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

Ladies and gentlemen, good day, and welcome to the Sarda Energy & Minerals Limited Q3 and 9M FY Q3 Earnings 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, Sarda Energy & Minerals. Over to you, sir.

Thank you, moderator. Good afternoon, everyone. I extend a very warm welcome to all of you to the Q3 FY '23 earnings call of Sarda Energy & Minerals limited. Our press release and investor presentation containing details of performance has been already been uploaded. Today's presentation and discussions may include 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. During the quarter under review, globally economy phase macro headwinds on account of free surface of COVID in China, high inflation, high interest rates, war between Russia and Ukraine and other sanctions. Globally, central banks adopted tighter monetary policies to weigh in the inflation, resulting into liquidity tightening and higher interest rates. Moving CY '22, world steel production recorded negative growth of 4.2%. China, which produces half of world, has recorded negative growth of 1.92%. Ferro alloy production suffered most and was down by 70.7%. India and Iran are the only countries among top 10 countries who have recorded positive growth in CY '22. India recorded growth despite fall in steel exports from 3.75 million tonnes to 1.3 million tonnes in the quarter Y-o-Y and from 14.5 million tonne to 6 million tonne. During 9 months Y-o-Y, an increase in imports from 1.13 million tonne to 2.25 million tonne in the quarter Y-o-Y and from 3.6 million tonne to 5.03 million tonne during 9 months Y-o-Y. This has been achievable due to robust energy demand. The apparent consumption in the quarter has gone up from 27.05 million tonne to 29.86 million tonne, and in 9 months, from 76.77 million tonne to 85.3 million tonne. Remove of export duties from 19th November will further boost the domestic steel production. The central government focused on infrastructure-led CapEx, and the budget will further boost steel. This reflects inherent strength of Indian economy and domestic steel industry. Domestic steel prices improved post withdrawal of export duties. Price of fuel is also moderated. However, there is impact of high-cost inventories in Q3 results in general. New capacity addition [indiscernible] fall in demand due to shutdown of capacity global adversely affected federalized prices and margins. Grid power prices have been increased by most of the state utilities due to increased fuel costs on account of [indiscernible] of imported coal and thermal generation. What has reduced profit margins in steel and ferro alloy manufacturing. However, we are less effective because With the captive coal, our fuel and power cost remain stable. Secondly, the foreign exposure of imports is hedged by exports at the consultant level. Thirdly, we are less affected by increasing interest rates due to no net debt. And fourthly, our diversification into Hydro Power sector reduces volatility of our earnings. The operating performance of manufacturing facilities has been stable. During 9 months ended December '22, we recorded highest ever production of our steel products, except Sponge iron. The Sponge iron production was affected on account of the captive coal and part replacement of high-grade imported coal. We are seeking permission to increase capacity of wire rod mill from 180,000 tonnes per annum to 250,000 tonnes per annum through debottlenecking without any major CapEx. We exported 20,554 metric tons ferro alloy valued about INR 176 crore against [indiscernible] in Q3 FY '22 valued at INR 289 crore and 16,740 metric ton in Q2 FY '23, valued at INR 175 crores. 13-megawatt Sikkim Hydropower Project built 388 million units in 9 months FY '23. At the generation cost level, the plant achieved PLF of 52% in 9 months. However, due to delay in arrival of monsoon and scattered rain, the [blue] Hydro Power plant in Chhattisgarh generated only 73.61 million units against 96.43 million units in 9 months of the previous year. The southern project generated 19.31 million units against 21.42 million units in 9 months FY '23. Projects. The 36 MVA of new capacity installed in Vizag commenced production in December 2022. The operation of the furnace is stabilized and commercial operation commenced in January 2023. Just to improve capacity utilization of power plant also bringing the benefits of scale. The process of environment clearance is going on for our coal mines. The public hearing for EC of Shahpur West coal mine has been completed successfully. The process for grant of consent to establish is also going on parallelly. Construction work at 25-megawatt Rehar Hydro Power project in Chhattisgarh is progressing as per schedule. Orders have been placed for long delivery items. The project is scheduled to be [indiscernible] before FY '24, '25. We have received permission for increasing the capacity of the Uttarakhand Hydro Power project from 4.8 megawatt to 7.8 megawatt. We are taking steps for other approvals required in this regard. Now I hand over to P.K. Jain ji, who will brief about financial performance and position of the company. Over to you Mr. Jain.

Thank you, Pankaj. The company has achieved quarterly consolidated revenue of INR 908 crores during quarter 3 of FY '23 against INR 967 crores reported in last quarter and INR 999 crore in corresponding quarter of the previous year. The company has reported operating EBITDA of INR 197 crore during the quarter against INR 281 crore in the previous quarter and operating EBITDA of INR 315 crores in quarter 3 of the previous year. The company's profit after tax at the consolidated level stood at INR 130 crores as against INR 181 in the previous quarter and INR 167 crore in quarter 3 of the previous year as available to the owners of this company. Debt position. At a standalone level, the company's net debt at surplus funds. As on 30th December -- 31 December 2022, gross debt stood at INR 1,370 crore. Bank balance and liquid investments stood at INR 725 crores. The debt net of the cash and current investments stood at INR 60 crores and net of loans given as treasury operation, the net debt is just INR 250 crores. Loans repayable within 1 year is INR 166 crore. Ongoing CapEx, including for coal mines, have been financed from internal accruals. The company is not exposed materially to the currency rate fluctuation. Foreign currency exposure is more recovered by natural hedge of imports and exports. I now hand over to Sri Manish Sarda, who will brief about the steel and ferro alloy industry scenario and outlook.

Thanks, Jain. In quarter 3 FY '22, we have reached 31.39 million tonne of steel with a growth of 1.95% year-on-year and 2.3% quarter-on-quarter. You will see production of 426 million metric ton in quarter [indiscernible] 6% quarter-on-quarter and 5% year-on-year. India totaled 1.32 million metric ton of steel against 1.8 million metric ton in previous quarter. In the 9 months, India exported 6 million tonne of steel against 18.5 million tonne. We think [indiscernible] 78.17 million metric ton to [ 79.86 million metric tons ] quarter-on-quarter. Energy and logistics prices, which considers a substantial portion of cost of production in the [indiscernible], still are at elevated level. As such, prices of finished steel may not go down substantially. Having our own coal mines, we are insulated to a large extent to increase in any cost. Outlook. The government's focus on infrastructure [indiscernible]. Talking about China has further increased [indiscernible], resulting into increase in steel prices. Coal and energy pricing may remain going down with upward buyers. Iron ore and stellar prices were also [indiscernible] strong demand. [indiscernible] prices have also started going up. [indiscernible] with upward buy with production cuts after collection, the oversupply on account of fall in [indiscernible] and capacity [indiscernible]. However, energy higher energy prices in other parts of the world is getting an improving price realization. The company is evaluating new opportunities in the [indiscernible]. This is all about the performance. Now we leave the floor and open for questions from the participants.

[Operator Instructions] The first question is from the line of Madhukar from AMAX Network.

My name is Madhukar. May I have a lecture from the coal situation, the coal trend and the price trend, not only the price trend, but the policy trend also so that we get some grip of what is happening in coal. And what will -- how will it affect us?

Manish?

The general understanding of the coal industry?

Yes.

Okay. So coal prices right now internationally are hovering for South African coal, they are basically hovering from $145 per RB1, around $125 to $130 for RB2 and around $117 $118-odd for RB3. As far as domestic coal production is considered, we are seeing that there is some improvement, but again, the monsoon will set in and the prices will again go up in international market because during monsoon time, the mining activities in domestic mining areas become very slow. So overall, the coal prices are going to [indiscernible] because of energy prices across the globe. Primarily, there are flooding which has happened in Australia recently due to which we have seen the coal prices shot up, and coal prices have also gone up because of that. Mostly for the 6 months, if you ask me to range bound or be stable at around these levels. But going up above $145, which will be really difficult for the South African [indiscernible]. So this is where the coal markets are right now. Our company is insulated because we have our own coal mines, and we are feeding our coal mining capacity also. So more or less, we are quite insulated from the energy prices in terms of the price movement. Do you have any specific question with regards to coal that we can answer? or was it just the general trend?

We move to the next question, which is from the line of Aman Madrecha from Augmenta Research.

Sir, can you please throw some more light on the [indiscernible] ferro alloy. Is that is happening? As you mentioned that the new capacities coming into the ferro alloy space and reduction the global steel production. So some more highlight on and some sense on how is the pricing trajectory moving currently for the ferro alloys?

Okay. The current pricing for the normal domestic rate [indiscernible] is hovering around 77,000. And for the international market, the export market, the pricing for ferro alloy is around 82 to 84 levels. I personally believe that the market is going to be range bound in this range for the next 3 months or so, but we might see some sharp increase in pricing only after the announcement by the state government in Andhra for the electricity prices because there is a talk which is happening that they will be increasing the electricity prices by [indiscernible]. So right now it is going to be range bound, but I think in the coming few months, we will see some uptick in pricing, if the electricity prices move up. And Iron ore prices have already moved up by 12% to 13%. So below this, I don't think the prices are going down, but it may move up further.

And sir, similarly, so how are you seeing the domestic pellet market post the removal of export duty. So is the domestic market able to absorb the pellets? Or is there overcapacity in the market?

See, you must be knowing that India is close to 40 million tonne, 42 million tonnes of pellet collection, and primarily, the domestic demand is already met. I mean there is overcapacity. So whatever is left out going into export markets in China, Korea, Taiwan, all these markets the takeaway. But mostly, all the domestic demand is met because it's easier to meet the domestic demand.

We can expect the pellet prices to hover around...

Export cycle is longer, and domestic market is very strong. Domestic demand is good. Domestic pricing is also good. So if you prefer, firstly, apart from the [posted] plants, we prefer that domestic demand is met first and then the export market.

So the pellet prices are also expected to remain range bound according to the orders of the [indiscernible].

[indiscernible] in the short term, I think, yes, it is going to be range bound. And this pellet prices also depends upon the price of iron ore in the international markets. So right now, we feel that the pellet market is going to be [indiscernible] and looks to be quite strong.

The next question is from the line of Subham Agarwal from Aequitas Investment.

Sir, I wanted to know a bit more on ferro alloy. You already mentioned a few things, but in terms of European production, so the prices of electricity has gone down there. So how would -- how do you think it will impact the total demand scenario situation?

So there has been a bit of easing in the European side, but you have to understand that in Europe, it is not that easy to simply shut the plant and start the plant. So we -- what we are seeing is that there is a plant built in Slovakia, which has been shut down. And even after easing out of the electricity pricing, we've not seen the starting up of the plant or any activity there in terms of startup because it's not simple because we are not sure how long the war is going to continue. And if the war again resurfaces in a stronger way, I don't think they'll be in a position to actually take on that kind of risk. So we are also waiting and watching. As European steel demand is now going to come up in the next quarter and then probably, we'll have a much better picture as to whether these units will start up or not. Plant based in Norway, they are already running, but mostly on ferro silicon and silicon metal as they get a better realization there.

Okay. Sir, as per our estimation, what would be the total volume of steel plant, which is lying idle and which has the potential to come back? If you have any number.

That exact number I don't have for Europe. I don't have that exact number. But there have been plants which have been shut down partially, and there have been plants in Ukraine, which are like power plant is completely shut. We don't have the exact numbers, but plants in Italy and all are running, but they're not fully back there. They are going to start up in the next quarters. We are going to see that the demand comes in because people are planning to start for production in the next quarter.

Okay. Okay. And with the increased capacity at our end, what's the increased incremental volume that we are expecting from Q4 onwards?

Increasing capacity where...

So we have started our new plant, 36 MVA, right? So what's the incremental volume that can be expected from Q4?

I think we'll be having roughly 50,000 tonnes.

Okay. 50,000 total. Extra capacity, so almost 12,000 per quarter.

[indiscernible].

Got it. Got it. And lastly, on the coal side, so our 1.8 million tonne plan has been approved. So what's the timeline from when we can start mining those?

So we see that in the next 6 to 8 months, we should be able to get the permission to operate at full 1.8 million tonnes.

Got it. And lastly, we have also bid for one of the power plant, correct? So what's the status there, if you can operate this?

No. That is on -- that is at the bidding stage only. Now bids have been submitted, which are being examined by the regulation professional and the negotiation process is going on. So it's still at a early stage.

So just wanted to know what would be the total size of the asset, in case it comes to us like in terms of numbers?

The plant is 600 megawatts. Now depends on how the things move, how the negotiations take is. There are multiple factors. It's too early to comment on that, but yes, as far as plant capacity is concerned, that is 600-megawatt plant.

[Operator Instructions] The next question is from the line of Maan Vardhan Baid from Laurel Advisory Services.

Thank you for the very informative presentation that you've shared with us. So when will the washery -- capacity on the Washery be operational?

So Washery -- for Washery expansion, we need to have a public hearing. Our application is pending with the environment clearance. We have already -- we are already submitting the same in this month end. And hopefully, in the next 3 months, we'll get the environment clearance. But before that, in the next 3 months, we have to do a public hearing for the expansion as well. So I expect, in the next 6 months, we should be able to complete the public hearing and all the environment-related approvals, and next 6 to 8 months, we should be able to get our clearance for [the one pending].

And also wanted to understand, since we mentioned that we are bidding for additional mining assets, so what are these assets? And...

So we are bidding for -- there are some iron ore mines that have come for the auctions. So we are -- as well as coal. So we are seeing some opportunities lies for us. So we are bidding for those assets.

So we'll be restricted to these 2 minerals only, coal and iron ore?

As of now, with the auctions that are lined up, yes. In the medium term, we are definitely looking for manganese-effects also, but as of now, we have not yet identified any specific one.

Fair enough. And also, sir, currently, on the iron ore front, I think we are operating at 30%, 35% of the mine capacity. So just wanted to understand how can that be scaled up? And what is the -- what are the challenges in scaling that up?

Mine side is very small, and we don't do much of the scope to increase the output beyond this level. It will be operating in this range only.

It will be operating in this range only. So from -- since -- I mean, you are mid way through February. From December to February, how was the pricing on the ferro alloy front moved?

The prices in January was much better. It had moved from 72,000, 73,000 to 80,000 plus. Again, there is some correction, as already stated in our recent statement. Presently, it is hovering around 77,000 for 60-40 domestic debt.

[Operator Instructions] Next question is from the line of Rajan [indiscernible], individual investor.

As an investor, I want -- there's a share-led liquidity in the stock market, and this is the Golden Jubilee Year of the company, how we are going to celebrate it?

Yes. 2003 -- '23, you mean Golden Jubilee Year?

Yes.

Next meeting of the board is in -- for [indiscernible] let's see how the Board takes review in this regard. It will be too early on our part to comment. Yes, we have received the observation of the investors regarding the liquidity. We will definitely discuss this.

Yes, sir. This is a request. Please celebrate the golden jubilee with bonus share and stock split.

Yes. We will definitely convey investor's feeling.

The next question is from the line of Maan Vardhan Baid from Laurel Advisory Services.

Sir, just wanted to understand. Sir, what -- for the benefits of coal, how should we sort of see it in -- because in the numbers as a whole. So when we are doing our calculations or something because it's not stated as a separate line item or a separate vertical. So just wanted to understand how should we see this portion? And sort of ex of coal, what would the numbers look like? And I mean, obviously, with coal, we have what it is like. I just wanted to understand that.

As you see, part of the coal is actively consumed in meeting our own requirement and start of the coal sold in the market because this is a commercial mine. Yes, definitely, first priority is given to our captive requirement, then whatever surplus is left off that is sold. And there has been a huge volatility in the prices of coal. There has been drastic movement in the prices. Therefore, it's very difficult to quantify specifically in view of the volatility, how much coal will contribute. But yes, the results are reflective. And in the initial -- when we acquired, we had estimated definitely EBITDA of INR 100 crore plus is from coal, and it has been better than that. But giving specific figures for coal separately will be very difficult because coal is integrated part of our operation and our purpose of the -- acquiring the coal mine was to basically support our raw material requirement or getting assured supply of the coal. That was the objective. Therefore, it will be very difficult to specify any figure for the coal separately. But yes, what we had estimated, the performance from the coal mines has been better than that.

Sir, this INR 100 crore EBITDA figure is an annual figure?

Yes, annual. More than that. This is what we had estimated, but because the coal market has been better than what we had estimated, yes, it has definitely contributed better than that.

So absolutely, sir. I mean back of the envelope calculations also kind of indicate towards that as to roughly with pricing. So the portion of coal that we have commercially sold, at least on that part, there would be clarity as to in terms of the pricing that it has been sold at, et cetera. That would be slightly simpler, won't it?

Yes. quantum-wise if you see, in the third quarter, we have sold about [indiscernible] in terms of coal.

Sorry, sir, your voice got sort of [indiscernible] for a second. Yes, quantum-wise?

Can you hear me?

Yes.

Yes. So far as Quantum is concerned, in the third quarter, we have sold about 140,000 tons of coal in the market. And with an average realization of about INR 4,600 per ton.

The next question is from the line of Jatin Damania from Kotak Securities.

Sir, just wanted to understand the trend in the ferro alloys. As you rightly pointed out that Magnesium prices have started moving up, but we haven't seen any significant increase in the ferro alloys prices. So given the trend currently, can one assume that the ferro alloy business will be under pressure for another couple of quarters or more than that?

Manish?

I think you have to understand that the ferro alloys industries had a good run. And at that point of time, prices and the coal prices were all stable. Right now, what we are seeing is that the coal price and Magnesium have moved up and ferro alloy prices have remained stable. I think there will be a bit of a pressure for another quarter or so. But then if the prices of electricity move up, then we'll be seeing a lot of outages in terms of states like Andhra where they are expecting a price rise of [ INR 0.80 ] per unit. So then you see a certain spark that will happen in terms of pricing and smaller plants will have to shut down.

Sir, looking at that, I suppose if the Andhra increase of prices by INR 0.80, what you said. So if looking at that into consideration, I mean at what level we can assume that our ferro alloy business will be profitable? At what realization?

I didn't get your question properly. I mean what...

If you look at the last sort of numbers on a ferro alloy business, you reported in [indiscernible]. So just wanted to assume that post tomorrow, Andhra increased the power tariffs by INR 0.80 and ferro alloy prices go up from 77,000 to 80,000. Let's assume on a hypothetical number. Sir, what realizing one can assume that the operational will become profitable or breakeven?

We are totally -- we totally enjoyed the benefits of captive power plant. And with the increase of this, most of the plants almost -- now all the plants in Andhra region, they are connected to the grid. They don't have their own captive power plant. So directly, the INR 3,000, INR 4,000 per tonne increase in the realized rate will add up to our profits.

That will be [indiscernible] to 80,000 level of realizing, you will be profitable at the EBIT level, can we put it like this?

Yes. But again, these are -- all are subject to the changes in the price of coal, coke and also the Manganese ore linked with the realization price, it is definitely relative to the pricing trend, then inventory gains, inventory losses, what happens in the rising market, you have the inventory [indiscernible] in a falling market, you have the inventory losses also for the time being of maybe 2 months or 3 months you bear the benefit or loss of the inventories also. What [indiscernible] is the market is falling. Our market is rising, so that also affects them. It's not a level of the realization, it's basically relatively demand supply, how the prices move up. But so far as we are concerned, our Raipur operations are profitable even at the present level of operations. Yes, in case of our Visakhapatnam operations because they are dependent on the imported coal to a large extent, yes, their margins are under pressure and the [indiscernible] sort of pricing. But once the price moves up from here, say, by one unit, then that will also be in the [indiscernible]. In terms of the -- you cannot say, at this price level, the operations will be profitable or at this price level, this will not be profitable.

I asked because Manish initially stated in his opening remarks that the ferro alloy prices have gone up by almost 8% to 12%. No, [indiscernible] prices, and ferro alloy prices, which have remained range bound in the range of 72,000 to 77,000. So that was -- on the back of that combination, I was just wondering that the costing has gone up and the ferro alloy have not gone up, what could be the overall drag on our business? That was precisely that question.

In between, there was a correction in the prices of Manganese ore also. They are recurring because in the -- as we stated in January, the prices of ferro alloy have also moved up beyond 80,000 plus. So then that is a reflection of increase in the selling prices has reflected on the manganese ore prices.

The next question is from the line of Nikhil Chandak from JM Family Office.

I have 2 questions. One is, given the way other players in the industry are also expanding or announcing capacities on the pellet side. Do you think, say, in the next 2 years, we are in a very serious overcapacity kind of a situation and that could impact the realizations quite significantly because everybody is kind of going very aggressive on the pellet expansion. And the second question was from a, say, next 2- to 3-year perspective, out of all your business segments, where is it that you are putting behind more CapEx? Because what I see from the presentation is, there is very little CapEx which is going into our increasing capacities in any of the business segments which are there. I mean some marginal is there, but in the wire rods and H.B. wire segment, but not very significant. So I'm just thinking, where will the growth come from here on over the next 2 to 3 years?

The pellet market -- so I will tell you right now, people are expanding in the pellet market, but we are not expanding right now immediately, but we are comfortable with our pellet production, and we are utilizing it in-house. So we get more value addition to that. Apart from that, we are looking at mining activities where we are planning to invest and improve efficiencies in terms of our raw material security. And overall, we are looking at expanding in Vizag also in a few projects we have already lined up there. So we will be having expansion. We are looking at opportunities for NCLTs. There are a couple of plants which we are looking at. We have already -- in one of the plants, we are in the beginning stage. So we are also equivalent -- I mean we are really looking at all growth opportunities which are there, and we will expand not just for the sake of expansion, but we'll expand it in a very strategic manner, which gives us...

Do you see a big capacity, so to say, a lot of capacity coming on the pellet side in the next couple of years, like an overcapacity kind of a scenario?

See, as it is, there's always been overcapacity in the pellet market because you know what people have seen that exporting iron ore will not be a possibility in the future. So what is happening is, basically, there are low-grade [mines], which needs to be beneficiated and after benefication, you need to make it into a pellet. Only then you will be able to export something out of the country. Otherwise, I know exports on its own is not going to be the future of the country. So most of the pellet capacity, which is coming in is also from an export perspective because people have a lot of fines line in their minds. They need to beneficiate that they can't really taken the product and export is stable. Expansion has always been there in this industry. I mean the overcapacity...

It's not an alarming...

I'm sorry?

It's not an alarming situation.

According to us, it is not an alarming situation because at the same time, if you're seeing that the infrastructure growth is also there, still we'll also be growing steel. We'll also be expanding pellet demand. In India, also we'll be there with steel growing.

And what -- I mean do you have like a number which you can share on the amount of CapEx over the next, say, couple of years, which is frozen and as per the plan? Like leaving aside the opportunities which may come up, but what has been decided? Can -- any amount you can share?

No. As far as the CapEx are concerned, one is undergoing CapEx on the Hydro Power project of INR 250 crore. About INR 100 crores we will be spending during the current year, maybe INR 100 crores plus we'll be spending in the next financial year. Next is the coal mines. There, we have already have a planning of about INR 300 crores plus CapEx on the second coal mine. In addition to that, there are marginal CapEx and the capacity improvement, as already stated in our address also. The -- In the steel plants, we have achieved almost the highest production in all the segments, whether it's pellets, whether it's [indiscernible] or wire rod or H.B. Wire. So we have been investing in debottlenecking and all those things, but these are all our smaller routine CapEx. In addition to that measure CapEx, what we are thinking of is, we'll be going in the iron ore and coal mine acquisitions. So which opportunities we are constantly evaluating and the few of them have come up for bidding, and we are participating in those mines. And in case of coal mines also, we already submitted a few of our bids, and we expect a decision to come up soon. So mining is one area. And in addition to that, we have 2, 3 hydro power projects lined up, which are in different stages of approvals. So there is no -- fund of CapEx, which has been committed as of now, except maybe INR 600 crores, INR 700 crores over the next 2 to 3 years. Beyond that, all are in different stages of planning and all those things.