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

Ladies and gentlemen, good day, and welcome to the Sarda Energy & Minerals Limited Q4 and FY '23 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. Thank you, and over to you, sir.

Thank you, dear moderator. Good afternoon, everyone. I extend a very warm welcome to all of you to the Q4 and FY '23 earnings call of Sarda Energy & Minerals Limited. Today's discussion 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. This year, the company shall be completing 50 years on 23rd June 2023. Over the years in its journey to the Golden Jubilee, the company has grown and diversified, successfully meeting challenges posed by domestic and global economic conditions and industry cycles. As reflected in the changed name, we have diversified from steel to energy and minerals. Steel is one of the downstream products in our offering. This has helped in reducing volatility in its earnings. To commemorate the Golden Jubilee, the Board of Directors have proposed special dividend of 75% in addition to the regular dividend of 75%, making a total dividend of 150%. Considering the demand from investors to improve the much-needed liquidity and equity shares of the company, the directors have also proposed to split the share for a face value of INR 10 each to INR 1 each. During the quarter under review, globally, the economies faced macro headwinds on account of high inflation, high interest rates, failure of certain banks, a broad war between Russia and Ukraine and imposed sanctions. Central banks adopted tighter monetary policies to rein inflation, resulting into liquidity tightening, demand compression and high interest rates. Price of fuel, though moderate from the past, remained at elevated levels. As a result, margins in steel ferro alloys business remained under pressure. New capacity addition in ferro alloys and fall in demand due to stagnancy in steel production globally, adversely affected ferro alloys prices and margins. Grid power prices have been increased by most of the state utilities due to increased fuel costs on account of mixing of expensive imported coal and thermal generation. This has further put pressure on profit margins in steel and ferro alloys manufacturing. However, we are less affected due to use of our captive coal. The operating performance of manufacturing facilities has been stable. During the year ended March '23 at stand-alone level, we recorded highest ever production of all products except sponge iron. The sponge iron production was affected on account of use of captive coal, which is of relatively lower grade for commercial considerations. The coal mine, pellet plant and wire rod mill achieved 100% of the approved capacity. We have received permission to increase production capacity of rolling mill from 180,000 tonnes per annum to 250,000 tonnes per annum, which will be achieved through debottlenecking without any major CapEx. In Q4 FY '23, we exported 34,560 metric tons of ferro alloys valued at about INR 294 crores against 26,300 metric tons in Q4 FY '22 valued at INR 300 crores and 20,554 metric tons in Q3 FY '23 valued at INR 176 crores. During financial year '23, we exported 98,000 metric tonnes ferro alloys valued at INR 983 crores against 91,000 tonnes metric tonnes, valued at INR 998 crores in FY '23. The 113 megawatts Sikkim Hydropower Project generated 432 million units in FY '23. At generation [ mass ] level, the plant achieved PLF of 44%. However, due to delay in arrival of monsoon and scattered rains, the Gullu Hydropower plant in Chhattisgarh generated only around 80 million units against 105 million units in FY '22. The [indiscernible] project generated 22 million units against 26 million units in FY '22. Mines & metals. We have received consent to operate for increase in the coal mining and Gare Palma IV/7 coal block by 20% from 1.2 million tonnes to 1.4 million tonnes. We are seeking approval for a further increase of 20% during current financial year. The Expert Advisory Committee of Government of India has recommended grant of environment clearance, EC, for sharper commercial coal mine. The consent to establish, CTE, has been received for the mine. Mine development work will be started after getting [indiscernible], which is a process. The company has been awarded mine development and operation contract for Kalyani underground coal mine in Chhattisgarh by Southeast Coalfields Limited on a revenue-sharing basis. We have estimated extractable reserves of 3 million tonne high-grade coal with estimated annual production of 1.8 lakh tonnes. 4.5% of net revenue shall be retained by SCCL. We are required to start production from the mine in third year. Our wholly-owned subsidiary company has been formed for the purpose in the name of Kalyani Coal Mining Private Limited. The company has also been declared the preferred bidder for [indiscernible] iron ore block in the state of Maharashtra. Hydropower project under construction. Construction work at 25-megawatt Ripur hydropower project in Chhattisgarh is progressing as per schedule and is expected to be operational before end of FY '24, '25. Now I hand over to Mr. P. K. Jain, who will brief about financial performance and position of the company. Over to you, Mr Jain.

Thank you, Pankaj Ji. The company has achieved quarterly consolidated revenue of INR 1,076 crores during quarter 4 of FY '23, against INR 908 crores reported in the last quarter and INR 1,058 crores in corresponding quarter of previous year. The company has reported operating EBITDA of INR 209 crores during the quarter against INR 197 crores in the previous quarter and INR 351 crores in quarter 4 of FY '22. The company's profit after tax at the consolidated level stood at INR 115 crores as against INR 130 crores in the previous quarter and INR 207 crores in the comparable quarter of the previous year. Debt position. At the stand-alone level, the company is net debt free with surplus funds. At the consolidated level, the gross long-term borrowing stood at about INR 1,250 crores and the short-term borrowings stood about INR 150 crores. The total net debt stood at about INR 700 crores. And total debt net of the loans given as part of the treasury operations is about INR 400 crores. Loans retable within next 1 year is INR 180 crores. All ongoing CapExes, including for the coal mines and for hydropower project, have been financed from the internal accruals. The credit rating of Madhya Bharat Power Corporation Limited has been upgraded by 2 notches from Ind A- to Ind A+ by India rating. This reflects improving performance and financials of the hydro subsidiary in which we have highest debt. The company is not exposed to -- materially to the currency rate fluctuations. The foreign currency exposure is majorly covered by natural hedge by import and export. I now hand over ton Shri. Manish Sarda, who will brief about steel and ferro alloys industry scenario and the outlook. Over to Manish Ji.

Thanks, Mr. Jain. During FY '23, the world steel production recorded negative growth of 2% from 1,875 million tonnes to 1,834 million tonnes. China, which produces more than half of world steel recorded growth of 3%. India recorded a growth of 5% in FY '23. India recorded growth despite the fall of 55% in steel exports from 18.37 million tonnes to 8.34 million tonnes year-on-year and jump in imports by 45% from 4.8 million to 7 million tonnes. This has been possible due to robust domestic demand. The apparent consumption has also gone up from 106 million tonnes to 120 million tons registering a growth of more than 13%. In Q4 FY '23, India produced 33.18 million tonnes of steel, recording growth of 5% year-on-year. Global steel production was 459 million tonnes in the quarter, recording growth of 1% year-on-year. Energy logistic prices, which constitute a substantial portion of cost of production and distribution of steel have receded, but are still at elevated levels. As such, prices of finished steel may remain range bound. The central government initiatives on infrastructure-led CapEx localization and import substitution will further boost steel demand. Input cost of steelmaking, including iron ore, [ coke ], whole and energy may also remain range bound. Steel prices may also remain range bound due to the increased conversion costs. Magnesium prices have also softened. Ferro alloys prices are range bound due to production cuts after correction due to oversupply on account of fall in global steel production and capacity additions. The company is evaluating various growth opportunities in the field of its operations. This is all about the performance and outlook. Now we leave the forum open for questions from the participants. Thank you.

[Operator Instructions] We have a first question from the line of Subham Agarwal from Equitas Investment Consultancy.

First of all, I would like to congratulate the entire team of Sarda on the completion of a very important milestone, I really wish best of luck for the next 50 years also. On the first question related to the mining asset, I just wanted a bit more clarification regarding what is the kind of investment that we are looking at what is the revenue and profitability that we expect basis the current prices that we have? And what is the total amount of investment that we are looking at for both the mining asset, by MDO contract and iron ore block.

Good afternoon. So far as the both the mining assets are concerned, these are basically long-term investments, not -- there won't be any material investment in the near future. As already stated so far as the iron ore block is concerned, this is a virgin block where we have to carry out the exploration activity, then only we'll be able to decide how much area has full potential. And based on that final mining plan will be drawn. So it will be very difficult to give any specific figure on the investment so far as the iron ore block is concerned. It will take time to explore and get the final details on the block.

Okay. And on the MDO contract?

So as far as MDO contract is concerned, there also we have got a 3 years' time to start the production. So at least in the near future, there won't be material investment that we are carrying out the detailed -- we are getting out the detailed mining plan so to get the certain but because it was an operating mine. Here also, there will not be material investment, except for the land acquisition. So we are exploring the possibility to what extent initially we have to buy the land to carry out the mining operations. Existing mine was in the underground, and we are exploring both the opportunities, whether to go for the underground mine or for the open cast mine. If we have to go for the open cast mine, there would be -- maybe we may have to invest a maybe INR 200 crores to INR 300 crores in totality for the project, but it will be the over a period of 3 years.

Got it. And when it comes to the coal washery, the plan to raise it to 1.8 Mtpa. So by when are we planning this?

So in this financial year, we'll apply for getting the environment status. And I'm assuming we -- so we'll have to -- above 1 million tonne has to go in the center and a public hearing is also required. So we have to complete that activity as well.

Okay. And the amount of investment in this project?

So 1.8 million tons, it is not substantial, it may around INR 20 crores to INR 25 crores.

Okay, okay. And secondly, a clarification on the Power division this time. So we reported a loss at EBIT level. So any reason, specific reason why this happened?

This hydropower is the lean season. This is the poorest quarter for generation because during this quarter, we don't have material generation. And our fixed are there, so that's why it happens in this case.

Yes. But if I just consider this Y-o-Y, last year, it was 25 million. And comparatively, this year, we generated a higher units? And our sales was also higher compared to last year, but we reported a massive loss competitively.

Yes. There are 2 factors. Last year, we had not provided for the transmission cost because that was on account of CSPDCL, now CSPDCL has raised their demand. So as a precaution, we have provided for the transmission cost during this period. So when we compare with the previous year, that is one of the differences. And second is, last year, we had some sale of power on th [ IEX ] at a much better price. This time, the pricing was not that good when we compare with the imported coal cost. So that also had some bearing on the power revenues.

So this transmission cost that you are mentioning, like what is the total amount provided for this? And what is the status like do we expect this going on for transmission for the coming future?

Transmission cost is about INR 10 crores per quarter. And the matter is under negotiation with the buyer and also we are exploring the avenues to get it clarified from the regulator because we are supposed to get the equity return net. So -- net of the all costs. So that matter is under representation. Until then, we have provided as a precaution for the transmission cost.

[Operator Instructions] We have our next question from the line of Vivek Mehta an Individual Investor.

I have just only one question. In our ferro business in FY '23, which was impacted due to the market scenario, but now what is your outlook for FY '24? And also, you have added the capacity in ferro. So how confident are you of utilizing the capacity?

Manish Ji?

Yes. The outlook for ferro alloys remains softer for the next 6 months or so. This is because of the global production capacity has also come online, which was shut due to the Ukraine and Russia war, but we have started and we have successfully started our third furnace, the additional capacity, which we've added, and we'll be able to completely sell the product in the market. The pricing -- the market will only determine the pricing?

[Operator Instructions] We have a next question from the line of Vikash Singh from Phillip Capital.

And congratulations on completion of so many years, for your 50 years of your company. Sir, my first question pertains to coal blocks. Just wanted to understand that some of the other peers who have received the coal block during that period, they are now telling -- giving a guidance of their coal block is getting delayed. So just wanted to understand that have you also been facing similar problems when the approvals are getting a little bit delayed than previously what you have expected?

First of all, thanks for the compliment. Our Gare Palma IV/7 coal block was the first commercial coal block to start in the country. We started the coal block in just 9 months. And our second coal block that we have got in Madhya Pradesh, I mean we are on track. It looks some hurdles come, but overall, primarily, it looks that we are on track. We have to start the coal block within 51 months and we'll start it before that.

Understood, sir. So we haven't faced similar kind of the problems as of yet. Sir, in terms of our our Surajgarh iron ore block, I just wanted to know a little bit more about giving it a nature of unexplored block. What is the time line you are expecting here? And since it's a JV. So who are the other partners basically there?

So the other partner is Shyam [ sales ] group has joined with us. So we both have partnered in this, and we have the majority stake in the joint venture.

So what is our economic interest basically or the offtake agreement, which you have done?

No, it's the economic interest is 51% with us. And offtake, it's a -- being a commercial mine, there is no specific offtake. It will be basically market-driven whosoever requires otherwise, it will be sold off in the market also. So it is not on the offtake. It is on the basically sharing of the revenues, anyone of us may take or may -- we may sell in the market also. That will be market-driven transaction.

Understood, sir. Sir, my next question towards the market dynamics right now. Just wanted to understand how the spot prices are now versus 4Q averages? And given that a lot of price correction has already happened, do you think that price correction is done likely? Or do you still see some weakness to persist over the monsoon period?

Manish Ji.

No, basically, I'll tell you something that the price correction has happened if you compare it to the last quarter, and price correction has happened primarily on the basis of the raw material prices being revised. If you've seen that the coal prices have come down and iron ore prices have also come down, and so the finished prices have also come down. Now looking at the future scenario, if the raw material prices go down, then -- and then the market demands are sluggish, then the finished prices will also go down along with that. The important part is we need to understand whether the spread remains the same or not. So the important part for us as a producer, as a manufacturer, is that we have to have our margins intact. That is important for us.

Okay, sir. And sir, as imported coal prices have corrected far sharper than domestic. So I just wanted to understand, is this variation is the newly found or it has been followed from quite a some time? And domestic prices does not have much legroom to correct from here. In terms of coal, basically, I'm asking.

In terms of coal, I'll explain to you what has happened is that there was -- last year, if you remember, there was a big, big shutdown in Indonesia and a lot of licenses were canceled and the mines were not operational because of irregular activities in Indonesia itself. Now those licenses have been reissued, mines have started operating in a regular fashion now. So we are seeing a lot of coal coming out from Indonesia as well. And also the logistics cost, the freights of the bulk vessels have also come down. And that is why we are seeing the price of imported coal drastically coming down?

So sir, my question was that our domestic prices were usually at a discounted to imported given that the e-auction price correction has not been that sharper, do you think that following the historical discounts, would the domestic prices have a more legroom to correct or even in the domestic thing, do you think that the prices have corrected and further fall in the prices looks unlikely.

No, no, sooner later, the prices have to be in line with the international pricing. The domestic pricing cannot be very high. But there is a lag in terms of that. A lot of linkages, which have been allotted are not being met and a lot of coal is not being shelled out of the government mines. So that lag -- once that lag is over, prices will fall in line internationally and the domestic prices, there won't be much of a variation. Right now we are seeing it. It's a very specific situation right now.

So sir, what was our linkage for the quarter? And what are the expectations for next quarter?

Most of our linkages are on the verge of expiry and some of them have already expired. Now we are not running most of the linkages, except for some high-grade coal, low-grade coal and medium-grade coal, we are meeting from our captive mines, and we are not going for further linkages, except for the high-grade coal.

Understood, sir. And just one last question in terms of our capital allocation, if you could give us some idea about the capital allocation policy going forward?

I think we have already clarified this -- there are 2 projects. One is the Shahpur Coal Mine where we are investing. Another is the hydropower project in Chhattisgarh. These are the 2 projects which we have already taken up. And definitely in the pipeline is already stated, 1 is the Kalyani coal mine and another is iron ore block [indiscernible]. So our focus of the capital allocation will be on the mineral resources as a backward integration. And definitely, in the future, we'll definitely look forward some bottleneck improvements or waste utilization maybe [indiscernible] is opposite in our Visakhapatnam project or maybe [indiscernible] utilization project. Similar type of projects, we will be taking so as to get the value addition on the capital investment with a minimal investment, whatever we can get to the maximum value. Otherwise, we have not taken up any major CapEx for at least next 1 or 2 years so far as any greenfield or brownfield expansion is concerned.

[Operator Instructions]. We have a question from the line of Rajesh Bhandari from Nakoda Engineers.

[Foreign Language] but this split is good.

[Foreign Language]

[Foreign Language] next 3 to 6 months?

[Foreign Language] They are at a higher price. As far as production capacity being shut, yes, a major plant has been shut down, but they have increased their production elsewhere because these companies have their production units in Malaysia, in Sarawak. So the ore and metals have increased their production capacity in Sarawak and so has ore metals. I think there will be a little bit of a rise, but there won't be a substantial rise in the next 6 months in the ferro alloys pricing. That is my personal point of view. Because there is a lot of capacity in India also, which has been built up in the last 1.5 years.

Yes, Yes. [Foreign Language]

So I don't think so in the next coming 6 months, the prices are going to go up because at the end of the day, the ferro alloys prices are also related to the steel pricing. The steel demand has to be very robust globally. And only then we can see an upsurge in terms of pricing of ferro alloys.

But globally, steel demand, [Foreign Language].

Globally, steel demand is picking up, but at the same time, we are seeing that the production centers, which were shut in Europe has also started. And one of the major [indiscernible] steel producers of steel products is basically China. China's economy is not showing a good amount of strength. So we'll have to see what China's economy comes up within the next 3, 4 months, 6 months, only then we can see -- because everything is demand driven by China.

[Foreign Language] we are able to sell the total produce?

Yes, yes. We are comfortably selling our products.

And at a margin, maybe a little less.

Yes, [Foreign Language] but overall, it looks to be okay.

[Foreign Language] prices have also come down. [Foreign Language].

[Foreign Language]

[Foreign Language] consolidated is less than stand-alone [Foreign Language]

[Foreign Language]

We were also shut down for practically 3.5 months in Visakhapatnam. We had a turbine hauling, which we had to do.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Operator Instructions] We have a question from the line of Prashant Kumar Hazariwala an Individual Investor.

Congratulations for completing 50 years. So my question is like have you finalized the unit price for our hydro plant package?

We have finalized.

All right. So it is above our consideration? Or is -- how it is like?

No, what is the question? Have we finalized the units for our hydropower project, right? Was that question?

Unit price for our hydropower -- for new hydropower we have [indiscernible], and it was told that it's not finalized yet.

No, no. That is still provisional tariff, another is yet to be approved by the regulators.

All right, not yet approved, right?

Yes. That is in process. The regulatory process is on.

All right. My second question, I'm new to this coal industry. So maybe my question will be little bit [indiscernible] find something. So how coal washeries will add value in our coal mining?

Sir, our coal is a little low-grade coal. So washeries help to reduce the ash content in the coal. So we could expect a reduction of almost 5% to 10% of ash reduction whenever we are washing coal. And it also helps to reduce the shale. A lot of blended dones come during coal mining activity. So the washeries help to reduce that also, which increased the capacity, quality of coal and product.

So what grade of coal we are mining?

So it varies. There are different things and different things have different grades of coal. So it varies.

So varies means like what will be the range? Like any calorific value range you can [indiscernible].

So the range varies from G11 to G17 grade.

Okay. And so where our coal is used?

So our coal is mostly being used in our captive consumption in our power plant, the washed coal is being used in our sponge iron and ferro alloys unit and in the gasifiers in pellet plant as well as the commercial coal block. So it is being sold also in the market.

So our coal is used for this -- all these heavy industries, right?

Yes.

So what is the difference between the Australian coal and our coal, like how it makes a difference for like economically?

No. Australian coal is generally of high grade, high maybe G3, G4, that grade. And that is much more costlier. And there are other chemical and physical properties of the coal so it depends upon the end use, where are you using, what exactly is your end use purpose? So there is no direct comparison because ours is G11 and onwards and where as the imported coal is generally of high.

Jain, let me explain, let me just clarify this basic question. I think what you're asking is the economics of the Australian coal versus our coal, right?

Right. Exactly.

Yes. So let me tell you all Australian coal, which comes into the port and from port to Raipur, the freight itself is very, very high. So our coal is cheaper in terms of the logistic cost itself. So that's where the economics comes into picture. And whenever we require high-grade coal, we import a little bit as a sweetener and then we blend it and use it in our applications in our plant. And primarily, we are not buying Australian. We are buying South African coal RB2. So we use that as a sweetener wherever it is required. Otherwise, in most of the applications, mostly the major guzzler is the power plant. So that's where the economics come into play.

Right. So where our mines are commercial mines? to whom we sell this coal because you told that Raipur is far from the port state, will be, logistics costs will be much more.

So there are a lot of plants around Raigarh where we are selling this coal. A lot of plants around Chhattisgarh and in the bordering areas, a lot of plants are there. We don't have too much, we will not -- Right now, will not have too much to sell also because we are also utilizing our own coal, and we are putting it through the washery, upgrading it and then utilizing it on our own applications in our plant.

Right. So after this expansion, we can sell coal to the...

Yes, but there are many plants in and around near our mines in the vicinity, there are a lot of plants. So they all save in terms of the logistics cost. For their landed cost for them to bring anything from Paradip or from Visakhapatnam or from any other port, it will be expensive for them.

Right. So we have client trade, if we expand our capacity, partially, all right?

Yes.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Pankaj Sarda for closing comments. Over to you.

Thank you. We thank all the participants. The company has been able to report a consistent performance on the strength of backward integration and diversification into mining and hydropower, which will continue to be our core strength and focus of the company. The presentation made and the discussions held in the conference will help the investors to evaluate the performance in a better way. We hope we have been able to address most of your questions. Please feel free to reach out us to our IR team if you have any further questions. We look forward to connect again in the next con call. Thank you all.

On behalf of Sarda Energy & Minerals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.