HEG Limited (HEG) Earnings Call Transcript & Summary

There was some improvement. Is there a further improvement ahead? To help us out with that, Manish Gulati, the Executive Director of HEG is joining us on the show.

Hi, Mr. Gulati, good morning, and thanks so much for speaking to us here on CNBC TV18. Before we get to the results, have you watched any of the movies of the retail?

No, no. I didn't watch any of the two movies you are referring to, but I do intend to. They must be the block blusters.

All right. So let's talk about the numbers then for the time being and movies a little bit later. Tell us what was the capacity utilization levels for the past quarter, Mr. Gulati. For the year, you had told us in the past, you'll be looking at around roughly around 65% to 70% on an average for the year. So what was it?

Yes. For this quarter, April to June, we were in high 80s, rather close to 90s, both ways, capacity wise and sales wise. And if you look at the last year, throughout the last year, we kept operating at close to 90% of our capacity. And sales-wise, we did about close to 75%, resulting in increase in some inventories, which is high, which is very well planned that way.

Okay. So Mr. Gulati, going by the numbers that are telling me close to 90% odd, realizations would be a little bit lower on a sequential basis? You have Indicated in the past as well when we spoke at the end of quarter 4. So just a rough calculation indicates that realizations could be down by around 4% for the past quarter?

I will not put a figure to it, but you're close. There is a pressure on pricing quarter-to-quarter, and you're close when you say that.

All right. Quarter-to-quarter, there has been a pressure on pricing, number closer to around that 4% market itself. Just a guidance on the volumes this year? I mean, what is it that you can do and you have an increased capacity as well, right, from 80,000 it's gone up to around 1 lakh. How much also comes in additionally from the new capacity?

See all the new capacity, which our process is essentially -- basically 4 different parts to that process -- 5 different parts, 4 processes of that are already up and running for the past few months. And the last remaining process is just going -- undergoing some trials and that will also be up and running by before end of September. Regarding capacity utilization, we -- you take as our original capacity of 80,000, we still intend around 85% capacity utilization, although which is our old capacity. And the new capacity kicks in, let's say, October onwards. And of course, there's some time to process -- there's time to process that material. But considering the demand scenario, we actually do not need that capacity right now. But certainly, we are going to need it from the start of 2024 as demand improves, and we would intend to sell more volumes out of that in the financial year '24, '25.

So this is what you're saying this year should be around 75,000 with no coming -- no new volumes coming in from the new capacity, right?

The volumes -- as I said, the plant has already started operating. So it's a combination of the old plant and the new plant. And together, this is what we are saying that we will be close to, let's say, if we consider our capacity at 80,000 it will be close to about 90% of that is what we should be doing.

So 65,000 to 70,000 should be a fair ask?

Yes, I think so.

Mr. Gulati, whenever you join us, I ask you Mr. Gulati, when will you commission this expanded capacity. You explained to us 3 out of 5 processes, 4 out of 5 processes are done. But you have been kicking the can down the road, right? Because now September is the date when you'll go live, and I'll be happy to visit your plant and cover this expansion as well. But do you think September end is going to take place or not because then our interview and your plant is being postponed. So is it sure now?

Absolutely. Absolutely. More than 100% sure. In fact, we are not pushing it ourselves because we don't really need that additional capacity right now. We needed a few months down the line.

Got it. What should the margin number look like now? You've seen some bit of fair improvement, which is good. From multi-quarter low, actually, the margins improved in the past quarter. So what is the ballpark band we should be looking at for margins for the year?

See, going forward, margins, I'll be honest, the margins are going to come under pressure for next 2, 3 quarters. So you will see it sequentially going down from this Q1 to Q2, to Q3 and maybe Q4, it picks up back, but they're going to be under pressure only because of the reason that there's still subdued demand for the second half. See, although the medium term, long term looks great. It's absolutely great. The kind of decarbonization is happening. About 100 million metric tons of electrical arc furnaces, steel production is going to increase between now and 2030. And there's going to be a humungous demand of 200,000 tons [indiscernible]. And we are just adding 20,000 to that, and nobody else is doing it. So post 2024 onwards, we are highly -- we're bullish about the demand for graphite electrodes. But right now, there's a blip for these 2 quarters. So we just have to live with that. And our peer group is also not working at high capacity utilizations. So that is going to bring pressure on the margins.

Right. No questioning the long-term demand prospects for the industry itself with the supply/demand dynamics that you just spoke about, Mr. Gulati, but how much lower can the margins go over the next couple of quarters? Because first quarter, you've done around 22.5 odd percent, same time last year, it was close to 25.5%. How much lower does it go? And how many levers do you have? Because other expenses as a percentage of sales are coming down as well. So you've cut down a lot of your costs. How much can the margins go lower by?

See, I am -- I can't put a number to it. But yes, they are going to get squeezed. We are getting some relief from the needle coke prices, but they are not enough. The electrode prices are falling more than the needle coke prices and there is also the lag effect. So I can't put a number to it. But yes, they're going to remain under pressure. However, still, we should be positive even in those quarters.

And final question then from my end. Your lithium ion says that you had the diversification planned for. I remember the last time you joined us, you said that the revenues from this product will be seen only from FY '25 and the number that you've said was closer around INR 800 crore to INR 1,000-odd crores on the first plant. Is that still on the cards. You are going to do that? Are the time lines maintained?

Oh yes, it is still on the cards. It's proceeding well. The plan is very much coming into action. We have the land now, and we are going to start on it very soon.

But the time line is quarter 1, FY '25 onwards, we'll start seeing some revenue, right?

I guess, in the second half of 2025.

Second half, okay. All right. Earlier, I think you were indicating for the first half, but we'll take it. Second, mid of FY '25 is when we'll see it, you're going to be looking at putting close to around INR 1,000 crores in the first phase. And I think the revenue potential will be around 1:1, which will be INR 800 crores to around INR 1,000 crores odd. Always good speaking to you, Mr. Gulati.

That's fine.

Thanks so much for joining. And as you said, the long-term story is very, very good for HEG with a lot of capacity coming in for the electric arc furnace. But in the short term, maybe there will be some pressure on margins because demand is a little bit weakish, high needle coke prices and realizations of graphite electrode a little bit weakish. That's about HEG. Let's move on though.