon credit gather steam, it all goes well as far as the graphite industry is concerned. Our expansion continues at full swing, and we expect to complete it by end of 2022 and be ready for commercial production in early 2023. This will increase our capacity under one roof to 100,000 tons, which is about 30% to 35% larger than the second -- next largest plant In the Western world. In '22, '23, we expect our sales to be higher by about 5,000 to 6,000 tons versus current year, part of which would be some technology innovations achieved by our technical team from the existing facilities. And part of that will also be from the new expanded facility, which should start production from early 2023. So overall speaking, we hold a fairly positive outlook for our industry as a whole and even more for HEG without timely expansion. On this note, I would like to pass on the floor to our CFO, Gulshan, who will walk us through the financial numbers. And then between me, our Executive Director, Manish; and our CFO, Gulshan, we'll be very happy to answer all your questions. Over to Gulshan.

Thank you, sir. Good afternoon, friends. I will now briefly take you through the company's operating and financial performance for the quarter ended 31st December 2021. For the quarter ended December 2021, HEG recorded revenue from operations of INR 598 crore as against INR 518 crore in the previous quarter, and INR 320 crores in the corresponding quarter of the last financial year. Revenue for the quarter saw an increase of 15% on a Q-on-Q basis, while it witnessed an increase of 87% compared to the corresponding quarter of the last financial year. The multidimensional growth in volume and price have led to the growth in revenue from operations. During the quarter ended 31st December 2021, the company has delivered EBITDA including other income of INR 171 crore in the quarter as against INR 167 crore in the previous quarter, and INR 24 crore in the corresponding quarter of the previous financial year. The EBITDA in the quarter ended 31st December 2021 was slightly pulled down due to the higher expenses pertaining to power and fuel on account of increasing LNG prices and settlement of one old power case, increasing consumption of stores and spares and higher logistic cost, which has been included under the head other expenses. Further, in accordance with the provisions laid down under Section 135, during the quarter ended 30th September, the company has incurred expenditure on account of CSR amounting to INR 5.4 crore during the quarter in comparison to INR 0.8 crore during the quarter ended 30th September 2021, which has been included under the head other expenses. Further, during the quarter ended 30th September 2021, the rates and other guidelines have been modified under the remission and duties and taxes on exported products, that is called RoDTEP scheme by notification dated 17th of August 2021. Accordingly, the company has accrued the benefits amounting to INR 4.85 crores during the quarter ended 30th September 2021 under the aforesaid scheme on the eligible export sales for the period from Jan 1, 2021, to September 30, 2021, out of which INR 3.24 crores pertains to the eligible export sales for the period from Jan 1, 2021, to June 30, 2021. The company recorded a net profit after tax of INR 108 crore in the quarter as against INR 113 crore in the previous quarter and INR 5 crore in the corresponding quarter of the previous financial year. The company is long-term debt free and has a crazy size of nearly about INR 1,470 CR as on 31st December 2021, yielding an average return of approximately 5%. We would now like to address any questions or queries you have in your mind. Thank you. Now over to Navin. Hello?

[Operator Instructions] The first question is from the line of Anandha Padmanabhan from PGIM India Mutual Fund.

So recently, there was some -- about the Chinese [ ore mine ] postponing the carbon emission norms for Chinese steel industry from 2025 to 2030. So as a result of this [indiscernible] implemented, how do you see the impact of the same on it?

Manish, would you like to answer that?

Yes. There are some rumors and this talk about China postponing that. But as late as yesterday, I think the news, which is coming out of China, they're very much on the path of converting their [ BOS to PS ]. So I don't -- I really don't think there is a change in the stance -- in China's stance. They might slow down the speed or gear up on speed, but you have seen them coming from 6% to 12%. And what they're saying 20% other 3, 4 years, maybe it gets extended by year. But there is no reversal as such, not that anything we have heard of.

And how are you seeing the pricing situation for your [indiscernible]?

See, as an industry, we are working and not only us. If you look at our peer group, which comprises the world leaders of the Western producers, all of us are working today at the rate of 90%, and we are able to see growth in demand. So pricing has been used to be strong. And between Q3 to Q2, there is possibly the increase of 8% or 10%. And again, the 8% to 10% is again there between Q4 and Q3. That's another point that GDP growth also continues to rise. And -- but otherwise, the pricing continues to be strong. You must have seen the results and outlook presented by our peers. And during the course of 2022, they're likely to remain strong. That's what we think.

How should we look at the overall margins per se because in one of the [ inventory ] you commented that the margins will remain in the current range. So just wonder.

If the closest word which can describe this is similar. Similar margins because GDP growth is also rising quarter-by-quarter. If electrode prices are rising quarter-by-quarter then needle coke pricing and some other imports are also rising.

Is there any issues with availability of input for this?

Sorry?

Is there any issues or availability of imports -- are or stratified or able to take [indiscernible]?

Yes, yes. Question of your prices. There's no problem of availability aspect. We've got more than enough, we have enough.

The next question is from the line of Dhawal Doshi from Pinpoint Asset Management.

I would just want to understand the overall supply situation in the developed markets, especially in the Europe and the U.S. Given the rising cost of electricity out over there, are we seeing any supply closures happening in the electrode segment and that could, in effect, have a positive impact on the -- pricing? Secondly, if the closures are not happening, but there will be significant cost pressures on account of electricity. So that should further inch up the electrode prices. Is the understanding correct?

Partly, yes. But you see, as far as our consumption -- consumer sector is concerned, for them pricing of electricity as important as it is for graphite. So both of them go hand in hand. But more important is that as we just said, in U.S., out of the 20 million tons new greenfield capacities which are coming in the next 2 to 3 years, the very first capacity is going to be available as early as next year -- early next year. So you can imagine a 20 million ton increase and all into electric arc furnace only in the next 2, 3 years, that, itself, adds at least 30,000, 35,000 tons of demand for our products.

I'm not denying this point, sir. I'm very well taking your long-term demand argument. What I was just trying to understand is in the short to medium term as and while the overall electricity price scenario in Europe is going from back towards, are we seeing any supply squeeze happening in the graphite electrode market? Or we have not yet seen that thing?

No, we haven't seen that. And as I said, the cost of power for our graphite industry and for steel industry, power remains one of the large cost elements. So if something happens to -- if there's a reduction in the electrode production due to cost pressures because of power, it will be more or less offset by some -- a little less production of steel. So they're both complementary to each other. And at the end of the day, power is still not as significant a cost for the electric arc producer as the scrap prices are.

No, that I understand, but power is still definitely decent cost contributor for an electrode manufacturer.

Yes, that you're right, of course. But then, as I said, it goes hand in hand. If it becomes unviable for the steel company, it becomes unviable for the graphite industry. So both will go up or go down at the same time.

But is it fair to assume that the players operating in Europe and U.S. are seeing a significant squeeze on margins, which probably can come to some benefit as far as we are concerned?

Manish, I mean, would you like to answer that? How do we compare in our margins compared to the American and Japanese producers?

In Europe, certainly, they have pressure on this price of electricity. In U.S., it is not. So Europe, I'm sure our peer group there is facing more cost pressures, which they have to try and pass it on to the customer by way of increasing prices. But the one point which you have asked that is there any supply closure or something? No, it is not to that level as long as the costs can be passed on. But certainly, they are facing -- they must be facing cost pressures on account of the surge in electricity prices in Europe. But it has not translated to reduction of production of our peers. I mean, who are operating there.

Sir, but what kind of upside pressure can it create on the electrode prices? And what I'm more interested is, let's say, if I were to look at the margins for the graphite players in Europe, electrode prices minus the needle coke prices, are they trying to maintain those margins by further reducing the electrode prices because of the power cost?

See, quarter-on-quarter, the electrode prices are increasing. And of course, they will try their best to pass on these cost to the electrode price and then to the steel industry. So far, that is going on. I mean it's not that they have to absorb all this additional electricity costs all to themselves, and we have not seen margin reduction to that effect from European plants. The issue is that these results, we cannot -- this electricity problem is happening only in Europe. So -- and when we see the results, we see them in total, all their plants combined worldwide. But sooner or later, the European results should also be available. So we'll have to -- I mean, we can only comment after we have a look at that once we are in public.

Okay. But as of now, you're saying that does not really had any major impact as far as availability as well as the pricing is concerned?

Yes.

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

My first question is if you could help us understand just the quantum of price hikes that we took in Q3. It's not actually just a quantum.

Okay. So we can say between 8% to 10%.

Right. And how much do we think we'll be able to increase in the coming quarters?

I think should be 7% to 8%.

Understand, sir. Second question is regarding the Chinese supply. We talked about how China is growing their EAF capacities to about 12% right now as of 2020. Could you give us with an update on what is the situation about with the excess electrode supply in China?

I mean I just repeat, if I've understood correctly, you're talking about the electrode supply from China.

Right. I mean do we foresee any risk that they would start or increase their exports again, which could disrupt the pricing of electrodes for ex-Chinese players.

They are exporting almost in excess of 300,000 tons of electrodes to 200 countries. And this is not something new. They've been doing it for a while. But the grades which they are supplying on the regular power, the high power, we do not see real competition in the segment in which we operate, when we are making big sizes electrodes supplying to mostly to the Western world. So there's a lot of demand from the lower side. They're in found small, small foundries, maybe even regular power are used. There are other applications. So when we look at volume terms, they continue to be at that level. But it has not disturbed our market because it's -- they are working in a different space and we are working in a different space. There might be slight overlap. They will call [ US ] from where you will hear this exceeded, some were not. And I think it's still a lot of time away of when we -- I mean, a lot of customers actually start banking on them by buying 30% to 40% of their requirement. So that is -- that, we have not seen so far.

Understand. Sir, lastly, some bookkeeping questions. In this quarter, our other nonoperating income is notably lower year-on-year and our depreciation and interest expense are higher year-on-year. So how do we look at it in the coming quarters?

Yes, I think Gulshan will answer this question.

Yes. If I talk about this quarter, the other income of INR 14.7 crore versus INR 25 crores. This is on account, if you see 3 or 4 years back when the company had a bump in EBITDA margin. At that time, the company had invested in our long-term funds as funds at a rate of 8% plus. And all these treasury funds have been matured in the start of the financial year. So this is one of the reasons, which has led to that reduction of this other income. And second, as you know that with our expansion from 80k to 100k is funded through intern accruals. So we need the funds add-on basis. So that's why we are placing our treasury and the funds on a short-term basis -- rather going for a long-term. So both these sectors has resulted in the reduction of that other income. And going forward, we are being -- it could remain in the same range.

Right. Sir, and about depreciation and interest expense, is it also on account of the CapEx?

I'm coming to that finance cost. Earlier, if you see the -- intra subvention scheme from the RBI, and that was 3%. So that has been -- there's no notification for further extension, and that was until 30th September. That's why if you see on quarter-on-quarter the interest cost has increased from that 1.15% to 4.17%. This is on account of that withdrawal of subvention or there is no clarification from that RBI, whether it would be further extended or not. That's why, we have charged that interest at a normal rate in our books of accounts. And the third part is of depreciation in this quarter means we have capitalized one of our data furnaces. So that has led to the increase in depreciation.

So these costs, we should expect at similar levels going forward in the coming quarters as well?

In case, if that notification comes, still means there is no clarity. In case of a notification comes about intra subvention. So definitely, our interest cost would come down. In case if it does not, then it would be in a range -- in the same range depending upon that working capital requirement. And that depreciation more or less, it would remain same for the next financial year also.

Understand. Sir, just last question of the CapEx. What is our total CapEx for the 20,000 metric tons? And how much of that has been already spent? That's it from my side.

Yes. Manish?

Yes. So total -- I mean, out of this total spend until date is about INR 700 crores out of the INR 1,200 crores we talked today.

[Operator Instructions] The next question is from the line of Veeral Gandhi from Ninety One.

Just a question on -- I saw that on Page 12 of your presentation, there is a minus INR 60 million crore change in inventory of finished goods, work in progress in stocking trade for the quarter, INR 60.44 million crores. Could you tell me what resulted in that?

Yes. If you see this change in inventory, you have to see as a total is that the cost of material consumed plus change in inventory. That has led to that raw material consumption during the quarter, plus 274, minus 16. We have put it in that way, sir.

Okay. I see. Okay, brilliant. And then the second question was, so -- yes, could see your share prices come under some pressure on. Do you have any views on what's resulted in that move down within the share price from September last year?

Sir, as far as share price is concerned, we are not that concerned. How -- that depends upon the market, how the market is, how the market proceeds also [indiscernible]. If you see the global concerns of Russia, Ukraine that is going on. So we are used as far as the share price, the market is concerned, we are -- we will not comment on that. [indiscernible].

Okay. Right. And the last question is, so you talk about quite a lot of net cash. Given your share price has fallen, would you be interested in doing some buyback?

Again, the question may be subject to that approval of the Board. And if you see the past history of you see that our HEG -- you see that our payout ratio always remains that in the range of 30% to 35%. And we hope that we will continue with this payout. Again, that date is subject to that approval of the Board.

[Operator Instructions] The next question is from the line of Dewang Sanghavi from ICICI Securities.

Congrats on a good set of numbers. My first question is regarding the industry dynamics. Currently, around 25% of the steel producer to the EAF route. And with the upcoming capacities in U.S. and Europe and China again talking to go to 20%, can we expect the same to go to 30%, 32% in the next 3, 4 years? Or do you perceive any headwinds in this result?

We'll have to split this question into two. I mean, it's very confusing to mix China and not mix China. So China until 5 years ago was producing only 6% whereas rest of the world produced about 47%, 48% through electric arc furnace. But because China produces more than 52%, 53% of the world's steel, the total average comes down to 25%, 26%, as you correctly said. But given the path of decarbonization that every country is pursuing, China announced their plan to go from 6% to 20%. It is huge. I mean, 3x more electric arc furnace production in a given period of 6, 7, 8 years. And they're on the path. But we -- let's segregate China for a minute because we are neither competing with China in India nor we are competing with China in our export markets. As Manish just explained, we are not exactly in the same segment in the market. We produce 60%, 70%, 80% of our production of ultrahigh power electrodes where China is not our competitor. So it is easier to -- it is easy to explain and discuss the world of steel without China, which is the other part of the world, minus China, where electric arc furnace, that part is increasing, as I just said. In U.S. alone, there is 20 million tons of new electric arc furnace capacities, which are already -- some of them are already on the ground. The construction have begun. And between now and 2025, they will add another 20 million tons. And in the last 3 months alone, Europe has followed and Europe has announced another 16 million, 17 million tons. Their time period is slightly later. They will start conversion from '24, '25 onwards. So in total, if you see minus China -- without China, the world is adding another 35 million tons of steel in the next 5, 7 years. And half of it is going to be ready in the next 3 years alone. And as the entire world graphite industry is already operating at more or less -- more or less the entire possible capacity utilization of 90%, 92%. It's very difficult to go beyond 90%, 92% in our industry. So in that backdrop, every new demand which is coming, we -- all of us, combined, are barely able to meet the full demand of the existing customers in the world minus China. So every new capacity of electric arc furnace coming, adding any more demand for graphite electrodes. So we are preparing ourselves to meet that demand. And luckily, we took this decision at a very opportune time, let's say, about 2 years ago. And again, luckily, somehow we were able to manage. And our plan, which was to complete the expansion and start by October, November is not really hampered. I mean, we are probably delayed by maybe a month or 2. But by end of this year or early next year's latest by November, December, January. So within this year, within the next 2022, '23 financial year, we will be producing some additional quantity in the month of February, March from the expanded capacity from -- to meet this additional demand. And besides that, as I just said, we have made some technological improvements in our existing plant. So between the part of the expansion being ready before March next year, and also 3,000, 4,000 tons, which we think we can produce, we've already started producing that proportionately in February and March. So we will have at least 5,000 to 6,000 tons of additional electrodes to sell between now and next March. And then from March, April onwards next year, the additional 20,000 tons. So we're very happy that our timing of decision that we took for expansion, we were worried about a year ago because of COVID. But with all the new announcements of electric arc furnaces and additional demand coming up, the timing is now matching with the demand for electrodes next year onwards. So we'll be able to -- we don't see any problem in selling whatever we are going to produce in the next 2, 3 years.

Yes, sir [indiscernible] future. My second question is regarding the new capacity. How quickly we can ramp up to optimally 80%, 90%?

This is a very, very difficult question to answer, despite a 45-, 50-year experience, it's not a very, very -- it's not an easy question to answer, even with a huge amount of experience that this company has. I mean, you may just run into some problem at some stage. But hopefully, given the experience and given that we are more or less repeating whatever we have, we have not gone for something which is very, very fancy. So we have been handling all these expansions in the last 10 years. So we are more or less repeating exactly the same thing. So unless there is a major surprise in store, which we can't see today, we don't see much of a problem. I mean, don't pin me down on a number, but I mean, it should be very easy to reach 70%, 80% in the first 6 months itself.

That was helpful. Last question regarding in this one-off in the power cost, which was kind of alluded in your opening comments. So what would be the content for this year?

What will be what?

There is a one-off in the power cost for the quarter three results, I believe [indiscernible].

Yes, Manish why don't you explain that.

That was INR 14 crore.

INR 14 crore one-off. And do you expect something like that to prove or like [indiscernible]?

It was an old matter, some areas with discount, which were reconciled. So it's not anything which will recur.

So it's not recurring nature, let's say for the situation recurring.

No, it is not right. There was a dispute between us and the SEBI. We didn't think that it was the right thing for them to direct. But then, at the end of the day, you don't want to fight a [indiscernible].

Absolutely. And all the best.

[Operator Instructions] The next question is from the line of Rajesh Majumdar from B&K Securities.

So my first question is, sir, on the export composition. Considering the differential energy prices across the globe, are we seeing differential export rates in, say, U.S., EU and Japan, I think the 3 largest countries in the EAF route? And are you seeing a different export competition country-wise over the last 2 quarters and the relation there?

I don't think there is any major difference between country A or country B. It's a very, very international product, and most of our competitors have production facilities in U.S. and Europe. So maybe there could be one-off small countries where you can ask for a higher price. But we haven't seen much of a differential pricing between country A and country B.

It's possible to break down the export composition -- I'm not asking the exact country wise, but the reason why broadly, not like Europe, Japan, at least let that?

Manish?

See, I would like to put it this way that if you put, let's say, take U.S. and Europe on one side, take Southeast Asia, another side, Middle East on other side, I would say it's not more than 5% difference, not more than that. And timing of other conclusion is also important. Suppose if we have picked an order this lasts for 3 months and meaning -- in the middle, the price hike leasing and an order which has concluded in the third month and goes very well exported that very month. So we'll see some variations. But across markets, since it's a global marketplace, it's not -- I think with this -- even with the freight we have today, you can virtually reach any country with your product. So it doesn't vary much, provided you are an established player in that market, all things remaining equal. Some of it we have a special trial price, maybe we want to get into some customer, we may offer some incentive just to give us an opportunity. Other than that, the pricing in a stable listing. All things remain equal, our pricing doesn't change from market to market.

But generally speaking, if you will really pin me down to one country, probably America is the first one to increase the price. So that has been more or less a trend. And then rest of the country follows, the rest of the world follows.

And what is our export share to the U.S. right now? Has it changed meaningfully over the last 2, 3 quarters or 1 year?

Yes. I mean, we have -- our export share in America keeps growing, increase growing rapidly. Our exports have practically doubled in the last 12 months. We are focusing on America for a very long time only for the simple reason that while the rest of the world, minus China produces about 47%, 48% of steel through electric arc furnace, in America, this number is about 70%. So America being the third largest country -- or fourth largest country for steel production, 70% of that steel is produced through electric arc furnace. So this is by far, the single largest consumer of electrode as a country. So we have been focusing on America for a very long time. So our -- we did a lot of trials in the last 2 years in new customers, keeping our expansion in mind. And most of our -- 90% of our trials were very, very successful. So on the back of that, our exports have actually doubled in America in the last 12 months. And they are again going up by, I mean, at least 40% to 50% this year, if not double, but at least 50% more than last year.

And what is that out of our total export share, sir, is it possible to quantify?

In America?

In America, yes.

America would be, what? I mean, Manish, at least 12.

I would say -- our export 10 to 20, I would say, sir.

Yes, 12 to 15 [Foreign Language]. So that will be the single largest export.

And after the expansion in.

[Operator Instructions]

No, no. After -- even after expansion, they will still remain the largest because that's the one country where the biggest expansion of electric arc furnace happening.

The next question is from the line of [ Hemant Kumar ], individual investor.

I just want to know like the EV business is picking up. I think a year back, we discussed that there's a consultant who is working on getting the new business and anode is like a kind of a 60% of the lithium battery, and that is the business we were planning to -- are looking to it and do the right investment -- to get into the market. So what -- any plan on that?

Manish?

See, it's been a -- being a carbon and graphite company, and these being kind of related products. We just keep looking at it. But at this time, as we speak, there's no plan as such. Maybe it's in the future, we'll certainly let you know. But it's a completely different process compared to graphite electrode. Yes, it is carbon definitely, but the whole processing and the whole value chain is completely different than graphite electrodes. Of course, EVs are the -- they're going to grow very fast. And from time to time, we consider this field, we look at it. But right now, there's no plan on the table.

Okay. Yes. I mean that's the -- maybe the CapEx policy is also has been approved from the government and then we saw what I understood from the last call was like it's just a minor tweak. So the anode simply get produced from the base product from your -- whatever the manufacturer currently is happening and the new facilities you're going to have the more capability on -- in front.

Yes. Yes, you remember correctly. There was a time when we thought that if there's anything can be done out of the existing plant, but then having gone into a lot of detail, it emerges that if you really want to make a cutting-edge anode the processing should be different right from the very beginning.

Okay. But not now because a lot of new brands are coming up in India planning to invest in [indiscernible] within you saw there was no like request for artificial electrode or it's always good for the natural electrodes and for the anode.

You're talking about the different materials, which can be used to make an anode. Of course, it started from natural graphite. Then of course, natural graphite is limited. It is a mined product, then it came to artificial graphite then people thought artificial graphite is also not easy to obtain. Then even meso phase pitch, the quota based which people came in. So the EV people are trying a lot of materials. They have substitutes depending on the right price and the right quality -- parameters they can obtain. So they have an option of 2, 3 different types of materials.

But there is no as such demand for you guys to like look at serious level and take the opportunity which doesn't start going?

No, not from the electrode plant, not from the electrode plants.

No, in this electrode plant, I mean we cannot diversify into anything else. I mean it's a dedicated graphite electrode plant. But you're absolutely right. I mean, it is something of the future. And as Manish explained and as we spoke about in the last call, we are looking at a couple of such opportunities. I mean, it's not the opportune time to talk about it yet. Nothing is ready. Nothing is ready to -- nothing is cooked up, let's say. But there are lots of things which we are looking at and it's a matter of time that will take some decision and let you know.

Okay. Yes, because it's been 2 years, and you said like there is a professional consultant is working on and looking at the opportunities, right? So that's why I was asking.

Yes, it will come. It will come. Let me assure you, give us some more time.

The next question is from the line of Rajesh Majumdar from B&K Securities.

My second question was actually on the expansion we have on the GE space. And I understand there's going to be some different raw material than needle coke.

No, no. It will not be different. It's the same graphite electrode.

It's the needle coke base only. So given the fact that needle coke supplies are not increasing globally, do you foresee any issues on the RM side in terms of the new plant?

No. It will not be easy, I mean, let me say. There's no yes or no answer to this. I mean, we are pretty sure that we'll be able to manage to get this additional tonnage. It's not going to be easy. Nothing is easy, but I don't think we should be worried about not being able to run the plant at full capacity because of that. I mean, we have been buying needle coke from 5, 6 different sources for the last 40, 45 years. So obviously, before we jumped into this expansion, I mean, we've gone met them. We have told them our requirements and everything. So it's a matter of just 20,000 tons in an ocean of more than 0.5 million tons that we produce.

And in the long run, this is going to be a limiting factor for the industry to grow beyond the point. Is that correct in terms of the GE industry, the availability of RM? So to that extent, our future plan, I'm not talking about the short-term nor beyond say 4, 5 years, we are going to capacity utilized fully. We'll have to think of some of the revenue stream because this -- this growth is likely to get saturated given the issue on the RM side.

Yes, you may be right. I mean, if somebody was to invest in a greenfield 50,000, 60,000, 70,000 tons of capacity, yes, that will be a constraint. I mean, today, you cannot say so easily that I'm going to spend X. And when you are talking about 50,000, 60,000 tons of the new greenfield plant, you're not talking of millions of dollars. You're talking of billions of dollars of investment. So at that stage, yes, I mean, it will be an issue. So that is one of the reasons why we are not seeing any -- we are not seeing many people talking about putting up a new plant or going for a very large expansion. And again, I mean, given the experience of electrode building capacity that we have, any new greenfield expansion -- any new greenfield plant, a new plant, will take minimum of 4 to 5 years to build. So when you are dealing in a space of steel industry where the fortunes can change very fast, it's not easy for any newcomer or even an existing player to talk about investing billions of dollars in a field where you're taking a view of 4 years plus.

The next question is from the line of Siddarth Mohta from the Principal India Mutual Fund.

Hello? Sounds better?

Yes.

Sir, on brownfield piece, just upcoming 20,000 [indiscernible] brownfield unit which will have this latest plant and machinery and all the latest equipment. So what impact it can have on the manufacturing costs and only rough range on the EBITDA margin or on this [indiscernible]?

See, first of all, it's not like a brownfield plant. It's almost a greenfield plant. Every shop, every process is different. We are going to be making nipples from that. So the main plant is dedicated towards electrodes. Of course, it will increase our depreciation costs. But we at the same place is going to actually cause a reduction in our overhead because we are 100,000 tons plant at a single location. So that way, we'll economize on the overhead costs. They will come down.

Okay. Okay. And sir, it's a bit early, but if it is possible to quantify the reduction in that overhead cost and what impact it can have on the margin? Any rough inventory, sir?

See, it [ 80 ] -- you're mixing 20 to that. So whatever expense you will be dividing that proportion. Of course, there will be a certain increase because we will still need 100 more people to run that plant. But all the other overheads will get amortized over a larger tonnage which is, let's say, 25% of what we are today.

And overhead costs would be what percentage of our revenue or of our cost roughly?

Gulshan, what exactly is that overhead on our revenue?

It's clear. If you go through the detailed balance sheet now, you can go to quickly calculate that our percentage of fixed cost or overhead cost or sales revenue.

How much? 10 to 12?

No, you can calculate easily from the detailed balance sheet, how much overall cost is a proportion to that sales revenue.

Ladies and gentlemen, we'll take the last question from the line of Raghav. Raghav, can you hear us?

Yes, I can hear you. Can you guys hear me?

Yes, yes, we can hear you.

Just wanted to ask that you earlier said that the Chinese electrodes, which were being exported. So they're not really competitive with us. I just wanted to understand whether the technology for them could be upgraded in a manner in which they become competitive with us in the future in the ultrahigh electrode space or from that's sort of the stand there.

No, by saying that they are not competitive, it is not in competitive or noncompetitive in terms of cost. It is -- we're talking of the quality. So because they don't have the technology, they are not able to produce, let's say, the ultrahigh power electrodes, which can be acceptable to an American customer or a European customer. About 80% of the total demand of electrodes in the world is for the UHP. And that is at 80% where Chinese are not able to meet the customers' needs.

Okay.

It's a technology reason -- issue.

Yes. So there is no way that they could upgrade the technology somehow because -- sorry, I'm new to this industry.

No. I mean, of course, I mean, if you keep trying, you will succeed 1 day, but you need a formal partner with 20, 30, 40 years of experience to back you up and give you the right advice, right, the right people, training right equipment. It's not very easy. I mean, just because you said you are a new person, so let me just tell you the easiest electrode that we produce takes about 6 to 8 weeks to produce. And the most difficult product that we produce takes as long as 5 months to produce. And in these 2 months to 5 months.

Participants, please stay connected line for Mr. Jhunjhunwala. Ladies and gentlemen, please stay connected. Ladies and gentlemen, thank you for your patience, we have line from Mr. Jhunjhunwala reconnected. Sir, you may go ahead. Ravi, sir, can you hear us?

Yes, yes, I can. I thought the person who was that last question was Raghav.

Yes, sir. You explained 5 months, it takes to -- for the.

Because you said you are new to this industry, I explained the technology part. The easiest product takes about 2 months to produce. And the longest product, the most difficult product takes about 5 months to produce. So between these 2 months and 5 months, there are five very different processes through which these electrodes pass through. So if you are handling a product where it takes 2 months or 5 months and five distinctly different processes, and by this distinctly different processes, I mean from one shop to second shop to third shop to fourth to fifth, and there is no relation between 1 and 2 and 2 and 3 and 3 and 5. These are very, very different processes. So if you're handling a product for as long as 2 to 5 months, there are various kinds of complexity. There are different technologies every day that you have to go through. So unless you have a solid company behind you as a technology partner, it's a trial and error otherwise. So that's where the Chinese are lagging. So they don't have a credible graphite company behind them.

Thank you very much. Mr. Jhunjhunwala, I now hand the conference to you for closing comments. The line from Mr. Jhunjhunwala has been disconnected. Ladies and gentlemen, please stay connected while we rejoin Mr. Jhunjhunwala back to the call. Ladies and gentlemen, thank you for your patience. I now hand the conference to Mr. Manish Gulati for closing comments.

Yes. First of all, friends, thank you so much for your time when attending our conference call. I would like to summarize it in this way that we hold a very positive outlook because of decarbonization efforts going globally, the carbon credits and the shift from blast furnaces to electric arc furnaces, the new electric arc furnaces coming up. So we are in this -- we are helping an industry recycled steel. So we hold a very positive outlook for electrode industry as a whole and [indiscernible] becoming 100,000 ton plant, which will be the largest plant in the Western world. I think that is in the right business, and it holds a bright future. So we look forward to speaking with you once again with our annual results. Thank you so much.

Thank you very much. On behalf of SKP Securities Ltd., that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.