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

Thank you very much. Good morning, everyone. I extend a very warm welcome to all of you to the quarter 3 FY '21 earnings call of Sarda Energy & Minerals Limited. Our press release and investor presentation containing details of performance has been uploaded. Today's discussions may include forward-looking statements, which must be considered in conjunction with the risks that the industry in general and our business in particular face, and actual results may vary materially. COVID-19 impact, with fast reduction in COVID cases and start of vaccination in a big way, economic activities have normalized. The economic recovery is faster than expected and impact of COVID-19 is diluted to a great extent. IMF, the Government of India, and RBI all have projected India's next year GDP growth in double digits, highest in the world. During the quarter, all of our manufacturing facilities operated at normal capacity, except Ferro Alloys plant in Raipur, where 1 of the 5 furnaces remain shut for refurbishing. During the quarter, we have achieved record production of steel billets and wire rods. The environmental clearance for enhancement and production capacity of pellet plant from 6 lakh tonnes per annum to 8 lakh tonnes per annum has been received. Consent to operate the enhanced capacity of the pellet is expected to be received anytime during the current financial year. This increase in production will come into effect immediately on receipt of consent to operate without any additional CapEx. The company has been declared successful bidder for two commercial coal mines. First mine is Gare Palma Block IV/7 in Chhattisgarh at a distance of 280 kilometers from the company's manufacturing facilities. This has got extractable reserve of 142 million tonnes, and existing approved mining capacity of 1.2 million metric tonnes. This is expected to be operational in the next financial year. Previously, this mine was held and operated by the company before cancellation of all coal mine allotments by the Supreme Court. The mine is backed by coal washery setup by the company, which was lying idle since March 2015. Second mine is Shahpur West in the State of Madhya Pradesh with extractable reserves of 13 million metric tonnes and presently approved extraction capacity of 0.6 million metric tonnes is there. The mine is at the distance of 260 kilometers from company's manufacturing facilities. The company has to start production in the mine within 51 months from the date of signing of the vesting order. Vesting orders for both the mines are expected to be issued this month. The company's coal requirement will be met from Gare Palma IV/7 mine in Chhattisgarh. The company is taking necessary steps to restart the mine at the earliest possible. I will give you a brief about the global and the domestic scenario of steel and ferro alloys. The global steel production was marginally up 6.9% year-on-year to 1.45% quarter-on-quarter. China recorded a growth of 9.4% year-on-year and a degrowth of 3.4% quarter-on-quarter constituting 56.5% of global steel production. Ex-China production saw a growth of 1.99% year-on-year and 8.6% quarter-on-quarter. India's domestic crude steel production during quarter 3 FY '21 was 28.78 million metric tonnes against 27.3 million metric tonnes in quarter 3 FY '20 and 26.7 million metric tonnes in quarter 2 FY '21, registering a growth of 5.4% year-on-year and 7.2% -- 7.82% quarter-on-quarter. Finished steel consumption during the quarter was 28.2 million metric tonnes against 24.5 million metric tonnes year-on-year and 24.18 million tonnes quarter-on-quarter, clearly reflecting improved demand and consumption of steel. During 9 months FY '21, India exported 13.82 million metric tonnes against 8.72 million metric tonnes during 9 months of previous year and imported 3.41 million metric tonnes against 5.82 million metric tonnes in 9 months of previous year. However, exports for the quarter fell year-on-year and quarter-on-quarter. The Union Budget has focused on more government spending, particularly on infrastructure building. This will give boost to the economic activities, which will have a positive impact on demand of steel in the medium-term. Sustained export will also help improved capacity utilization and stability of prices. Supply constraints of iron ore due to various constraints in mining dispatches at global level and delay in restart of mining post auction of mines at domestic level have resulted in demand supply mismatch. The central government has allowed sale of iron ore by Steel authority to the extent of 25%, which has eased demand pressure. Though an amendment in the mining laws, it is proposed to allow captive producers to sell up to 50% of the production on payment of specified premium linked with royalty rates, however, globally, iron ore prices are still hovering around USD 160 metric tonne. Recently, there have been some price corrections in the domestic market, but post New Year holidays in China, demand and prices are expected to move up again. Ferro alloy prices remained stable during the quarter, however, prices have firmed up during the current quarter by about 15%. Ferro alloys exports are again on increasing trend after falling from July to October. During the quarter, the country exported 382,000 tonnes of ferro alloys against 403,000 tonnes in September quarter. We exported 10,600 metric tonnes of ferro alloys against 10,000 metric tonnes in quarter 3 FY '20. Prices of steel products also remained at elevated level during the quarter on account of improved demand consumption, both domestically and globally. During the current quarter, prices have softened, post sharp increase and should stabilize with a positive bias. Now Mr. P.K. Jain will brief about the financial performance and position of the company. Thank you.

Yes. Thank you, Manish Ji. The company has consolidated operating income of INR 604 crores during the quarter as against INR 548 crores in the previous quarter and INR 456 crores in the corresponding quarter of the previous year, registering a growth of 32% year-on-year. The company has reported EBITDA of INR 186 crores during the quarter against INR 154 crores in the previous quarter and INR 96 crores in quarter 3 FY '20. Profit after tax at the consolidated level stood at INR 116 crores as against INR 43 crores in the corresponding period of the previous year and INR 84 crores in the quarter ended September 2020, reporting an EPS of INR 32 per share. Hydropower. During the quarter, we generated and sold 34.4 million units against 37.35 million units in the quarter 3 FY '20, recording a degrowth of 8% Y-o-Y on account of early withdrawal of the monsoon. However, during 9 months, we have recorded a growth of 24% by generating 120 million units against 97 million units in 9 months period of previous year. Debt position at the standalone level, the company's net debt fee in operating companies, the long-term borrowing stood at approximate INR 625 crores against -- and the total borrowing at about INR 700 crores. As on 31st December, bank balance and liquid investments stood at INR 100 crores. Term debt, net of the cash and current investments stood at INR 350 crores. Loan repayable within next 1 year is INR 74 crores. The debt equity ratio is below 1. The bank interest rates are falling on the back of ample liquidity. Present cost of borrowing and operating plants is less than 9%. Sikkim Hydropower Project. There has been some delay in deputation of supervisory team of the equipment supplier from Europe due to COVID. And also in receipt of some critical parts on the vendor, this has delayed commissioning of the project. The team of equipment suppliers from Europe has reached to the site for final inspection and pre-commissioning activities. Dry test run has been completed for the first unit. The pre-commissioning activities, including filling of the tunnel will start soon and the first unit will be operationalized in this quarter. The second unit will be commissioned in next quarter. We have received environmental clearance for increasing our Hydropower -- Sikkim Hydropower Project capacity from 96-megawatt to 115-megawatt with an objective to add 30,000-megawatt of hydropower capacity by FY 2030. On 29th January 2021, the central government has notified separate hydropower purchase obligation to be met exclusively from large Hydropower Projects of more than 25-megawatt, which come into operation after 8th March 2019. The HP obligation will increase every year. Power generated from our projects will be eligible for meeting the hydropower purchase obligation. Hydro Energy Certificate price has been kept at INR 5.50 per unit of electrical energy up to 31st March 2021, with annual escalation of 5% every year. Manish Ji? Manish Ji? Hello?

Mr. Manish Sarda, we would request you to unmute yourself.

Hello? Okay. I'll speak about outlook. India is expected to record positive GDP growth in quarter 4 financial year '21 with overall contraction of less than 10% for the whole year. Increased export demand has been a -- demand supply in the steel sector enabling stable capacity utilization and improved pricing. On global supply concerns, price of iron ore and steel is expected to remain firm. Various state governments and central government are also taking policy initiatives to incentivize fresh capital investment by industry. Because of lower leverage our company is well placed to take the advantage of emerging opportunities. Commissioning of Sikkim Hydropower Project will be -- will further improve the financial performance of the company. Government policy for attracting investments in large hydropower projects will also boost the hydropower sector. This is all about our performance and outlook. Now we leave the forum open for questions from the participants. Thank you.

[Operator Instructions] The first question is from the line of Jatin Damania from Kotak Securities.

Sir, I just wanted to understand in terms of hydropower now since you are indicating that our Sikkim Project is expected to start by end of this financial year. So have you got any indication in terms of the PPA and for how many years that we have signed it? And the additional CapEx that we will be doing is to increase the capacity from 96 to 115, what is the amount that we'll be spending it and how are we going to fund that CapEx?

So far as the PPA is concerned, we have already signed PPA for 35 years. Second thing is pricing. Pricing will be determined and approved by the regulatory commission after approval of the project cost. So there is a regulatory process, which has to be followed for getting the final price of the PPA. In the meantime, we will be getting provisional tariff from the regulator, which we expect to get approved soon.

Okay. Sir, in terms of COVID -- yes, 1 second. Sir, in terms of the follow-up on this on the provisional tariff for the regulatory approval, so what will be the provision tariff? Will it be lining with the other hydropower project or it will be higher than that and how much time will we take in terms of getting a regulatory approval for that tariff?

What we expect -- it's very difficult to comment on. But what we expect, we should get to whatever tariff they are giving for the small hydropower projects as of now, which is somewhere about INR 6 plus. So this is what we expect on the provisional side in the near-term.

Okay. So sir -- yes. So we will expect INR 6 or INR 5.50 we'll get, but from the cost -- from the next financial year, the revenue from Sikkim will start kicking in right? There won't be any delay in terms of commissioning of the project?

No, there won't be any delays from commissioning. Next financial year, we will be getting the full generation power. And so far as capacity is concerned, we have built up our capacity at 115-megawatt. We were awaiting permissions. No further CapEx is to be incurred on account of the increased capacity. We already built up the plant with a 115-megawatt generation capacity.

Okay. So sir, once we received an approval, so then probably we don't need any other things. Just we can start operating a 115-megawatt, right, if I'm not wrong.

Yes. Yes. But that 115-megawatt will be opening only during the peak season.

That's fine.

Yes. Hydropower project operates at the peak capacity only for peak season during rainfall. For rest of the year it does not operate even at the full capacity.

Right, right. And sir, coming more to this pellet front, is there's a news that probably from second half of next financial year, the supply of iron ore will normalize, and we have seen that recently, steel price have also corrected. So have you seen any pressure on the pellet prices? What's the outlook of the firm on the pellet prices?

Manish Ji? Hello? Manish Ji, will you...Yes, Manish Ji.

[Foreign Language] I'll call you back. [Foreign Language]

Hello? Sorry.

Sir, you can go ahead. Yes.

Yes. Yes, tell me.

sir, I just wanted to know the outlook on the pellet going ahead, we have seen the steel prices you have corrected in the recent past and probably once the iron ore supplies yet normalized in the country, how do we see the pellet price going down the line probably 1 or 2 years down the line?

Sir, it's very difficult to predict for 2 years at this point of time because there is a lot of things which will be in developmental stage. Frankly speaking, right now, we are seeing a global shortage of iron ore, which is there. Basically, in Brazil, we are seeing some disruptions in supplies. In South Africa, we have seen the climatic issues, which have cropped up, the rail disruptions which are there. So for the next 6 months, I don't think so there will be a very good supply of iron ore, which will be there in the country, or globally. But yes, over a period of time, the mine will be operating, and they'll be producing. So it will take some time. We can't really predict for 2 years from right now. But for the next 6 months, the markets look quite firm and bullish.

Okay. The next 6 months, we expect the market to remain strong. And in terms of increasing capacity because we had given an approval to increase the capacity from 6 lakhs to 8 lakhs tonnes. So where are we on that?

Where are we? We've already received the environmental clearance. The consent to operate will be received in this current financial year because there are 2 different permissions that you need to take. The environmental clearance comes from Delhi, and the consent to operate comes from the state government. Once we receive that, we'll be ready to operate, and there's no additional CapEx, which is there on this additional 2 lakh tonnes of capacity enhancement.

[Operator Instructions] The next question is from the line of [ Chetan Shah ] from Abakkus Asset Management.

Sir, sorry, I just missed one data about the debt position, can you just give that number, if you don't mind, please?

Yes. Yes, definitely. What we have said, at the standalone level, we are a debt-free company. At the consolidated level, if we see, in operating companies, our total debt is about INR 625 crores and total borrowing is about INR 700 crores, including short-term borrowings and we have liquid investments of about INR 100 crores. Term debt net of the cash and current investments is about INR 350 crores, this is the position on the standalone level. And at the consolidated level, if you consider, total debt is about INR 1,550 crores gross level. And at the gross level, if you consider. And at net level, net of the cash and investment, it is about INR 1,350 crores. And net of cash investment in loan, it is about INR 1,000 crores -- INR 1,050 crores.

Next question is from the line of Vikash Singh from Phillip Capital.

Sir, this recent notification from the ministry about the secondary players also managed to participate in the government tenders now. So how does it going to impact our company? Are we previously already eligible or this would be the new opportunity which we would be getting into?

Can you repeat your question? There was a disturbance in between.

Am I audible now?

Yes. Yes.

So sir, this recent notification regarding this secondary steels are also being eligible to participate in the government tenders in terms of infrastructure and road and highway transportations. So I just wanted to understand, would it be a new opportunity for us, or we were already -- we were there in this space?

This is materially -- it relates to the TMT bars and that infrastructure, we are basically in the wire rod segment. We are not in the...

Let me answer that. We -- basically, what you're saying is that the secondary steel producers are allowed now to participate in all the tenders of the infrastructure. But we, as a company, do not produce any TMT at the moment. We are just producing wire rods, which typically is not going in the infrastructure side. It's more of a application side. So it will have materially no impact on us, but it's a boom to the secondary steel producers that they'll be able to participate in all these government tenders now.

So, would this -- would you be able to share your thoughts whether this would enable them to increase prices or given the current situation, you feel that the primary producer prices should fall down? So what is your read-through on this?

See, there will be competition. There will be competition, and it will be a healthy competition, but I don't see the demand is so good on ground. I think everybody will have their place.

Understood, sir. Sir, in terms of inventory into the system, any thoughts on that that we have already seen the destocking and now the destocking would take place and supplies should go up or whether there's still some more time before the price would remain under pressure especially on the long side [indiscernible]

No. Overall, see I'll tell you something. The prices will move according to the international pricing as well as the pricing of the raw materials. We have seen that coke has shut up to quite a bit. Today, the imported coke pricing is at all-time high. The imported RB2 coal and the domestic coal is also on a high. So the pricing of steel will all be dependent on various factors. It is just not the ground demand. But we are seeing good ground demand and we are seeing the prices, which have gone up quite a bit have come down also, but there will be some correction in the stabilization will be there somewhere in between. But the prices overall for the steel market and for the steel products will remain firm and bullish.

Sir, what is the current prices of billets and wire rods vis-à-vis 3Q average, if you could tell me what percentage or what amount higher or lower right now?

Can you just repeat your question?

Sir, current billets -- sponge billets, and wire rod prices vis-à-vis 3Q average?

Q3 average?

Yes. What is Q3 average? How much they are up or down, current prices?

Prices are still on the higher side as compared to the Q3 average.

Any ballpark number or how much they are high?

No, if you take the sponge iron, our Q3 average was below 21,000. Now it is somewhere about 24,000.

Understood. And we don't see further price correction from this level?

Price correction downward or upward, do you mean to say?

Downward. Downward.

No. At the moment, we don't see any downward correction in terms of the pricing.

Understood, sir. Sir, just one last question in terms of your ferro alloys division. The prices of ferro manganese has been -- silico manganese also has been quite high. I just wanted to understand what was the prices you have realized this quarter. And any outlook on that front also since the [indiscernible] shaping up pretty well on that side also?

I'm not able to actually understand your voice clearly. Can you just speak a little slowly, and I'll be able to hear you?

Okay, sir. Am I audible now better?

Yes you're audible now.

Vikash, are you on the speaker phone right now?

Because your voice is getting muffled up and I can't hear your question clearly.

No. No, I was on the Bluetooth headset. Is it bit better? Is it better now?

Yes. It's much better now.

Sorry, sir. So basically just wanted to understand on your ferro alloy division price. So basically, the prices had been peaking there also, in terms of silico manganese prices -- what we have heard that the prices are pretty high kind of a 2-year high. So I just wanted your understanding on that side that how do you see that market shaping up? What is the import parity vis-à-vis China? And would that high prices would continue for long?

First of all, there are no imports which are happening from China in ferro alloys. Whatever imports happen in the country are basically the smaller fraction sizes of ferro alloys which come into the country and the Noble ferro alloys which come into the country. So India typically is the largest seaborne exporter of silico manganese in the world. And we, as a company, are also exporting silico manganese to around 62 countries in the world. As far as pricing is concerned, yes, the prices are high on the back of raw material pricing as well, as well as there is a good growth demand in domestic as well as in international markets. Today, what we are seeing is the production centers across the world are under the grip of pandemic. And they initially did not take that much care. And today, those production centers are suffering because of the pandemic -- because of COVID. And India, that way has got an opportunity to supply silico manganese to the world. One of the reasons which I feel is that India is quite competitive in its approach to silico manganese production in India and plus I think the markets will remain bullish for at least 6 months.

[Operator Instructions] The next question is from the line of Parthiv Shah from Tracom Stock Brokers Pvt. Ltd.

Congratulations for a very good set of numbers. Sir, my question is regarding your pellet capacity. After your pellet capacity is enhanced to 0.8, may I understand what is the quantity that you are envisaging to sell in the open market and what sort of price are you penciling in for this year?

Our present sales volume is about 4 lakh tonnes and whatever the additional production will be there, that will be going to the market. So if the capacity is going up by 2 lakh tonnes so there will be additional sales of the pellet in the market by 2 lakh tonnes.

So around 6 lakh tonnes of pellet you'll be selling in the market for -- on a yearly basis?

Yes, yes, yes.

Okay. Any sort of a price that you have projected for your entire year?

No. It's very difficult to project the price for the entire year. See, because it all depends upon the raw materials also, right? We have our own captive mines. So we are quite secured that way, but at the same time, the dynamics of the market depends upon the raw material pricing in the global as well as the domestic market. But I think we are looking at a 6-month period where we think the prices will remain at the same levels or probably move up if there are any disruptions at the global level, especially in South Africa and in Brazil.

Okay. And sir, I have a question regarding any sort of modernization required in your furnaces for this year? Any sort of modernization CapEx plan for this year?

Which furnaces? We have 2 types of furnaces. We have submerged-arc furnaces and we have induction furnaces.

Okay. Either of them, any sort of modernization like...

No. Sir, our ferro alloys furnaces, I think, we have 1 furnace, which is under refurbishment. And once that's done, I think we are practically going to have all the furnaces in place running.