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

Ladies and gentlemen, good day, and welcome to Sarda Energy & Minerals Limited Q2 FY '21 Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pankaj Sarda, Joint Managing Director. Thank you, and over to you, sir.

Thanks a lot. Good morning, everyone. I extend a very warm welcome to all of you to the Q2 FY '21 earnings conference call of Sarda Energy & Minerals Limited. Our press release and investor presentation containing details of performance has been uploaded. 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. COVID-19 impact, with gradual unlocking economic activities have geared up, but the resurface of coronavirus has also intensified regionally posting administration to impose localized restrictions. Still the economic recovery is faster than expected. And in fact, of COVID-19 is diluted to a great extent. RBI has projected current year GDP to contract by 9.5% with positive growth to be achieved in last quarter of the FY. During the quarter, all our manufacturing facilities operated near-normal capacity. The company has got sufficient liquidity to meet its obligations and to face the challenges evolving from research of COVID. Our external credit rating is reaffirmed by CRISIL at A plus, which reflects that the company is well positioned to face the challenges posed by COVID. Our subsidiary, Chhattisgarh Hydro LLP, which had availed COVID moratorium, has prepaid the moratorium amount in current quarter. Its trading was also upgraded from ICRA BBB to BBB+. I request Sri Manish Sarda to brief about global and domestic scenario of steel and ferro alloys.

Thank you, Pankaj. Global steel production was marginally up year-on-year. It's 7.8% quarter-on-quarter on base effect. China recorded growth of 10% year-on-year and 4.42% quarter-on-quarter, constituting more than 60% of global steel production. Ex China production saw a de-growth of 10.1% year-on-year and growth of 13.31% quarter-on-quarter. India's domestic crude steel production during quarter to FY '21 was 26 million tonnes against 27.12 million tonnes in quarter FY '20 and 16.29 million metric tonnes in quarter 1 FY '21, registering a degrowth of 3.76% year-on-year and growth of 33.6% quarter-on-quarter. Finish steel consumption fell from 26.22 million metric tonnes to 23.63 million metric tonnes year-on-year. Export of steel during current half year has more than doubled from 5.03 million metric tonnes to 10.98 million metric tonnes, and imports half from [ 5 ] million metric tonnes to 2.11 million metric tonnes over corresponding period of previous year.

Sorry to interrupt. Manish, sir, your audio is not very clear. If you could speak a little louder, please?

The government has announced various steps to boost the liquidity demand and credit flow in the economy, which will have a positive impact on demand of steel in the medium term. Sustained export growth will also help improved capacity utilization and stability of prices. Supply constraints of iron ore due to COVID at global level and auction of mines at domestic level have resulted in demand/supply mismatch and kept prices of iron ore and pellet at higher levels. The miners have been increasing iron ore prices regularly since May 2020. During the quarter, production in our plants was near normal. The pellet plant was under scheduled maintenance shutdown for 17 days during the quarter. At Raipur, 1 ferro alloys furnace was under shutdown for refurbishing and operationalized in the last week of September. Another furnace has been shut for refurbishing. As such, effectively, 4 out of 5 furnaces will be available during the current year. Our power unit was also under shutdown for repairing and -- from July 6, 2020, which has been restored on October 22, 2020. The shortfall of power was met by importing power from our subsidiary at Vizag, which has got surplus power capacity. This caused extra transmission costs, but helped in maintaining production levels near normal. Through -- this had some bearing on production of steel. Details of production sales and realization of products have been provided in our press release and presentation shared in public domain. The permission for increase in production capacity of pellet plant from 600,000 tonnes to 800,000 tonnes is expected by January 2021. Ferro alloys, the ferro alloys prices remained stable during the quarter. Ferro alloys exports have been falling -- have seen falling trend in quarter after peaking in June. During the quarter, the country exported 400,000 tonnes of ferro alloys against 364,000 tonnes in June quarter. Prices of manganese ore remained volatile during first half of current year. With the fall of prices in manganese ore, the prices of ferro alloys also have seen softening in recent times. Sarda Metals. Prices of steel products remain elevated on the back of global shortage of iron ore. In India, also production from mines in Orissa were adversely affected due to rainy season and delay in transition of mines to new allottees. Supply is expected to improve from next quarter. Prices of iron ore pellets also remain firm due to export demand and higher price of iron ore. Margin on downstream long products remain stressed due to poor uptake for infrastructure projects. Old mine owners were granted 1 more month up to October for removing the stacks from the mines. They have requested for 1 more extension. SAIL has also auctioned substantial quantity of iron ore finds. This has eased pressure on supply of iron ore. Newly auctioned mines in Orissa have also started production and ramping up their production. Mr. PK Jain will now brief the financial performance and position of the company.

Thanks, Manish. The company has reported consolidated operating income of INR 548 crores during quarter as against INR 347 crores in the previous quarter and INR 550 crores in the corresponding quarter of the previous year. The company has reported EBITDA of INR 154 crores during the quarter against INR 98 crores in quarter 2 of previous year. Profit after tax at consolidated level is to date INR 84 crores, as against INR 68 crores in the corresponding period of the previous year and INR 36 crores in the quarter ended June 2020, resulting into EPS of INR 23.41 per share. Hydropower. Better monsoon helped in achieving better capacity utilization in hydropower generation during the quarter. During the quarter, we generated and sold 65.23 million units against 49.65 million units in quarter 2 of previous year, recording a growth of 31.37 year-on-year. Debt position. At a stand-alone level, the company is net debt-free company. In operating companies, the long-term borrowing is to date approximate INR 60 crores and total borrowing at about INR 760 crores. As on September 30, bank balance and liquid investments is to date to approximate INR 300 crores. Term debt net of cash and current investment is to -- about INR 1,350 crore. Loan repayable within next 1 year is INR 78 crores. The debt equity ratio is well below 1. All obligations have been met on time. Bank interest rates are falling on the back of ample liquidity. Effect of this will be reflected on reset. The company has refinanced 1 of its term loans with saving of more than 2% per annum. Environment is condition for renegotiation of terms or refinancing of the existing loans. Sri Pankaj Sarda will brief about second hydropower project, ongoing coal mine auction and industry outlook.

Second hydropower project. As explained in the last con call, the project is in final leg of completion. Heavy rains washed away [ Filicudi Ramco highway ] and also affected work at site of contractor. Heavy landslide has also affected work at site. Although we are putting best efforts to start generation by end of this quarter, this may cause delay 15, 20 days. Coal mine auction. The central government has auctioned 19 coal mines for commercial mining. We also participated in the auction process. We are highest bidder for Shahpur West, underground coal mine in Madhya Pradesh and Gare Palma IV/7 coal mine in Chhattisgarh. Gare Palma IV/7 was previously owned and operated by us prior to cancellation of all mines by the supreme court. The company is entitled to 20% rebate on coal to be consumed in gasification. Both the mines are at a distance of less than 300 kilometers from our manufacturing facility in Raipur. This will provide long-term security and consistent quality of 1 important raw material, coal. So the company had reasonable price and provide hedge against price fluctuation. Outlook. India is expected to record positive GDP growth in Q4 FY '21 with overall contraction of 10% for the whole FY. Increased export demand has balanced demand supply in the steel sector, enabling stable capacity utilization and improved pricing. Good monsoon, better condition in rural and semi-urban India and government stimulus, backed by focus on self reliance and infrastructure creation, should pull the demand further. On global supply concerns, price of iron ore is expected to remain firm. Since the company is sourcing part of its requirement of captive mines, high type of iron ore is positive for the company. Various states governments and central governments are also taking policy initiatives to incentivize fresh capital investment by the industry. Because of low leveraging, the company is well placed to take advantage of emerging opportunities. Commissioning of Sikkim Hydropower Project will further improve the financial performance of the company. We expect credit rating upgrade and further interest rate reductions on completion 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] The first question is from the line of [ Shubham Agarwal from Equitas ].

My first question is regarding iron ore guidance. So actually, the voice was not very clear when you were updating about iron ore. So I understand that you said that prices will remain firm in the next quarter also. So can you just elaborate on that?

Yes, the prices of iron ore are expect to be firm because so many Orissa mines, which were auctioned, has not yet started. And prior allottees have still 1 more month. They were taking out the mines and materials till October end. So assuming that the new owners will start taking over the mines and will start operations in the mines, there will be a shortage of lumps and fines iron ore in the coming 3 to 4 months, or maybe 6 months.

Apart from this, the international prices of iron ore is also pretty strong because the demand from China is also very huge.

Sir, and in the existing iron ore mine. So there are some inventory, which is still pending, which is expected to be off taken. So what is the total amount of inventory? And will this reduce iron ore pricings in India as packaged?

I'm sorry, can you repeat again?

Sir, in the existing iron ore, there are few inventories left, which is expected to be off taken. So once this is allowed, do you expect the iron ore price to go down? And what is the total inventory that is lying there in the mine, if you have any idea?

No, no. Are you talking about Orissa mine?

Yes.

So in the Orissa mine, I mean, the government is not giving extra permission to the past owners of the mine to take out the material. So they are not allowing it as far as I know about it. And the new owners will come into picture. And [indiscernible] have to buy their heavy machinery equipment, et cetera, and they will be starting their mines very soon. And since the premium quoted is very high, that will not allow the iron ore prices to go down.

Okay, okay. Sir, and secondly, my question is regarding Sikkim. So in the presentation, it is mentioned that it is likely to start in December '20, but in the call just now you said that 15, 20 days, it may be delayed further. So can we -- so this can be expected in mid of Q4, am I right?

No, no, well before that. Maybe somewhere in January latest. We are trying to complete by December, but then maybe some delay, so I think in January, we should be able to start.

Okay, and we...

We are trying -- still trying so is to complete by December end, but there may be delay for few days.

Okay. And with regards to the refinancing, you said that the interest cost side is lowered by 2%. So what was the total amount on this, which has been lower?

I think it was somewhere about INR 50 crores, INR 60 crores amount. That is only a small loan amount we have refinanced.

Okay. So rest of it will go lower once the Sikkim starts?

Yes, major reductions will come only after commissioning of the Sikkim power projects.

Okay. And sir, my question regarding...

There are certain reset also due, which will also have bearing on our interest cost.

Okay. Got it. And sir, regarding the ferro alloys business. So this quarter, the margin was substantially lower compared to the last quarter. What was the reason you would attribute this to? If I see EBIT margin was 8.6% compared to 18.3% in last quarter.

Yes. The prices of [indiscernible] ferro alloys has gone from in -- when was the inventory low was because of the reduction in the prices that also affected the margins. So to some extent, it was contribution of the inventory loss and to some extent, it was basically fall in the prices.

Sorry, can you come again?

There are 2 contributing factors in ferro alloys EBITDA going down. One is the inventory loss because of the fall in the prices. Inventory loss and another is on account of the falling prices, margins ascend to some extent and as told, 1 of our furnaces is also under shutdown.

So if we're going ahead, what can we expect the margins to be? Because given some of the competitors, their margin was still healthy this quarter also.

[Foreign Language] It also depends how is the cost structure, what is the power cost. There are multiple scenarios which works. As I told, 1 of the reasons has been inventory loss, which may not be there that will definitely improve our ferro performance from here.

Okay. Got it. And -- so in the last pellets shutdown was there, and the power plant also was shutdown from October 22, do we expect any more shutdown in the current year? Or all is done except ferro alloy?

Except ferro alloys, all is done.

Okay. And regarding the Chhattisgarh 25-megawatt hydropower project, for which line has been acquired. So what is the current status of further investment there?

We have not yet started work on the project, but I think soon we will start work on that project, maybe within next 6 months work on the project will be started.

Next 6 months. And what is the total investment expected?

Total investment is about INR 250 crores over a period of 3.5 years.

[Operator Instructions] The next question is from the line of Rahul Jain from Systematix.

Sir, on steel, what are the trends you're seeing on pricing? Because what I see on Q-on-Q prices are not like very robust. I'm just wondering, is that small price increases to come from here?

The overall pricing of steel, I think, will remain more or less stable and firm because we are seeing the reopening also of the economy now in terms of COVID and a lot of government projects, which were stuck because of labor issues and because of COVID will start in a big way. There will be a lot of pent-up demand as well, which has been there. And we have seen imports being very negligible if you look at the previous year and this year the government has imposed a lot of curbs in terms of steel imports and is focusing more on made in India. So effectively, I think the steel prices will be stable and firm for the coming 6 months.

So currently, by how much, they would be higher compared to our 2Q average? Are they similar? Or they would be like INR 1,000, INR 2,000 higher?

No, no, they have definitely increased, in some of the products they have increased up to INR 1,700, INR 1,800.

Right, right. And sir, could you also elaborate on your coal mines, which we are not the highest bidders. So essentially, where do we -- do you intend to use it for merchant sale or for in your steel plant? And how long will it take to get started?

I mean, regarding the coal mine, that's the best part about it. It's a complete merchant mine. Whenever if we see that the low-grade of material is coming out of the steams, we can sell it locally. Only high grade we could get to our plant. So that's the beauty about it. So regarding the Chhattisgarh coal mine, we intend to start this mine within 1, 1.5 years. All the permissions and clearances because everything is clear, and it was earlier with us, so we have complete idea about it. So we feel that we should be able to start it within 1 year. The Chhattisgarh mine...

I think it was something about the rated capacity within 1.5 years. Is that right?

So 1 year -- within 1 year, we'll be able to start the mine. And within next year, we'll try to reach to the rated capacity.

And so how does...

The best part about this mine is this mine was operated and owned by us only. So we have the bank in place. We have our labor in place. We have -- we know the mines in and out. And apart from that, our whole perspective of this restarting of this mine would be to get the best quality coal to our plants for application of this coal into sponge, pellet, ferro alloys and whatever best we can do in terms of the logistics per GCV basis. We'll be trying to do that because now since it's a commercial mine, we are also allowed to sell the coal at the pit site to other power plants, and there are a number of power plants, which are there near our coal mines. So we can sell that coal easily.

Right. And how does system work? So you have a revenue share of, say, I think one is INR 2,600 at 36.8. So -- but whatever is the relevant whole India price of that particular grade, you have to share that percentage with the Ministry...

So if you see the earlier bidders [ Monet ] had bidded this at INR 2,600 per tonne.

Right. Over and above the royalty revenue?

Over and above the royalty, yes, over and above the royalty. That's how they went up to. Whereas the 66.75% will be much below INR 1,000.

So the equivalent grade is about INR 1,000, this is -- which is great? This is the...

This is the open cast mining has an overall grade of around G11.

G11. So particularly around say INR 600 is roughly you will have to share. Is that...

INR 800 to INR 900.

Yes.

INR 800 to INR 900? Right. Even then your -- what is the cost of mining you expect? Around INR 500 or...

It should not go beyond that.

Yes.

[Operator Instructions] The next question is from the line of Abhishek Maheshwari, an individual investor.

I have just 2 basic questions. Sir, are we exporting our steel also or on only ferro alloys?

No, we are not exporting our steel. We only export our ferro alloys. Steel is sold locally. And domestically, we sell it in India.

Okay. And sir, secondly, in like certain places in Maharashta like Mumbai and all, we are seeing realizations crossing 40,000. So in there could also that's the case? Or are we still seeing 35,000 to 37,000 realizations?

No, the case in Bombay is totally separate because you have to understand that in Bombay, mostly the steel is sold by the traders. And the traders have their credit margins and all. So there is a long -- because it's mostly for the real estate sector and the infrastructure sector in Bombay, the long products. And there is a big payment delay in terms of 30 days and 60 days, depending upon the customer. So the pricing is more or less 37%, 38%, but they had their own margins for financings. And the storage -- and the warehousing storaging cost is very high in Bombay.

Okay, okay. Fair enough. So your realization, sir, somewhere around 38,000 only?

On the product?

For HB wire?

I mean wire rod and HB wire is somewhere around 35,000 to 38,000.

Yes, INR 37,000.

The next question is from the line of Vikash Singh from PhillipCapital.

Sir, my first question pertains to your Hydropower Project of Sikkim. So any update on the base which could be fixed? Or what kind of utilization of the PLF we can take this plant in 1 year's time?

No. What presently is the lean season. So in the rainy season, we get the full -- in the first year itself, we will reach the normal capacity utilization level.

That is roughly around...

50% around. In the first year...

Annualize basis?

In the first year it will -- yes, in the first full year of operation. In the next season, we will register [indiscernible] capacity. But things we will be starting in the main season. Initially, we will be starting only with the 1 unit because presently, power will be on the low flow.

Okay. And any word on the provisional rates as of now?

Provisional?

Provisional rates at which we would be able to say?

No. We have not yet got the order, but as I told the provisional -- the rates for smaller hydropower project of 225-megawatt is INR 6 plus. I think we should be getting the same provisional rate. We have not yet got the provisional rate approved.

Understood. Sir, my second question, pertains to dealing that your second hydropower projects starts. But we have a couple of more smaller hydropower projects, one you have mentioned INR 250 crore plus upgradation in the ferro alloys unit as well. So how do you see that the CapEx and the cash flows in next couple of years and overall the debt correction because of that?

No. As far as the Sikkim Hydropower Project, there capital outflow will slow. So far as this Chhattisgarh Hydropower Project water expansion we are going with water internal -- promoter contribution is required that project -- existing project will support that. Now from the Chhattisgarh Hydro existing project is generating sufficient surplus as to after mitigate that obligation. So that will be financed independently. That won't require any equity contribution or support from the promoter company.