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

Ladies and gentlemen, good day, and welcome to the Sarda Energy & Minerals Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Pankaj Sarda, Joint Managing Director of Sarda Energy & Minerals Limited.

Thank you, dear moderator. Good afternoon, everyone. I extend a very warm welcome to all of you to the Q1 FY '23 Earnings Call of Sarda Energy & Minerals Limited. Our press release and our 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. Global economies are facing macro headwinds on accounts of challenges posed by high inflation, rising interest rates, Russian-Ukraine war and resurgence of COVID. The export duties imposed with effect of 22 May, 2022 has changed the whole demand-supply dynamics of steel industry and resulting in the sharp progression in the prices of both, iron inputs and finished steel. With the fall in the domestic steel prices, the same is expected to be rationalized soon. However, price of coal remains at an elevated level due to supply concerns. Due to higher fuel costs, grid power prices have also been increased by most of the state utilities. This has reduced profit margins in steel and ferro alloys manufacturing. However, we're less affected because we are not exporting any steel products. Secondly, we're captively consuming about 35% to 40% of the iron ore pellets. Thirdly, with the captive coal, fuel and [Technical Difficulty] cost is lower and stable. And fourthly, the company procures majority of its iron ore requirement from markets where prices have corrected. This is also providing a cushion against falling prices of steel. And fifthly, our foreign exposure of imports is [Technical Difficulty] ahead of exports. Prices of ferro alloys also corrected on oversupply concerns. Price of manganese ore is also correcting globally. However, margins are expected to shrink as compared to last few quarters. We exported 26,300 metric tonnes of ferro alloys valued about INR 388 crores against [ 17,100 ] metric tons in Q1 FY '22, valued at INR 158 crores and 26,300 metric tons in Q4 FY '22 valued at INR 300 crores. The company has achieved the highest ever quarterly production of iron pellet and captive thermal power. The overall performance of manufacturing facilities has been stable and in line with the last quarter. The 113 megawatt Sikkim Hydro Power project built 132 million units, a generation above level, the plant achieved a PLF of 58% in this quarter. However, due to delay in arrival of monsoon and scattered rains, the Gullu Hydro Power Plant in Chhattisgarh generated only 3.57 million units against 13.57 million units in corresponding quarter of the previous year. The Uttarakhand project generated 4.04 million units against 4.25 million units in Q1 FY '22. Ongoing projects. The government has approved mining plans of the company for mining of Shahpur West Coal Mine in Madhya Pradesh and for increase in the mining capacity of Gare Palma Mine from 1.2 million tonnes to 1.8 million tonnes. The process of environmental clearance is going on. Work on the ferro alloys expansion project at Vizag is progressing ahead of schedule. And we expect to start the third furnace in the next quarter against scheduled commissioning of March 2023. Construction work at 25 megawatt Rehar Hydro Power project is progressing as per schedule. We expect to complete the project before end of FY '24, '25. Mr. P.K. Jain-ji will brief about financial performance and position of the company.

Thanks, Pankaj-ji. The company has achieved quarterly consolidated revenue of INR 1,261 crores during quarter one FY '23, registering a growth of 19% quarter-on-quarter and 52% year-on-year. The company has reported operating EBITDA of INR 364 crores during the quarter against INR 351 crores in previous quarter and an operating EBITDA of INR 260 crores in quarter one of previous year. The company's profit after-tax at the consolidated level stood at INR 173 crores as against INR 207 crores in the previous quarter and INR 168 crores in quarter one of the previous year. The company is supplying hydro power to CSPDCL under cost-plus regulated tariffs. The cost of transmission of power from Sikkim to Chhattisgarh was paid by CSPDCL to the transmission utility. Recently, we have received a demand from CSPDCL for payment of transmission charges in terms of PPA. We shall take up the matter with the regulatory commission in the course of approval of the final tariff. The same was not considered in the provisional tariff as a cost. However, as a prudence, we have provided for the transmission charges as an expense in our results. The transmission cost relating to the previous year shall be adjusted against the retained earnings as per provisions of the applicable Indian Accounting Standards. The company had bought back 811,108 equity shares of INR 1,500 per share, which has been completed and the funds remitted on 27 June, 2022. The acceptance ratio was about 41% in case of retail category and about 2.8% in case of general category. Debt. At the standalone level, the company is net debt free with surplus funds. As on 30 June, 2022, gross debt stood at about INR 1,400 crores. Bank balance and liquid investments as on 30th June stood at about INR 700 crores. The total debt net of the cash and current investments stood about INR 700 crores and the net of loans given as a part of treasury operations is below INR 400 crores. Loans repayable within next one year is INR 151 crores, Ongoing CapEx, including coal mines, have been financed from the internal accruals. Long-term external rating of the company has been upgraded from CRISIL A+ to CRISIL AA-with stable outlook. The company's short-term rating has been upgraded from A1 to highest level of A1+. The long-term external credit rating of Sarda Metals was upgraded by 2 notes from CRISIL BBB+ to CRISIL A. The short-term rating has also been upgraded from A2 to A1. With this, the rating of all subsidiaries of the company stands upgraded to A category. This is a reflection of healthy financials and strong business fundamentals of the company and its subsidiaries. I now request Shri Manish Sarda to brief about the steel and ferroy alloys industry scenario and performance.

Thank you, Mr. Jain. The imposition of export duty has adversely affected India steel production and exports. In quarter one of '23, India produced 31 million metric tonnes of steel, recording degrowth of 3% quarter-on-quarter. However, year-on-year, India recorded growth of 9.54% on account of COVID-affected low base of 28.3 million tonnes. China's crude steel production increased by 16.47% quarter-on-quarter and reduced by 0.8% year-on-year to 283.5 million tonnes. Global steel production recorded growth of 8% quarter-on-quarter to 493 trillion tonnes, but fell year-on-year by 3.4%. India exported 2.88 million tonnes steel against 3.89 million tonnes in previous quarter, constituting 9.3% of production. The domestic consumption fell from 29 million tonnes to 27.35 million tonnes quarter-on-quarter. India continues to be the second largest producer of steel with 6.3% share in the global steel production. Japan with third ranking is far behind us. Energy and logistic prices which constitute a substantial portion of cost of production and distribution of steel is at elevated levels. As such, prices of finished steel may not go down substantially. Having our own coal mine, we are insulated from a large extent from increase in energy costs. The prices of steel products have moved up backed by demand from consuming sectors who have postponed buying in falling market. Steel demand in India is expected to improve in second half of '23 with the end of monsoon driven by increase in government spending, revival in construction activities and auto sector revival and that should push up the Indian steel prices. China steel demand is likely to find support as COVID restrictions ease and pave way for pent-up demand. China is not buying coking coal from Australia. That has kept their cost structure at elevated level. Coke, coal and energy prices may remain rangebound and volatile and that may keep the steel prices at an elevated level. Iron ore and pellet prices may remain subdued due to surplus domestic supply and heavy export duties. Ferro alloys prices may also remain subdued due to oversupply on account of fall in global steel production and capacity additions. This is all about the performance and outlook, and now we leave the forum open for questions from the participants. Thank you very much.

[Operator Instructions] We'll have our first question from the line of Subham Agarwal from Aequitas.

First of all, I'd like to congratulate the team on a very great set of numbers. Sir, my first question was relating to the coal division. Last quarter, we did a sales of around 2,23,000 and before that almost 2 lakh tonnes. So can we take a run rate of 2 lakh tonnes going forward of external sale of coal? And also, if you could help us with the total revenue and profitability at EBITDA level that we generated because of this thing?

So far this sales of the coal is concerned, about 50% of our present capacity of 1.2 million is capitally consumed, rest only will be available for sale. So the sales will be somewhere in the range of 1.25 lakh tonnes per quarter to 1.5 lakh at the max. This is what I think will be the -- if we get the permission for increased capacity then the sale may increase.

And for the last quarter, sir, what would be our total sales from coal?

It was 2,02,000 tonnes.

No, in terms of total value and EBITDA I'm asking.

We will provide this separately. We have not calculated separately because this is considered majorly for our captive requirements. So EBITDA is forming part of our steel division. But we will share with offline.

Now secondly, coming to the pellet part of the business. So obviously, since notification, we have observed a significant decline in pellet prices. Sir, I'd like to know the current on-ground reality. Do we see further decline in the prices of pellet going forward? And also, if you can help us understand if there is any challenges in terms of selling the total quantities of pellet going forward?

Manish Sarda-ji?

So let me answer this. We have a pellet capacity of 8 lakh tonnes installed. And we are mostly utilizing our own pellets for our capital consumption. So we have very less quantity to sell in the market. And you might have seen that in the recent past that the pellet prices went down with the duties being imposed and there was a certain rebound in terms of the pricing of pellets also. So pellet prices have moved back and inched up. And I don't see that the pellet prices will be moving down in the near future as coal prices and energy costs are going up across all the producing states. So I -- we personally, as a company, we don't see too much of a trouble in terms of selling our pellets because we have a very limited quantity to sell in the open market. And overall, I don't see that the pricing will go down because there's a huge amount of cost pressure from the energy side.

Sir, so for us, what would be the current cost of production of pellet given the current low price of iron ore, and obviously, we have our captive coal?

Jain, could you answer that question, please?

Pardon?

What is the current cost of pellet without captive coal?

Current cost of pellet. Our captive coal and mix of the -- this iron ore finds. This will be in the range of I think INR 6,500 to INR 7,000.

Secondly, sir, on the ferro alloy part of the business, again, my question would be on the similar lines. We saw a significant decline in the last 2 months as far as realization of ferro alloys is concerned. Obviously, we export most of it, but how do you see the market evolving from here on or is there a stable price that you -- based on the current demand and supply scenario that you see the ferro alloy division coming back to?

So if you look at the market pricing definitely has gone on for ferro alloys. But to be very honest, the market is very fluid right now because the Ukraine-Russia war, as anticipated, has carried on for a way much longer period of time. So there are a couple of scenarios now. Europe is facing a huge amount of electricity crisis, gas crisis and oil crisis. There, the steel production, we have seen sharp declines and the demand for ferro alloys is not as strong in Europe as we used to normally witness. What we are seeing is also that there are issues in terms of production in terms of the ferro alloys oils which are situated in Western Europe and Eastern Europe. And we'll have to just wait and watch because some of the plants we've heard have closed down like OFZ in Slovakia has completely shut down operations, which was running at around 55%. So what we are seeing is right now a flux situation, but I think the prices will go back and elevate up further because production centers will be hampered in a major way because of electricity crisis in Western and Eastern Europe. Ukraine also may face some issues with Russia going forward. And like we have seen in the past that there were disruptions in the steel plant and one of the steel plants are to completely shut down because of the war situation there. One of the largest producers of ferro alloys in the world is situated in Ukraine. And if there are disruptions there in terms of logistics and in terms of operations and production, we might see a certain spot in pricing of ferro alloys as well. So here and all, we personally feel that the markets have stabilized right now and manganese ore prices have also reduced a bit. So the margins will still be there. The only cost pressure which is right now for the entire steel DNA industry, as to say, is the cost of energy, the coal cost. We are quite insulated from that also because we have our own coal mines and we have gotten expansion permission. So we are just trying to ramp up our coal production and trying to see what maximum utilization we can do from our own captive coal.

So our expansion also is scheduled to come by next quarter, right?

Yes.

And finally, on the hydro division. So there was few new sales which suggested that Northeast, the total rainfall is very low in the month of July. So in our catchment area, are we observing the same thing or it's normal for us?

Yes, we are observing similar trends in our catchment area as well.

Similar in normal situation?

Yes. As the news feed you have got, even in our catchment area it's showing that the rain -- in this last 15, 20 days, there has been a little shortfall, but let's see how it goes from here.

[Operator Instructions] We have our next question from the line of [ Rakesh Shah, ]an individual investor.

So I just had a couple of basic questions about the coal mines. So what is the coal requirement and quantity at the Raipur plant and the Vizag plant?

So both together, as mentioned, around 0.6 million to 0.7 million tonnes.

So how was the coal requirement met before the Gare Palma plant?

So we were buying -- we were importing a lot also from abroad from South Africa and from Indonesia. So because the prices there have escalated so much at the moment, so we are utilizing our own captive coal from our coal mines and substituted that part to our own coal.

Mr. Shah, we have 1.8 million tonnes capacity utilization from our coal mines in the current situation and we also have our own washery. So what we are trying to do is maximizing our captive consumption so that we are insulated from price shocks of the imported as well as market-driven coal pricing.

So the next question is like the Shahpur coal mine which is there, from that, we will be selling all of the coal extracted to the outside market?

So Shahpur -- no, Shahpur coal mine, it's an underground coal mine and the grade of coal there is very, very good. So that time we can bring it to -- for captive views as well or if the prices there, if we catch a better price, so we can sell it across also from Madhya Pradesh itself. So it will depend on the coal pricing, et cetera, during that time.

We have our next question from the line of Vikash Singh from PhillipCapital.

Sir, I want to understand that in the industry level there was a lot of talk about capacities has been cut. So could you give us some idea about in terms of secondary players or the smaller players like yourself, what kind of capacities have been taken off from the market recently?

Manish Sarda-ji?

Frankly, I have no idea of capacities being taken off from the market in the secondary steel. In fact, it's a news to me because temporary shutdowns here and there do happen in the industry. But to say that capacities have been withdrawn from the market is a little unheard for me in the current situation. Definitely, during the...

What I was talking about sir basically these temporary shut downs basically. So during, let's say, an extra 2 to 3 months, what kind of the capacity rebalancing in terms of temporary shutdowns has happened. I understand that...

No, I have no idea and I have not heard apart from temporary shutdowns that any capacity has been taken off from the market. If it's a company which has gone into NCLT or something, that's a separate issue. But otherwise, I don't think so there was a bit of a shock in terms of the duties being imposed by the government in a very sudden manner. But that time, there was a little bit of a shake-up. But I think everything is now normalized and people have taken cognizance of the fact of the duties and have started reworking. We've seen the iron ore pricing falling and the margins being constant or, let's say, the margins being in place. I have not heard specifically about major shutdowns being taken or major capacities moving out of the industry.

Sir, in terms of our cost of production, whilst the steel as well as ferro alloy division, what kind of the cost escalation we are building in for the 3Q or 2Q and 3Q basically if we have some visibility up to next 6 months?

No, there won't be any material cost escalation. So far as fuel is concerned, as we told, most of that is already covered by our captive coal mines, although quality there is a little inferior, but we are using after washing that coal. So it won't material effect. And so far, it's cost -- if it goes to the manganese ore, there also prices are falling down. And in case of iron ore also, so far too, price corrections have been made by even by NMDC and other private players have also released the prices. Yes, now it depends how the market moves.

No. In fact, just to add on to that, even coke prices have fallen from 42 levels -- from 42,000 levels, the coke prices have also come down. And I personally believe that relatively the imported coal RB3 and RB2 pricing has also more or less stabilized and it will more or less may come down only now, it will not go up further. So I think the cost pressure in terms of going forward for Q2 and Q3, I don't think so there will be a visible cost escalation from our perspective. I don't think so there will be a cost escalation at all. In fact, the costs should be going down.

Sir, just small clarification. I believe that...

Mr. Singh, I'm sorry to interrupt. Can you speak a bit louder, please? Your volume is little low.