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

Ladies and gentlemen, good day, and welcome to the Sarda Energy & Minerals Limited Q4 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.

Thanks a lot. Hello?

Sir, yes, please, go ahead. Your line is unmute.

I mean, you're not clearly audible.

Sir, you may please go ahead. Your line is audible.

Okay, okay. Thanks a lot. Good morning, everyone. On behalf of the management, I extend a very warm welcome to all of you to the earnings call of Sarda Energy & Minerals Limited to discuss performance and results of Q4 FY '20 and 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 discussions may include some forward-looking statement, 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. COVID-19 impact. The coronavirus emanating from Wuhan in China in November '19 started spreading across the globe in the quarter under review. To contain the spread, most of the countries, including India, imposed lockdown on movement of people, resulting into complete halt of economic activities. This severely affected trade and commerce, financial markets across the globe nosedived, resulting into sharp erosion in the value of investment. Performance of the company has to be seen in this backdrop. The emerging scenario from Wuhan had started impacting demand and pricing in the quarter, which finally resulted into complete closure of company's manufacturing facility from 25th March 2020. The lockdown, social distancing norm and impending fear of spread of the virus have brought economic activities to grinding halt resulting into high level of unemployment and resultant economic impact. The company took steps to resume production from 16th April 2020 in gradual and synchronized manner, keeping in view the restrictions imposed by the government, availability of resources, logistics and demand of end product. The normalcy could return by end of third week of May 2020. Shutdown resulted into fall in prices of fuel, particularly oil, but this benefit of fall in oil prices was nullified by the government by raising taxes. However, miners of manganese ore increased price due to fall in production. Iron ore prices remain comparatively stable with upward bias. Government of all major economies have relaxed lockdown and announced stimulus packages to revive economic activity. Effect of stimulus on demand creation has to be seen. Steel. Global steel production for FY '20 was 1,836 million tonnes, up 1.31% Y-o-Y. China produced 997 million tonnes, up 5.55% Y-o-Y, constituting more than 54% of global steel production. Ex-China production saw a de-growth to 839 million tonnes, down 3.3% Y-o-Y. India's domestic crude steel production during FY '20 was 110 million tonnes, against 111 million tonne in FY '19, registering a de-growth of 0.98%. In the Q4 FY '20, India produced 27 million tonne steel, recording a growth of 1.16% Q-o-Q and de-growth of 5.23% Y-o-Y. In the falling domestic market, India's exports grew substantially, whereas imports have contracted. India was net exporter of steel. The government has announced various steps to boost liquidity, demand and credit flow in the economy, the effect of which will be felt from second quarter with a lag. Ferroalloy. Ferroalloy prices had improved in the first half of the quarter, but corrected sharply in the later part due to COVID impact. Due to shutdown of mines, prices of manganese ore has gone up, but finding it difficult to sustain due to lack of demand. Operations. The manufacturing facilities were closed for part of March 2020. Still the company could achieve higher production of iron pellets, sponge iron, steel billet and wire rod. The pellet plant had to be shut in February on achievement of permitted capacity. In the quarter, we produced 104,711 metric tonnes iron ore against 125,053 during corresponding period of PY. Extended monsoon and lockdown has adversely affected output at mine during the year. Sarda Metals. In the fourth quarter, the ferroalloy plant operated at normal capacity up to 25th March 2020 and achieved a production of 21,213 metric tonnes of ferroalloy. However, annual production was down on account of closure of furnaces for relining and overhauling work undertaken during the year. The plant restarted operation on 10th of April 2020 and is operating at normal capacity. Generation at captive power plant was also affected due to shutdown in ferroalloy plant and unviable pricing and merchant power of the Chinese market. Hydropower performance. Better monsoon helped in achieving better capacity utilization factor in hydropower generation during the quarter and the year. The hydropower generation during the quarter was 18 million units against 8 million units in Q4 FY '19, recording a growth of 115% Y-o-Y. During the year, we have generated 115 million units against 85 million units in previous year, registering a growth of 35%. Financial performance. Shutdown of one captive power plant for repair work and consequent effect on production of steel and ferroalloy, shutdown of pellet plant for about half of the quarter due to achievement of permitted capacity and shutdown of all manufacturing facilities in March due to lockdown, have all affected both top line and bottom line for the quarter and year. Other income turned negative, mainly on account of fall in fair value of investment, which is a notional loss. A part of that has recovered subsequently. In the backdrop of subdued prices and reduced capacity utilization of ferroalloy, the company has reported consolidated operating income of INR 438 crores during the quarter against INR 456 crores in the previous quarter and INR 496 crores in corresponding quarter of the PY. The operating EBITDA stood at INR 77 crores against INR 82 crores in the previous quarter and INR 81 crores in the corresponding quarter of the PY. The operating EBITDA for the year stood at INR 356 crores against INR 482 crores in the PY. Progress of Sikkim hydropower project. The construction work of the Sikkim hydropower project also halted consequent to lockdown. The lockdown affected availability of manpower and other resources such as cement, et cetera, at the site. This has also affected work at site of suppliers. Work at the site resumed in the month of May. The project is now expected to be commissioned by the end of second quarter of this financial year, resulting into a delay of 3 months. Debt. At the stand-alone level, the company is net debt-free company. At the consolidated level, the total gross debt as at 31st March 2020 stood at INR 1,632 crores. The debt, net of cash, liquid investments and current loans, stood at INR 1,068 crores. Loan repayable within next 1 year is INR 53 crores. The debt equity ratio is well below 1. The company has not opted for moratorium on repayment of its term loans or servicing of interest. However, subsidiaries of the company have opted for moratorium as permitted by RBI and allowed by bank. All obligations have been met on time. Impact of stimulus. The government's stimulus and liquidity infusion will create demand, particularly from infrastructure sector. Interest rates are going down. That will also bring substantial saving in capital-intensive sectors. The self-reliant India campaign will generate lot of employment and business opportunity, pushing demand side of the economy. However, the transition may be painful for the economy and industry. Various steps taken by the government and RBI will ease pressure and provide conducive environment for growth. Outlook. There is a lot of uncertainty on demand side of steel. However, government stimulus, that by focus on self-reliance, and infrastructure creation, should augur well for steel industry. Ample liquidity into the system will bring down cost of funding and create demand and investment into capital-intensive sector. Increase in grid power tariffs augurs well for captive power producers. Because of low leveraging, your company is well placed to take advantage of emerging opportunities. Commencing of Sikkim hydropower project will further improve financial performance of the company. This is all about the performance and outlook. Now we'll 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, my first question pertains to this delayed hydropower project, sir, due to lockdown. And if there is any associated cost inflation in the entire project's CapEx because of that?

No. Delay, there will be some increase in the interest component -- interest during construction component. As well -- there is no other increase in the -- so marginal increase will be there to the extent of interest during construction.

So sir, what is the total project cost as of now? What is our current estimate of the total project cost? And how much you have already spent on the same?

Total project cost as of now is INR 1,450 crores.

And how much we've spent?

Maybe around -- we have spent about INR 1,300 crores.

Okay, sir. And sir, secondly, in terms of domestic demand size. So if you can elaborate a little bit how the May and June has been in terms of steel demand and what are your expectation on the July side?

Demand wise, steel demand has been quite good during the quarter. And prices have also seen upward trend during the quarter. Whatever we could produce, we could comfortably sell and the inventory levels are almost at the low level.

Okay. And is our…

And these are compared to the previous quarter.

Sorry, sir. Sir, I just missed it. It would be better than the previous quarter, you said?

Yes.

Okay. And sir, in terms of pricing, what kind of a blended average increase we have seen vis-à-vis last quarter, if you can give us some sense?

Pardon.

The blended average pricing of the last quarter and what kind of increase we have seen in the 1Q?

Blended product to product, if you see from the March month, if you compare, not from the quarter, if you compare, as soon as the prices had gone down, so comparatively, prices tend to have a better trend.

Sir, this fourth quarter product-specific realization you used to give. So can I have that for pellet sponge and billets for your…

If you see for the quarter because quarter-on-quarter, it might not be more than the last quarter. But if you compare the prices when the shutdown -- lockdown had taken place, from there, prices have improved. Initially, when market opened, the average realization, if you see for -- hello?

Yes, sir. I'm listening.

Yes. Pellet prices which had gone down to INR 5,100, INR 5,200, those finally are hovering around INR 5,800, average realization-wise if you talk about the iron ore pellets.

Okay. And sir, sir, basically, what I have asked is 4Q average realization, 4Q FY '20, because usually, in previous quarter, we have got the product-specific realization. Like 3Q pellets was INR 5,900 was the average which you had realized. So the corresponding figures for pellets, for billet and wire rods?

INR 5,900 you're talking about [Audio Gap].

Versus 4Q realization, sir, for pellets, for billet and wire rods?

Yes. The last year average realization was for pellet, it was INR 6,400. For sponge iron, it was INR 16,600. Steel billets it was somewhere about INR 28,500. Hello?

Okay, sir. Yes, sir.

Wire rod INR 33,000 approximate. And if you compare for the June quarter, June quarter, prices have been -- for the pellet, it was somewhere about INR 5,800, sponge iron INR 15,000 and billets INR 28,000. And wire rod…

And wire rod?

Billets, INR 28,000. Wire rod, INR 31,000.

Understood, sir. And sir, in terms of our -- this pellets plant environmental clearance, current status, sir, if you could tell us?

So we have applied for the environment clearance in the center. But in the center, in MoEF, we are not taking any presentation due to COVID and they are also thinking how to go about it. I mean, they have not yet started doing a video con call or video presentation or something like that. So we are just waiting for that. All [Audio Gap] application, everything has been -- we've already put and ready, and we're just waiting MoEF presentation to start.

Understood. And sir, just one last question, if I may ask. What is our current, say, capacity utilization, sir, right now from June end onwards?

Pardon. Can you repeat, for pellet…

Sir, current capacity utilization of the plant. So basically pellet as well as we have sponge, so have we gone back to running at 100%? Or we are still running at a little bit lower than that capacity?

No, no, we are operating all the plants at normal capacity, full capacity.

Full capacity, right? And what would be the average for the 1Q FY '21?

Average?

Average utilization for 1Q FY '21?

Hopefully, in case of pellet plant, we'll definitely cross the -- we'll achieve full production to the extent there is no problem. In others also, we should be able to achieve materially, on average, about 90% production. In pellet, if we get the MoEF clearance, we will touch more than 7 lakh tonnes.

Understood, sir. This is annual expectation for us, 7 lakh tonnes, right, sir?

Yes, yes, yes.

We take the next question from the line of Abhishek Maheshwari from Wallfort Financial.

Sir, previously, you said that all your plants are operating at optimum utilization levels now. So I just wanted to know this includes ferroalloy also? Or only steel plants you're talking about?

All the plants, ferroalloy also.

Okay. And sir, this -- our demand is majorly coming from domestic markets or export markets because you export a lot of your products to China also?

No. Majorly, it is from the domestic market. Ferroalloy, exports are also there.

Okay. And are we seeing any supply issues in China and all because there is some trade issues going on between our countries?

Manish?

No, we don't supply to China. We don't supply to China. We are basically exporting to the Middle Eastern regions and Japan, and some countries which are in Africa, but we don't supply anything to China.

Okay, okay. Good to know. And sir, our realizations are stable now as compared to Q1 and March?

The ferroalloy realization? Or you're talking about the steel?

Overall, overall. Like, are this similar to December levels or…

No, no, no. There is a bit of a dip, but I think that fluctuation is normal in the business.

We take the next question from the line of Mihir Manohar from CapGrow Capital.

Mihir this side. I wanted to have an understanding about the Sikkim hydro project. So what is the debt structure over this project? Is it 70:30?

What is the…

Debt structure.

Debt equity funding for the Sikkim hydro project?

The total debt is somewhere about INR 900 crores out of INR 1,450 crores. INR 900-some crores, Mihir, may be INR 920 crores or INR 930 crores.

Okay. I got it. Perfect. And how are we planning to have the utilization of this capacity? Is it going to be PPA? Or is it going to be merchant power?

It is a merchant power.

It is full merchant power?

Yes.

Okay. Understood. So what is our projected utilization? I mean, will we have complete utilization and complete sales of this entire 96-megawatt right from the first year of operations itself?

No. It basically, the complete utilization, 100% utilization comes only during the rainy season. For the rest of the period, plant operates at a load capacity depending upon the water flow.

Right, right. Understood, understood. I mean, there is no possibility of gradation in the merchant power, there won't be a possibility of getting incentive, right? Is this understanding correct?

Can you repeat? Actually, today, we are finding disturbance in the voice. So can you just repeat your question?

Yes, sure, sure. I mean, so if you are going to have this capacity on merchant power, so you will not get the incentives which we typically get when we cross a certain threshold, right?

Incentive…

There are no incentives. Whatever we will generate in hydropower, that goes to the buyer.

Got it. Okay. Understood, right. And we are confident of this being operational from October '20 onwards?

Yes, yes, yes. But now Government of India has made all the hydropower projects that will be commissioned from now onwards above 25 megawatts into renewable category. And we will -- with this nomenclature of above 25 megawatts, we expect better rate realization.

Okay. Understood. And then better rate for what, 20%, 30% tariff or our share?

Presently. I think it is somewhere for renewable energy -- in hydropower, rate is somewhere about [Technical Difficulty].

[Technical Difficulty].

INR 4, INR 4.50 earlier project that they have got, and we expect that we should get above INR 5.20.

INR 5.80.

INR 5.80. Above INR 5.80 at least.

You are expecting above INR 5.80?

Yes. That is the expectation.

We take the next question from the line of Ayush from Aequitas Investment.

Sir, I wanted to understand how have the iron ore prices been moving? And what has been the impact of the mine auctions that were auctioned at such premium valuations?

Manish? Hello?

Is it regarding coal mine auctions?

Iron ore.

Yes, the iron ore mine auctions.

Iron ore prices are stable with the upward movement.

Yes, because, I guess, last time around, you mentioned that we expect the prices to go up.

Yes. That will depend upon how the Brazilian issues of the dam burst, et cetera, are there because of -- and there have been production halts in the mines in South Africa and other places because of this COVID and all those things, so that had affected supply side. Demand side was also affected. So there is no material movement in the iron ore prices. Just some upward movement. I think yesterday also NMDC has increased its prices by about INR 200 per metric tonne.

INR 150.

Okay, okay. And sir, on the ferroalloys business, what is our outlook? Like how are the prices moving in ferroalloy? Can you just give the ferroalloy prices for the quarter and the previous quarter?

Yes. Post reopening of the economy, the prices of the manganese ore has moved up because of the short supply and I think effect on the mining. And accordingly, the price of the finished products had also gone up. Both have got corrected. Manganese ore prices have also got corrected and finished products which had moved -- silico-manganese normal domestic rate, which had moved to INR 67,000, INR 68,000, now it is again at around INR 60,000, and similar correction is there in the manganese ore prices also.

Okay. So I guess, the last year, the prices were very low for ferroalloys, right?

Last year?

Last year, the prices were on the lower side for ferroalloys, right?

Yes.

So this year, what is our expectation on the pricing front? Do we think the worst is over in terms of the ferroalloy prices, the realization?

I think the prices should remain at the levels at which those were in the previous year. There won't be a material movement in the prices. And even if somewhere movement is there, that will be compensated by the manganese ore prices. So that will not materially change.

Okay. No material change is expected.

No material change at the profitability or EBITDA level.

Okay. And on the demand side, are we seeing some improvement? So our mainly -- all our -- mainly we export the entire ferroalloy production, right?

No, no, no, it's not like that. A part of our ferroalloy production is exported from our Visakhapatnam subsidiary plant. And from Raipur we have minimal export, nominal and Raipur plant supplies mainly to the domestic market.

Okay. So what will be the proportion of exports to domestic in ferroalloy?

I think majority is in domestic market.

Okay. And how is the demand moving in the domestic versus the export market?

We have a good demand in the domestic market. We are not finding any decrease in the demand side.

Okay. And sir, lastly, on the financing side. So we have mentioned that we are planning to do some refinancing of loans. So have we started the process already? Or will we do that after our hydropower plant commissions?

No. So far as Madhya Bharat project is concerned, that will be done only after commissioning of that project.

Correct. And other than the debt for hydropower?

Other than, in Sarda Metals, there have been some renegotiation of the pricing and some refinancing options are also going on. Already, we have renegotiated pricing from existing bankers for reduction. Already taken place for part of the loan and for another part, we are looking at refinancing.

Okay. So sir, if you can quantify, like what kind of interest rate reduction are we looking at?

It depends from company to -- in case of hydropower project, I think minimum, there will be 3% reduction the post commissioning period.

Okay. Minimum 3% reduction.

In hydropower project in Madhya Bharat.

We take the next question from the line of Yogansh Jeswani from Mittal Analytics.

Sir, most of my questions have been answered, but just one follow-up on the comments that you've made so far. So looking at the numbers and the price trend, the price is more or less getting supported. But if you look around, we don't see much economic activity happening. So can you share your thoughts on where are we seeing this demand coming from? Or how is this getting supported at these levels? Maybe are you seeing some better revival in the rural side of the economy? Or how is this demand coming from, sir?

Actually, post-COVID, lot of migrant labors have moved out from major industrial areas. And most of the companies are running at 50%, 60%, 70% of their capacities. So during the lockdown, we saw a lot of demand coming from all the metros because all the industries around metro were shut like in Nagpur in [Audio Gap] major industrial hubs were shut. And so we saw a lot of price going in upward trend in TMT and wire rod during this period. And now the normalcy has started coming back. A lot of migrant labors have started moving back, and still all the major plants around these metros, they are not running at 100% capacity. So one of the major demand that is coming is from these regions.

And secondly, sir, I think usually, all the steel-related products, be it sponge iron, billets, pellets, all of it follows a part of a trend. But this time around, we are seeing somehow that pellet prices are still stronger compared to the other prices, sponge, billet and everything else. So any specific reason why this pellet is breaking out of the group and showing some more strength? And if that is right, if my understanding is right, are we seeing any benefit out of this?

So definitely, pellet is one of the major contributors in our EBITDA. So that advantage will always be there. And substantial part of our raw material for pellet is taken from our iron ore mines. So to that extent, the price will basically safeguard our EBITDA margin or improve EBITDA margins on the pellet side. And in case of other, pellet prices, it mainly depends on the export demand also. In the mean time, the iron ore prices, in general, sir, market had moved up mainly on account of the effect on the mining on account of the [Audio Gap] this lockdown and it was all the impact. So that had a bearing on the pellet prices.

Right. Sir, we also do hear that a lot of our players based out of that similar region are also looking at exporting pellet mainly to China. So are we also looking at -- because I think in your commentary, you mentioned that we are so far not supplying anything in China, but that was I think on the alloy side, if I'm not wrong. But on the pellet side also, we don't export anything to China? And do we intend to do it going forward as the prices are much better there?