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

Ladies and gentlemen, good day, and welcome to the Sarda Energy & Minerals Limited Q1 FY '24 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 and Minerals Limited. 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 Q1 FY '24 earnings call of Sarda Energy and 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. The company has completed 50 years of its success journey on 23rd June 2023. To commemorate the occasion, the directors had recommended a special dividend of 75% in addition to the regular dividend of 75% and had also proposed split of each equity share and timeshare. Fourth August has been fixed as record date for splitting the shares. This will improve much in liquidity and equity shares of the company. During the quarter under review, globally, the economies continue to face macro headwinds on account of high inflation, high-interest rates, war between Russia and Ukraine and impose sanctions affecting commodity prices, including steel. In India, domestic steel demand continued to grow and was up around Y-O-Y basis, but steel spot prices moderated in line with global Que. Raw material and fuel prices also moderated further. As such, margins remained stable with downward bias. Central banks continue to adopt tighter monetary policies to rain inflation, resulting into liquidity tightening, demand compression and high interest rates. The operating performance of manufacturing facilities has been stable. During the quarter, we recorded highest level of production of 226,360 metric tons of iron ore pellet against capacity of 8 lakh tonnes per annum. In Q1 FY '24, we exported 29,358 metric tons of ceroid valued at about INR 242 crores against 226,300 metric tons in Q4 FY '22 valued at INR 300 crores and 34,560 metric tons in Q4 FY '23 valued at INR 294 crores. The hydropower generation was low during the quarter as compared to the corresponding quarter of the previous year due to delayed arrival of the monsoon in the eastern part of the country. The total generation was 101 million against 149 million units during Q1 FY '23. In July, the generation was better than previously. Mines and Minerals. We have applied for increase in the coal mining capacity from 1.44 million tonnes to 1.68 million tonnes and expect to receive permission during the current year. In view of increased in-house coal requirement post acquisition of SKS Power, we are seeking approvals to increase the core mining capacity of Gare Palma IV/7 Coal Mines to 5.2 million tonnes in phases. The capacity of the coal wash is also proposed to be increased suitably to meet our requirements. Process of forest clearance is going on for Shahpur West coal mine in Madhya Pradesh. We expect to commence commercial production before the stipulated period of 51 months from allotment. Soon, we shall enter into an agreement with SECL for mining of high-grade coal from Kalyani coal mine on revenue sharing business. We have to restart mining within 18 months after obtaining all required approvals, et cetera. This will be the first mine under revenue sharing model. Surjagad iron ore mine, we expect to get a letter of intent for composed license for the mine soon thereafter prospecting work will be started. Hydropower project under construction. Construction work at 25-megawatt Rehar hydropower project is progressing as per schedule and is expected to be operational before the end of FY '24, '25. Acquisition. Considering the rising power demand and positive outlook for the sector, we have submitted our bid for acquisition of SKS Power Generation, Chhattisgarh Limited through IBC route. We have been declared a successful resolution applicant. The plan has been filed with NCLT for its approval. NCLT has heard the petition and reserved for orders. As part of resolution plan, SKS Power will be merged into our company. We expect to complete the acquisition before end of current year. SKS is having an operational thermal power plant of 600-megawatt capacity near our coal mine and rival cortical and this acquisition will bring operational synergies with our all coal mine. Presently, NTPC is running the plant under O&M contract. We are taking steps to increase mining capacity of the coal mine to meet increased coal requirement. The acquisition will be funded through a judicious mix of debt and equity. Equity fund requirements will be met mostly from surplus funds and internal accruals. Now I hand over to Mr. Padam Jain, 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 1,052 crores during quarter 1 FY '24 against INR 1,076 crores reported in the last quarter to INR 1,261 crores in corresponding period of the previous year. The company has reported operating EBITDA of INR 207 crores during the quarter against INR 209 crores in the previous quarter and INR 364 crores in quarter 1 FY '23. The company's profit after tax at the consolidated level, stood at INR 173 crores, as against INR 115 crores in the previous quarter and INR 173 crores in the quarter one of previous year. At a stand-alone level, the company's net debt fee mix plus fund. At the consolidated level, gross long-term loan stood at INR 1,200 crores and short-term borrowing stood around INR 100 crores. The total net debt stood about INR 500 crores and the total debt net of the loans given is just INR 150 crores. Loan ratable within next one year is INR 110 crores. Ongoing CapEx, including for the coal mine and the hydropower project have been financed from the internal accrual. The company is not exposed materially to the currency rate fluctuations. Foreign currency exposure is majorly covered by natural heads by import and export. Now I hand over to see Manish Sarda, who will brief about steel and Ferro Alloys industry scenario and also outlook in the coming period. Over to Manish.

Thank you, Mr. Jain. During June quarter, the whole steel production recorded negative growth of 3% from 497 million tons to 483 million metric tons. China, which produces more than 57% of world steel recorded negative growth of 4%. India produced 31.9 million metric tons recording growth of 12% despite a fall of 20% in steel exports from 2.88 million metric tons to 2.33 million metric tons year-on-year. And jump in imports by 28% from 1.23 million metric tons to 1.5 million metric tons. This has been possible due to robust domestic demand. The apparent consumption has gone up from 27.5 million metric tons to 30.3 million metric tons, registering a growth of more than 10%. Energy and logistic prices have softened during the quarter. The finished goods prices also softened broadly maintaining margins. Fertilizer prices also collected during the quarter. Outlook. Input cost of steelmaking, including iron ore, coal, energy and may remain range bound with downward bias. Steel prices may also remain range-bound due to seasonal effect. Magnesium prices have also softened, fertilizer prices have also softened and may improve from here due to production cut post increase in power tariff, particularly in Angra. The hydropower projects generally operate at their peak load during quarter 2 and generate about half of annual generation during the quarter. Since hydropower contributes a substantial amount to EBITDA levels that should result in a better financial performance in Q2. This is all about the performance and outlook. Now we leave the forum open for questions from participants.

[Operator Instructions] The first question is from the line of [ Adi Sarathi from Equitas Investments ].

This is Sugar from Equitas. Sir, my first question is related to the thermal power plant that we are planning to acquire. So by when can we expect the NCLT orders? And what's the timeline that we are expecting internally to consummate this transaction?

Good afternoon. The meter we stated in our initial comments, the metal hedge already been hired by the NCLT entities reserved for orders. But still being in subdues, it's difficult to give any time frame, but what we expect, I think, before end of current year. Calendar year, we should be able to produce the transaction.

And if we are able to get this asset by the end of the year, will we have enough coal for forward integration of our coal mines or will we acquired coal from outside?

No, this is ITT. We have whatever power we are supplying under the long-term contracts for that linkage colleague available from the government at concessional price. For power projects, there is a different rate. So to the extent, they already have a long-term linked contract or whether we supply even in the future for the under long-term contract of the power supply, we will get from coal from Coal India Limited. For any power supply under the bilateral contract or on the multilateral forums just like IEX or any other exchange that we still have to purchase coal from outside for which we will take from our mind and that will take care of the requirement.

Okay. And can you also give us some indication as to what will be the size of this transaction?

Since the metal subsidized, it will be very difficult to give you a specific figure. But so far, as the transaction is concerned, it has been bond on net-to-net competition and at a reasonable price. But given the specific trigger will be very difficult because the metric is subsidized. And whatever transition is there, that is also again subject to certain adjustments from the date of the admission to the IRP to the date of the completion of the transaction.

Got it. Fair enough. And on the Steel division, sir, could you explain what drove the margin so low this quarter compared to last quarter in the Steel division specifically?

No. If you see the prices of steel products have gone down on all the funds, there is always a time there between the raw material price correction and service size correction. So one is the reason we have the ties also and the oral since we have our own coal to that extent our raw material price was not affected to that extent.

Okay. So sir, it would be fair to assume that this is the stable rate margin that we can expect in future quarters also given that our raw material is not expected to go down further.

No. But if the prices move from here, move up, then the advantage will be available. And second thing is what the raw material inventory was we were holding at a higher price. And in the future, we will be having the purchase inventory also at a lower cost. In the last 2, 3 months, we continuously the pricing of iron ore, coal and all the items have gone down. So the type of debt should definitely get reflected.

And the total coal that we have sold outside also declined substantially this quarter compared to last quarter. Any reason for this?

Sales quantity [ quarterize ], if you compare year-on-year, last year, what had happened is we had produced more in the January to March '22, we had produced much more quantity because of a limited tank load available for production of the 1.2 million tons. So because of debt in the first quarter of 2023, there was higher sales but otherwise, there is no material difference so far as the sales quantity.

Okay. But if we consider that we got an approval to increase this quantity in May only, Q-on-Q, we would have expected increase in production, right?

No, you are talking about 1.2% to 1.44%?

Yes.

That capacity will consume over a period of 12 months now. So in the coming months, definitely sales will go up and once or on in the falling market generally bias even from buying. So that also has some effect on the quantum. But overall, there is not an issuance, we will be able to close what we have sold in the previous year or 10-year sales should be more than that.

[Operator Instructions] The next question is from the line of [ Rakesh Roy from Ankara Capital ].

My first question regarding your SKS power, sir. Sir, is the power you use for our captive use or sell sir?

No, this will be used for sales, but partly, we may also consume captively if we find the economic sense in consuming captive power by producing there and supplying to our subsidiary. We will evaluate depending upon the situation. But as of now, it is purely for the market sales.

Sir, apart from buying this one so we need any CapEx is a CapEx for the base part?

Yes. Some minor CapEx is not materially, but there may be one more CapEx for this FGD related, but we have some time for that. As of now, we don't recur material CapEx. Some minor improvement related CapEx, maintenance-related CapEx will be that will be inventorial element.

So how old we start, sir? How old, sir?

We started in 2018.

This is a new one, sir.

And in between, it was closed also. So it has not run much of the life.

Okay. Sir, my next question regarding -- so you see the pellet prices have come down. But do you see any more pad down in near future? Or what are your outlooks in terms of pricing, sir?

Manish?

We personally don't see too much fall in the pellet pricing going forward, and we are waiting for the China stimulus, which is about to come in anytime. And once the China stimulus is there, we'll be seeing [ bouncing ] all products of steel.

Okay. So do you see if you took a big realization is the same for the full year, sir, if I got '24?

Can be difficult to comment on the full year, you know the war between Russia and Ukraine has also intensified, and there are many factors which lead to things going forward. So it will be very difficult to predict credit for the entire year. But once we are seeing that the Chinese stimulus is in place, you will see that there's a lot of bands which happens in iron ore pellets and related steel products.

Right, sir. So my next question, sir, apart from this 35 mega hydropower in Chhattisgarh, we are looking to add more hydro in near future in the next 2, 3 years?

Yes, we are.

Okay. And then what is the target of a...

So we have 3 more projects lined up. So we are trying our best to get the environment and forest clearances, and then we'll talk about it once we have those in place. So we have 3 more projects lined up.

All 3 projects are not fully or in a...

All these 3 projects are in the state of Chhattisgarh itself. They are self-identified projects. All of them are 25 megawatts each.

Okay. Understood. Safer business sir, how is the Ferro business growing because the [indiscernible] is marketing medical for Q1, they are a very tough market for this was like? Then what is your outlook for [indiscernible] business?

So you are well aware that we are in the commodities business and commodities business is cyclical. We have seen very, very good market pricing of Ferro Alloys and we are seeing softening of orals and also demand contraction in terms of Europe and the Western European sector because of the war being on. What we foresee is that when fertilized prices go down, also the raw material prices go down, so the margins should remain intact. That is the most important thing. Pricing is up and down depending upon demand. And I think for the next couple of months, we have to see what the Chinese stimulus comes around and what are the controls of the Chinese stimulus and only then we will be able to clearly say what exactly the market would look like.

The next question is from the line of [ Raj Bandari from Naura Ingenios ].

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[Foreign Language]

I'm saying that it should have been there in this week. So I hope by the end of this month, we should be seeing something or maybe in the next week itself, we should be seeing something coming on.

[Foreign Language]

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[Foreign Language]

It is only to put machinery and start?

No. I will just clarify as it is a 200 to 300-megawatt operational project. And as of now, that is the deal.

[Foreign Language] is a power when we'll be selling. So is it a very profitable business because batteries soon as the power purchase all at come rates at?

Market improved year-on-year decline power price to down but again, the commodity type had open it for [Foreign Language].

[Operator Instructions] Next question is from the line of [ Pawan Nahar ], as an investor.

I'm sorry if the question has already been asked because I've joined us too late. If you could tell us what is the amount paid for this or what we have agreed to pay for this 200, 300 industry in this megawatt power plant, one. Two is, what, whether it already has a PCA or will be entering into a PPA, later? How would we be selling? And yes, these 2 things are if you already have a tariff, if you could tell us.

Estate meter subdue before NCLT. So specific figures for home in the paying. But I can aim competition make a reasonable price, we have been able to avail this facility. And [indiscernible] part of the capacity tied up for longer, part of that is tied up for medium term, in part is freely available, which can be tied up for any term or we can also sell even in the open market. So we have legibility in all the 3 minutes, something is for long term, some for medium-term and something is available for open market conditions.

So how much is the opening capacity?

Open capacity as of now, we have about 50%.

Okay. So 50% can be sold as merchants or off that we did that.

Or can be sold even in the medium or long-term tie-up with others. That is the option available to us that will be evaluated and taken care of. With the K2 power, we can always have the benefit of our coal for selling in the open market.

[Operator Instructions] Next question is from the line of [ Payal Goenka from Quest Investments ].

I want to know about ECL power plant, what will be the source of coal – from where you will source the coal for the plant?

So you are asking from where we'll source the coal, correct?

Yes, yes. So where are we planning to source to coal? Is that like on the ECL?

So there are big FCL coal mines and MCL coal mines around 100-kilometer distance from the power plant, one is [ Chalendar ] and Chhattisgarh itself. And there is MCL, coal blocks are also very close by.

Okay. So sir, currently, do we have any FSA with Coal India for that?

Yes, we have asset but whatever power we are supplying under long-term contracts for the long-term or medium-term contract FSC is available and coal will be available under those FSAs, but that will be available only for the long-term and medium-term power supply contracts.

Okay. So currently, the plan, is it 200 and 300 megawatts, right?

Into 300 megawatts, correct.

The next question is from the line of Namit Mehta from KC Capital.

So I'm new to the industry, and I have a few basic questions about the Ferro Alloys business. Can you actually just walk us through what happened to realizations over FY '22 and FY '23? And what were the key drivers behind such as spike in realization and then corresponding decline over a period of time?

Good morning. Do you want to take that question? Or should I take it?

Okay. So far as realizations are concerned, in the Ferro Alloys is 2022, '23 was the peak period where realizations were better in the first quarter, we had a realization of more than INR 1 per ton, which gradually came down in second quarter, it was somewhere about INR 35,000, then 26,000 in the [ cage ] 6,000. And in last quarter, this silicones has come down to 72,000. And gradually, it has been going down from first quarter of the previous year.

And was this majorly caused by increases in demand? Or were there a lot of supply constraints during this time as well, especially during FY '22, '23?

Can you just repeat the question again, please?

Yes. Can you just talk a little bit about the factors that have been driving realization? Is it largely supply related? Or was it demand that drove realizations during FY '22 and then over a period of time in FY '23 and currently?

Yes, there was a lot of supply constraint during war between Russia and Ukraine, if you remember, and the prices rocketed to 120,000. And slowly, slowly, the plant started operating in Western Europe and Eastern Europe. And then we gradually saw the realizations coming down. And typically, right now, the market is oversupplied, and we are hoping once China brings back the stimulus, we'll see a lot of material going into China as well. And what we see is that the markets will remain a little subdued for the moment, but once the power prices start hitting the producers because all of the federalized industry has made a good amount of money in the previous highs of the fertilizer industry. So we're just waiting to see what is the capacity shutdown that is going to take place. And one of the capacity shutdowns are there, the smaller plants, which are not able to cope up with the high electricity prices, we'll see the markets becoming more antigen.

And how much capacity has been added in the last 2 years?

In the last 2 years, there were 3 plants which are not operating. They have started, and there are 2 more expansions which have happened majorly in [ Anapolis ] only. And I think the capacity addition roughly would be around 45,000 to 60,000 tonnes a month.

And last question, sir, given the power price hikes in Vizag, what is now the power -- the price differential and cost competitive differential between plants there versus in West Wing coal in other regions?

So what is the power rate today in Angra is 7.80 per unit. And for the smaller plants, which are connected on the 33 KV line there on the INR 8 and INR 10 half per tonne. And if you look at the power pricing in West Bengal and Jharkhand and Chhattisgarh, they are on an average pricing of around INR 5, INR 50, INR 90 to INR 50.

The next question is from the line of [ Adi Sarathi from Equitas Investments ].

My question is, again, related to the thermal power plant. So given that after this acquisition, our entire energy asset would become quite substantial. So how do we look at this part of our business going forward? Are we exploring possibilities of value unlocking through demerger of the entire power plant at our division, et cetera?

I think it may be a little early because we saw to get it integrated with our operations, it has to come to the full capacity utilization in also to come to the full capitation. Then this can always be reduced, we have a separate vertical in hydro, we have a separate vertical on definitely thermal will also become a little large one. But then we also to see the synergies with the mining. So when it comes to the thermal ARPU because with the captions, you hope the certain advantages on the cost side. So it has also to come into consideration while deciding on the nature of the vertical.

The next question is a follow-up question from the line of [ Raj Bandari from Naura Ingenios ].

[Foreign Language] That will be under Sarda Energy only or it will be a separate vertical?

[Foreign Language] It will be part of Sarda Energy Direct.

[Foreign Language]

This is what we have proposed.

[Operator Instructions] Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference back to the management for their closing comments. Thank you, and over to you.

Yes. Thank you, dear moderator. We thank all the participants. The company has been able to report consistent performance on the strength of the card integration and diversification include mining and hydropower, which will continue to be the core strength and focus of the company. We have perfect synergies in place, the acquisition of SKS Power through IBC should take the company to the next level of growth. We hope we have been able to address most of your patients. Please feel free to reach out for our IR team if you have any further questions. Look forward to connect again in the next con call. Thank you all.

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