Sarda Energy & Minerals Limited (504614) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sarda Energy & Minerals Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Pankaj Sarda, Joint Managing Director. Thank you, and over to you, sir.

Thank you, Madam. Good morning, everyone. On behalf of the management, I extend a very warm welcome to all of you to the earning call of Sarda Energy & Minerals Limited to discuss performance and results of Q3 FY '20. Our press release and investor presentation containing details of performance has been uploaded, which you may find to be relevant for the performance review. We draw your kind attention to the fact that today's discussion may include some forward-looking statements, which must be considered in conjunction with the risks that industry in general and our business, in particular, face, and actual results may vary materially. The ongoing trade war had an impact on global economic activity. Global steel production for CY '19 was 1,869.9 million tonne, up 3.4% Y-o-Y. China produced 996.3 million tonne, up 8.3% Y-o-Y, constituting more than 53% of global steel production. Ex China, production saw degrowth to 873.6 million tonne, down 1.6% Y-o-Y. India's domestic crude steel production during CY '19 was 111.2 million tonne against 109.3 million tonne in CY 2018, registering a growth of 1.8%. In Q3 FY '20, India produced 27.189 million tonne steel recording nominal growth of 0.24% Q-o-Q and degrowth of 2.74% Y-o-Y. Due to declining demand, prices of steel started falling from June 2019 and the trend continued in the third quarter. In the falling domestic market, India's exports grew substantially, whereas imports have contracted. In 9 months, India was net exporter of steel. The cascading effect of NBFC defaults and credit defaults in banking system also affected credit availability and private investment. The government has proactively announced various steps to boost the demand and credit flow in the economy. The effect of which is reflected in demand and price pickup in current quarter. The green shoots of economic revival are reflected in different sectors. However, global headwinds are posing a challenge to the revival. In anticipation of supply disruption due to expiry of existing leases in Odisha, prices -- price of iron ore has moved up in last few months. However, the Central government has taken proactive steps to minimize disruption in transition. Recent ordinance notified by Central government allows successful bidder to carry on mining operations with existing clearances and approval for a period of 2 years. A few of the mines have already been auctioned. Government has allowed Steel Authority India Limited to liquidate their dumps, tailings of approximate 70 million tonne and 25% of their annual production. Existing lease is given a time period of 6 months to lift the piled-up stock and infrastructure. Ferroalloy prices also fell substantially in the third quarter, but have seen substantial improvement of 15% in current quarter. The reduced corporate tax rate from 34% to 25% has directly benefited the company because we were in higher tax bracket. The benefit is reflected in the tax provision for the quarter and period ended December 2019. Coming to operations. For the 9 months FY '20, the company has achieved the highest ever production of sponge iron, steel billet and wire rod. This also helped in improved capacity utilization of captive power plant, reporting higher turbo thermal power generation of 440 million kWh. The extended monsoon adversely affected production at captive iron ore mines in third quarter 2, but reached normal levels in November 2019. In the quarter, we produced 86,816 metric tons iron ore against 114,109 metric tons during corresponding period of PY. The performance of ferroalloy division in Sarda Energy was affected on account of inventory losses and loss in variable price contract in falling price scenario. Coming to Sarda Metals. The refractory relining work of ferroalloy furnace in Sarda Metals was completed in last week of November 2019. And now both furnaces are operating at full capacity. The improved price of ferroalloy and full capacity utilization in current quarter will help in achieving much better results in this quarter. Lower prices and lower production affected both financial and operating performance. Due to good and extended monsoon, power prices in open access market remains sluggish, as power could not be sold on exchange affecting power plant capacity utilization. Sarda Metals has recently renegotiated interest rates with existing lenders, which will provide substantial recurring savings in current and ensuing quarters. Hydropower performance. Extended monsoon has been achieving better capacity utilization factor in hydropower generation during the quarter. The hydropower generation during the quarter was 37 million units against 16 million units in corresponding quarter of the PY, recording a growth of 136%. During the 9-month period, we have generated 97 million units against 77 million units in corresponding period of PY, registering a growth of 27%. Financial performance. Steel, ferroalloy and merchant power prices have remained subdued during the quarter owing to demand-side pressure. In the backdrop of subdued prices and reduced capacity utilized -- capacity utilization of ferroalloy, the company has reported consolidated operating income of INR 456 crores during the quarter against INR 550 crores in the previous quarter and INR 614 crores in corresponding quarter of the PY. The EBITDA stood at INR 97 crores against INR 99 crores in the previous quarter and INR 155 crores in corresponding quarter of the PY. Progress of Sikkim Hydropower Project. The construction work of the Sikkim Hydropower Project is progressing steadily towards completion. Most of the equipment have reached to site and erection work is going on. The project is expected to be commissioned in the first quarter of the next financial year. The required equity has been fully infused. The company has signed a long-term PPA for full power of the project. Debt. At the stand-alone level, the company is net debt-free company. At the consolidated level, the total gross debt as at December 31, 2019, stood at INR 1,450 crores. The debt net of cash, liquid investments and current loans stood at INR 1,100 crores. Loan repayable within next 1 year is INR 81 crores. The debt-to-equity ratio is well below 1. Budget impact. Budget is focused on infrastructure development. Budget has proposed development of 100 airports. Time limit for completion of affordable housing project is extended by 1 year up to 31/03/2021. All these factors will boost demand for steel. Outlook. Interim trade agreements signed between U.S.A. and China was a sign of relief for the global economy in general, and steel industry, in particular. However, the coronavirus has affected China, which may have effect on global markets. For the company's next financial year, we'll see growth in revenue and EBITDA on account of commissioning of the Sikkim Hydropower Project. This is all about the performance and outlook. Now we leave the house open for questions from the participants. Thank you.

[Operator Instructions] We take the first question from the line of Vikash Singh from PhillipCapital.

Sir, the question is basically pertaining to iron ore pellet production versus iron ore pellet production sales. If I see the sponge production also. So sponge production has been a little bit weaker in this quarter. But despite that our pellet sales has not gone up. So any particular reason or we have kept the inventory and we would be liquidating it in fourth quarter?

Yes, we have built up inventories. Actually, in the second quarter, the inventory was at the lowest level. The prices have moved up. At the quarter end, we had basically intentionally held with the sales and built up the inventory.

So how much inventory we are carrying right now in terms of pellet?

It was about 40,000 tonnes.

Okay. And sir, second question, we have talked about the renegotiation of interest rate. So can we know that what kind of basis point lower we have renegotiated? And if anything has changed in terms of payback period also?

No, there is no change in the payback period. It's basically pure and pure reduction on account of the, basically, improvement in the financials and performance of the company and the group, so purely on account of the risk assessment. It is between 1% and 1.5%, depending upon the different lenders.

So 1% to 1.5% is lower, right?

Also a part of it was [indiscernible] refinanced that was at a pricing, I think, more than 2.5% reduction in [indiscernible] refinance.

Sir, this pertains to the Sikkim project also or how the bad debt has been done? Or some part of the debt has been realized, if you can explain?

This is with regard to the Sarda Metal.

Only Sarda Metal, right?

Sarda Metal.

And we had this -- once the Sikkim project would complete, we were thinking of renegotiating rate on that also. So we maintain that stance or -- currently?

Yes, that always happens in all the hydropower projects. And once the project is completed, this profile totally changes. And there is a drastic reduction in the financing rate. Because -- in case of hydropower project, most of the risks are associated with the execution, not with the operation. Based on the project is completed, the total risk profile changes and the refinance is at a much lower rate.

Okay. And sir, this -- one more thing, this PPA for the Sikkim project, we have said that we have signed for the entire capacity. So what is the rate for that?

No. This is basically -- rate will be determined based on the project specific, it takes its own time through regulatory process. If the project is specific, rate will be approved by the regulator. And we are also trying for generic. Generic, last what has been approved is, I think, INR 5.69 or INR 5.70 for a generic tariff. We may get better than that or generic also we may hope for. But we will be -- we might be going for the project with specific terms, which will be approved by the regulator based on the complete assessment of the project costs and all those things.

Okay. But then in any case, this -- it should be INR 5 up, right? That is our assessment.

Definitely.

And sir, just one last thing. Last phase, you used to give the product-wise realizations. So can I have that for pellet sponge?

This time we have given in our presentation also. If you see there, 1 chart is given. So if you see from there, you can get the product-wise realization also.

Sure, sure, sure.

Otherwise, if you want, it was -- I think, pellet, it was somewhere about INR 6,000 and sponge alloy, it was INR 16,000 for the quarter 3.

Okay. And sir, specifically, these 2 products, what is the current prices versus the 3Q rate?

Yes, prices have improved in all the segments.

So basically, I was just asking that 3Q average versus current average, how much it has increased on a product-wise?

Majorly, if you see the majorly increases in the pellet side, pellet and sponge iron. You can say 2 items where there is a major increase.

So how much are we are up as of January end?

January, it was INR 7,000 plus for the pellet.

And sponge would be INR 19,000 or almost.

INR 19,000.

[Operator Instructions] We take the next question from the line of Ashish Kejriwal from IDFC Securities.

So this is on ongoing Odisha mining auction. On an industry level, because the way premium has been quoted by players to acquire the mines. So -- first of all, do you think that any merchant miner can make profit out of it? And secondly, the way steel producers are also paying the huge premium. So how do you see iron ore prices going forward?

I think the way price premiums have been quoted, from here, we can definitely look at price increase or maybe matching with the global market. So from here, in my personal view, I think prices of iron ore will move up. And initially, there basically, most of them are taking a long-term call. I think difficult, but definitely the bidding is very, very aggressive.

So -- but do you think that merchant miners can make profit out of it?

No, no, no. I think, here, the merchant miner will not be able to make profit on the immediate future, because see, at the end of the day, the iron ore prices will be governed by the international prices, and the international prices are governed by mostly Vale and BHP Billiton and the big miners, the big 5. So I don't see that the prices will cross beyond the international pricing at a certain point because imports will start coming in.

I just want to add 1 thing here, that minimum 75% to 80% of volumes they have to produce. That's the clause in the...

80%, they have to produce.

80%, otherwise, they have to pay the royalty of minimum 80% of the total volumes of the year.

So are you seeing any risk of crash in iron ore prices, maybe a year after?

No, there won't be a risk of crash in iron ore pricing because you have to understand 1 thing very clearly that China has clamped down on illegal and rat-hole mining of iron ore or any other minerals. They are very, very clear on the pollution norms in China.

I'm talking about Indian iron ore prices, sir.

So you have to understand that Indian iron ore pricing is also linked to international iron ore pricing. It cannot be seen independently. So iron ore pricing in short, medium and long term is not going to cross -- crash right now at least for 1.5 years.

We take the next question from the line of Saumil Mehta from BNP Mutual Fund.

Sir, my first question is on what is the PPA rate we have done for the new hydropower project? And how different is from the existing one?

No, it is not -- as I explained, it is not a -- rate is not signed. It will be approved by the regulator. Project-specific rate will be approved by the regulator after complete -- following the new process of the fixation of the pricing.

As of now, any ballpark range?

Pardon?

Any ballpark range, if you can give?

Ballpark range, as I told, the generic tariff approved for the smaller projects is -- I think, last is somewhere about INR 5.70. So we should get at least minimum that amount, because we might be going for the project specific, it may be a little bit on higher side. But on conservative side, the general regulatory -- that is the generic rate at least that we should get.

Sir, my second question is, why -- I mean, I understand the sales for pellets would have been down because of maybe higher capital consumption. But why was production down, last year was 171 kt versus 158. So any special reason for production being down? Was there a demand issue or any...

No. There is no demand issue. Our total capacity is confined to 6 lakhs tonnes. So we have accordingly planned in a way that -- as of now, we don't have the approval for production beyond 6 lakhs tonnes. So that -- so we gave the continuity, and we have built up some inventory too for our capital consumption requirement.

Okay, okay. And in continuation to one of the previous questions, hypothetically, if the miners who have won these mines, if they don't produce up to 75% or 80% of the EC limit, is there a risk of mine being taken away? Or they will only have to pay the royalty for the 80%, that's the only risk?

I think they have to pay the royalty of minimum 80% of the volume.

So a 6 million tonne EC limit, I can still produce only 2 million tonnes. There is no risk of mine being losing away, but I will have to pay royalty for the entire 6 million tonnes or is it 80% of that?

80% of that.

Okay, okay, okay. And sir, in terms of your pellet prices where they are and sponge iron prices, I think last Q3, INR 16,000 is what we got for sponge and about INR 26-odd thousand for billets. So what would be the spot prices as of now?

As of now, it is INR 19,000 for sponge iron and is somewhere about, I think, INR 29,000 for billet. INR 29,000 plus.

INR 29,000. So roughly INR 3,000?

Yes.

INR 3-odd thousand, okay, which has been gone up. Okay, okay, okay. And in terms of last question on coal, what is the landed cost of coal what we have -- because Coal India production has not been that great. So any specific availability issues? Or have the rates gone up? Any guidance on that?

No, the pricing depends upon the grade. There are multiple grades. And it was definitely the price of the coal had gone up. I mean, recently, it has seen the -- basically reduction in the pricing. Recent auctions of the Coal India have gone at a much lower rate. But in between definitely, price of coal has moved up substantially. Now it is seeing the reduction in the pricing.

Okay, okay. And my, sir, last question, while we believe that the conversion margins in sponge would have gone up because prices have gone up, but between sponge to billet, the conversion margin has not gone up. I mean, is that a fair assumption? The price hike?

Yes, yes. Yes. That's a fair assumption.

Okay. So making billet is still not a very profitable proposition?

Yes, definitely. There is not much of the improvement in the margins in the billet side.

On a stand-alone basis, basically, billet on a stand-alone basis.

[Operator Instructions] We take the next question from the line of Chirag Singhal from First Water Fund.

Firstly, thank you so much for giving the details on the industry and all. I just wanted to ask 1 question on the ferroalloys industry. Sir, you mentioned that there has been a 15% price hike in ferromanganese alloy. So it is just in India or is it backed by the international prices?

No, the pricing increase is basically linked to international pricing as well. If you see the Chinese prices are much higher than the Indian prices in the Chinese domestic market currently.

Okay. So is this some effect from Indonesia, we are seeing? Or like, is it sustainable going ahead?

I didn't understand the Indonesia thing here.

Hello?

I didn't understand the Indonesia thing here.

No. Like we saw recently, like lot of stainless steel plants are getting shifted to Indonesia and banning of nickel ore to China has hiked the prices of lot of raw materials that are used in stainless steel. So is it because of this that the ferromanganese, which is essentially used in stainless steel production, the price hike is backed by that?

No, basically, you have to understand that India is not producing ferromanganese to that extent. India is a major producer of silico manganese. India is the single largest seaborne producer of silico manganese, not ferromanganese. So in India, in fact, ferromanganese production is very minimalistic compared to silico manganese. So basically, ferromanganese, I don't think so there is a much impact in terms of stainless steel being shifted to Indonesia. What we are seeing is a price increase in silico manganese in India. And the price increase is also because the international markets have gone up and the domestic market is also looking good at the moment.

Okay. And sir, my second question and the last question. Sir, you said that there has been like -- SAIL has been given the permission to sell the 70 million tonnes of the low-grade inventory which they have. And we saw that due to the auctioning of iron ore mine, there seems to be a shortage of 60 million to 65 million tonnes as the mines are getting auctioned right now. So this 70 million tonnes cannot substitute the shortage completely.

No, I think you're confused. I think you're confused. This is basically SAIL has got the permission for selling the tailings dam. The tailings which are there in their plants. I think they've got the permission to sell that, but that needs to be beneficiated and it cannot replace iron ore. It cannot replace iron ore.

[Operator Instructions] We take the next question from the line of [ Ganesh Jeswani ] from [ Mittal Analytics ].

Sir, of late, we have been reading about all these mine auctions, wherein large steel players have been bidding aggressively and they are paying like 90%, 110%, 120% premium. So just wanted to understand what does this premium exactly mean? Is it a onetime payment? Or is it a regular payment linked to the market price of iron ore? And how does it impact players like us who have captive mines and who have pellet capacity buildup?

Yes, this is basically the premium is percentage of the basic price of the -- average basic price of that date. If the average basic price is INR 3,000 and premium is 110%, means they will be paying INR 3,300 for the ore mined by them. So there are different rates for different grades of the lumps and fines that is notified by IBM.

So this price keeps changing in reference to monthly market price going forward?

Yes, yes.

So basically, if the iron ore price today, on an average is, say, INR 3,000 per tonne, then a steel company which has bid at 110% premium will have to pay more than -- will have to pay INR 3,300 to the government on a monthly basis.

Yes, this is the premium they have to pay.

And additional to this, they will have to incur cost for mining and use and all those things will be extra?

Yes, yes, everything extra.

Plus royalty also.

Plus royalty also. So in effect, their captive cost will be much higher than the market price if they have bid at more than 100% premium.

So basically total gain you have to see what -- finally basic price, how the basic price goes. Basic price may go down. Ultimately, if everyone is paying the premium to somewhere -- to some extent, it will get adjusted to some extent. But definitely, the premiums -- the way premiums are going, definitely, iron ore price will go up.

Okay. And what is the...

It's a long-term game. You have to see that iron ore prices, if you look -- it can range from $60 up to $180-odd, internationally. So it's a long-term game that they're playing because in a scenario where the prices drop, then it becomes viable for them, and it gives raw material security. At this point in time, it's $100. So it's looking very expensive, and it is very expensive.

But the premium is linked to market price. Like when the price falls to, say, $60, then also, their cost will be higher than $60 because...

Correct, correct, correct.

Correct. So it is basically because the larger companies, it's also a raw material security base for them. And when they're using it, they're looking at the value addition. And at the end of the day, in the value addition, they are able to make money, that's what they are looking at.

Okay, okay. So somewhere they will absorb that additional cost in their whole entire value chain.

In their value chain.

But they want raw material security, that's the only point here.

One of the most important point is raw material security for larger plants who are having capacities beyond 10 million tonnes.

So what does it mean for players like us who are having captive source and who have build pellet capacities and all?

That's [ positive ] for us.

That's a big, big positive for us because we are going to be competitive in any of the scenario. We are going to be extremely competitive.

So does this bring more stability to these pricing going forward?

Definitely, the stability is going to be there because at some point of time, for a certain point of time, they'll have to pass on at least some part of the premium that they are trying to get the mines at. So in some way, they will try to keep the prices because these are the players who are going to make the markets move.

Agreed, agreed. Sir, in defense to the China uncertainty that has happened recently, what has been the impact on the pellet prices or the demand in the near term as of now, in last 15 days or so?

We have seen that the pellets are being exported in a big way. If you look at the year-on-year impact on pellet exports, India's -- 59% year-on-year exports have been more in terms of the pellet going to China.