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

Ladies and gentlemen, good day and welcome to the Sarda Energy & Minerals Limited Q2 and H1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that the conference is being recorded. I now hand the conference over to Mr. Pankaj Sarda, Joint Managing Director. Thank you, and over to you, sir.

Thank you, Akshay, and good afternoon, everyone, and a very warm welcome to each one of you to this call. First of all, I would like to wish a happy festive season ahead. I would like to state that some of the statements made in this call may be forward-looking, and a disclaimer to this has been included in the investor presentation. During the quarter under review globally, the economy continued to face macro headwinds on account of high inflation. High interest rates, war between Russia, Ukraine and imposed sanctions affecting commodity prices, including steel. In India, domestic steel demand continued to grow and was up around 10% on Y-o-Y basis, but steel spot prices moderated in line with global SKUs. Raw material and fuel prices also moderated further. As such, margins remained stable and downward bias. Central banks continue to adopt tighter monetary policies to rein in inflation resulting into liquidity tightening, demand compression and high interest rate. The output from manufacturing facility was lower due to seasonal impact and scheduled maintenance shutdowns. During the quarter, the pellet plant was under scheduled maintenance shutdown for 24 days for refractory lining -- relining. One of the sponge iron kilns also -- was also under shutdown for relining. However, it will not affect annual targeted production. In Q2 FY '24, we exported 25,454 metric tonnes of ferro alloys valued at about INR 189 crores against 29,358 metric tonnes in Q1 FY '24 valued at INR 242 crores. And 16,740 metric tonnes in Q2 FY '23 valued at INR 175 crores. The total generation of our hydro projects during 6 months was 360 million units against 390 million units during H1 FY '23. The lower generation could be attributed to rainfall in the eastern sector of the country, particularly in catchment areas of our projects being below average. In Jashpur district of Chhattisgarh, where we have 24-megawatt hydro power plant, the rainfall was 38% below average. In Sikkim, deficit compared to previous year was around 10%. Mines and Minerals. Coal mine, a joint venture has restarted in the quarter under review after acquisition of additional land. During the quarter, the mine produced 87,000 metric tonnes. The production will be ramped up in the ensuing quarters. We have applied for increase in the coal mining capacity of Gare Palma IV/7 coal mine 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-proposed acquisition of SKS Power. We are seeking approval to increase the coal mining capacity of Gare Palma IV/7 coal mines to 5.2 million tonnes in phases. The capacity of coal washery 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 a revenue-sharing basis. We have to restart mining within 18 months after obtaining all required approvals, et cetera. That was the first mine under revenue-sharing model. Surjagad iron ore mine, we expect to get letter of intent for composite license for the mine soon thereafter, prospecting work will be started. Hydro power projects under construction. Construction work at 25-megawatt Rehar hydropower project is progressing ahead as scheduled and is expected to be operational well before scheduled completion by end of FY '24, '25. Acquisition. It may be recalled that SEML had bid for SKS Power through the NCLT route. NCLT had remitted back to COC, the resolution plan of our company for SKS Power for reconsideration of all plants. On our appeal NCLAT has stayed the order of NCLT and listed for final disposal on 24 November 2023. SKS is having an operational thermal power plant of 600-megawatt capacity near our coal mine in Raigarh, Chhattisgarh. And this acquisition will bring operational synergy with our own 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 future coal requirements. The acquisition will be funded through a judicious mix of debt and equity. The equity fund requirements will be met mostly from surplus funds and internal accruals. Financial performance. The company has achieved quarterly consolidated revenue of INR 1,001 crores during Q2 FY '24 against INR 1,052 crores reported in last quarter and INR 967 crores in corresponding quarter of previous year. The company has reported operating EBITDA of INR 240 crores during the quarter against INR 207 crores in the previous quarter and INR 281 crores in Q2 FY '23. The company's profit after tax consolidated stood at INR 141 crores as against INR 171 crores in previous quarter and INR 181 crores in Q2 FY '23. Fall in the selling price and shutdown of pellet plant resulted in fall in revenue and profitability. Debt, the company is net debt-free at consolidated level. The working capital utilization at consolidated level is nil. At the consolidated level, gross long-term debt stood at INR 1,150 crores. Loans repayable within next 1 year is INR 182 crores. Ongoing CapEx, including our coal mine and hydropower projects, have been financed from internal accruals. The company is not exposed materially to the currency rate fluctuation. Foreign currency exposure is majorly covered by natural hedge by import and export. I now hand over to Shri Manish Sardaji, who will brief about steel and ferro alloy industry scenario and outlook. Over to Manishji.

Thanks, Pankaj. During the quarter, India recorded 1.5% growth quarter-on-quarter and 18% growth year-on-year in crude steel production. During 9 months ended September '23, India recorded 12% growth in crude steel production against flat global production. China recorded less than 2% growth. India recorded growth in steel production despite fall of 24% in steel exports from 1.8 million tonnes to 1.37 million tonnes year-on-year. And jump in imports by 19% from 1.54 million tonnes to 1.83 million tonnes. This has been possible due to robust domestic demand. The apparent consumption has gone up from 28.3 million metric tonnes to 32.8 million metric tonnes, registering a growth of 16%. Energy and logistic prices softened during the quarter, the finished goods prices also softened resulting in compression of margins. Ferro alloys prices have also corrected during the quarter. Outlook, global steel production and consumption is flat due to high inflation, high interest rate and war situation. The Indian economy remains stable against the pressure of the high interest rate environment. India steel production and consumption has recorded healthy growth and is expected to continue its high growth momentum. Growth in steel sector is driven by government spending on infrastructure and recovery and private investment. The infrastructure investment will also support the capital goods sector after growth of 9.3% in 2022. Steel demand is expected to show healthy growth of 8.6% in 2023. Seasonally, third quarter is good from demand perspective. Input cost of steelmaking, including iron ore, coke, coal and energy may remain range bound with upward bias. To check import of substandard steel, government approval has been made mandatory to import non-bias approved steel. This will reduce import of steel in the country and will help in price maintenance. Ferro alloys prices have softened due to poor export demand. Power demand growth is outpacing the supply, which is reflected in increasing price trend in energy exchanges. In Sarda Metals, we are selling part of power to take advantage of the market conditions. China is issuing CNY 1 trillion, roughly $137 billion of sovereign bonds for fiscal stimulus to the economy. After the treasury bond funds are put into use, it will help drive domestic demand and further consolidate the recovery of the economy. This will push demand of steel and push the prices also up. That's 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 Aditya Rathi from Aequitas Investments.

Sir, like you mentioned in your opening remarks that by the end of the year, we'll be able to reach our production requirement of steel billets and wire rods. So do you still hold it true?

Please repeat the question, please?

Yes. Like you mentioned in your opening remarks that by the end of the year, we'll be able to reach our production requirement of billets and wire rods. But like we can see, in the first half of the year, the production has not been really up to the mark. So do we still stand to produce it by the end of the year?

Yes. We'll be able to achieve.

We will be able to achieve. And sir, what is our target?

The target for palletization -- because there was a shutdown in pellet plant, the target of pellet plant was 8 lakh tonnes.

Okay. And what about billets and wire rods?

The billets and wire rods...

Billets will be 2,25,000 approximately. We will be achieving production of about 2.25 lakh tonnes. What we achieved in the previous year, same level, 2,25,000, 2,30,000 in the range. And for wire rod, it will be in the range of 2 lakh tonnes.

In the range of 2 lakh tonnes. Okay. And sir, any timeline for SKS transaction to consummate?

As already stated in our opening remarks, hearing for the -- in the NCLAT is on 24 November for final disposal.

Okay. Sir, any outlook or margin guidance or expectation for ferro alloys?

Manish?

Jain sir, would you like to take that? Or should I take it?

[Foreign Language] margin outlook on the ferro alloys.

Yes. So forward-looking statement would be that going forward, we don't expect too much of price increases in the ferro alloys market for the next 3 months, and the margins will remain range bound at the moment.

Okay, okay. And sir, my last question, sir, we've already taken seeking approval for the coal mining enhancement to 1.68 million tonnes per annum. And sir, as per your guidance towards moving towards 5.2 million tonne per annum, sir, any timeline or of the phases, which is planned yet?

So for 1.68 million tonnes, as we said we'll do it in this current year, we'll get all the approval by this year. And for the 5.2 million tonnes, we'll take 1 more year to get because all the clearances, all the environment clearances will be done post 1.68 million tonnes, so another 1 year for that.

By '25, we should be there at 5.2 million tonnes per annum.

Correct.

[Operator Instructions] Next question is from the line of Vikash Singh from PhillipCapital.

Sir, I wanted to underline our current realizations vis-à-vis 2Q average, how much percentage it is up or at the same level, if you could give us some insight into it?

We have been slightly on lower side as compared to the Q2 in some products in case of -- I don't know, pellet it is slightly on higher side. Our Q2 realization was in the range of 9,000 and present realizations are in the range of 9,500 plus. In between the prices have moved up to 10,000 plus also. And in case of billets and wire rods, more or less, these are in the range what we have achieved in the second quarter.

Understood, sir. But as against this, our coal as well as iron ore prices would have been on a higher side. So another quarter of some margin pressure, which we can experience, is that the right assumption?

No. We have our own -- that pressure we won't feel. And in case of iron ore as stated the prices of the pellet is a little on higher side as compared to the second quarter.

Understood. But we buy coal for sponge from the import market, right? So that -- at least that much would have been on the costing side -- on a blend, we would be on the lower side.

Very less. Very less.

Okay, Very less. Sir, second question pertains to assuming that all of our expansion plans for the coal mine goes through in a timely fashion, then what is the peak coal capacity which we would have and what would be our peak requirement, including SKS Power?

No. So for last year, our peak capacity was 1.2 million tonnes, that was a permission granted to us, and we achieved that. This year, we have got permission of 20% higher, 1.44 million tonnes. We'll achieve that. And we are trying our best so that if we can get 1.68 million tonne by January, we can achieve 1.68 million tonnes as well. So that is the capacity regarding the peak capacity of our Gare Palma IV/7 coal block. Regarding SKS Power, we might require another additional 4 million to 4.5 million tonnes, 4 million tonnes, so which we'll be able to achieve if we increase our capacity. Apart from that, lot of PPAs are there, which is going to be great and they have a PPA with Rajasthan government and others for which the coal we are getting at a very, very substantial price from the linkages.

So what kind of linkages they would have right now in terms of total requirement of 600-megawatt or 4 million tonnes?

They might have linkages for around 210, 230 megawatt.

Understood. And equivalent coal would be backed by the...

It is like a very cheap price because the [ SHAKTI ] linkage offers the IPPs for a very cheap coal rates than the normal market rates.

But till what year sir, because coal linkages also gets expired after a certain time period. So...

Till the PPA is there, we'll get the linkage. And once the PPA is expired, then we have to go for new PPAs.

Understood, sir. Sir, my third question is, I just wanted to understand what was bone of contention on it at which basically Torrent has tried to derail this process. And if any precedent is there in terms of similar kind of event happening and any outcome in the last similar kind of incident, if you could highlight?

This was the method NCLT had -- although it was against the Supreme Court settled precedent where it is well settled proposition, the commercial wisdom of COC will be final commercial decision. And in this case, NCLT had gone into some certain details without much of the clarifications. And there was -- we strongly feel that there was no strong ground to sustain. And that's why we have been able to get a stay on that.

Understood, sir. So I just wanted to understand the point which Torrent Pharma has raised to objecting -- the objection of Torrent Pharma on which grounds basically?

Torrent Pharma was of the view their bid was on higher side than our bid.

Understood. Understood. And we are reasonably sure since there is a Supreme Court precedent regarding similar matter, we would be able to triumph in this case.

Yes, yes. We are quite confident on that.

Understood, sir. And just one last question, if I may ask. Just wanted to understand our debt repayment strategy since we are still making -- our cash generation would be good. But we are also buying Torrent Pharma. So how should we look at the debt -- peak debt levels and from there -- this level, it will start coming down, if you could give us some insight?

No. You see as we go for this acquisition, a part of debt will be made from our internal accruals, that much surplus is already available into our system. And borrowing from this level will go up from the present level for acquisition. And that will be the point from where post-acquisition, debt will start going down gradually.

So any kind of run rate, which you could share with us that once the acquisition would come down or even ex of acquisition, this much of debt, we would be able to pay on an annual basis?

As of now, we are practically net debt-free company. So whatever repayment is required, that will be for acquisition funding and that will also spread over not less than over a period of 10 years.

[Operator Instructions] The next question is from the line of [ Vivek Jain from Chanakya Capital ].

Sir can you write, how much we are spending on maintenance CapEx for the year?

CapEx is within the range of INR 100 crores.

Annually?

Annually.

Okay. And sir, can you also write on contribution that we will be getting per kilowatt from SKS plant?

It will be too early to give on that because a large quantity is untied in case of SKS. We have long-term PPA only for 125 megawatts approximately. And we have some medium-term PPA for 3 to 5 years and remaining is untied-up. So a large will depend on the power market conditions, if -- as what we have seen in the last 1, 1.5 year, the power prices on the energy exchanges are going up. If the trend continues, it will give a very good EBITDA return on that.

Sir, can we confirm it around 2, 2.25?

As I told, giving any EBITDA guidance at the present level when we don't have any long-term tie-up for the power project, but looking to the scenario, as stated in our initial address also, the power prices have been going up. And in recent past also, you have seen the prices on the energy exchanges has gone up because of continuous increasing demand in the country. And you must also have seen in last 3 years, there has not been much investment particularly in the thermal power sector and most of the investment has gone into solar power where also the average PLF is very, very low.

Just last question. Can you just tell us current capacity utilization of hydro plant.

Presently, these are operating somewhere in the range of slightly below 50% as of today.

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

Sir, my first question is regarding your realization part. Sir, pellet realization, if I see compared to quarter...

Sorry for the interruption. Rakesh sir, your voice is not audible. Can you speak loudly.

Is it okay?

Yes, yes. Please go ahead.

My first question is regarding your realization part. If you see quarter-on-quarter, last quarter, pellet realization is near by 9,157 compared to this quarter is 8,925, sir. Why it's come down because iron ore prices already increased, sir? Any reason behind this, sir?

No these are market driven, iron ore prices had gone down in between. Price realization depends on the prices prevailing during the whole quarter and some spillover is also always there because of the pipeline of the orders. So in between the iron ore prices had gone down.

Okay. Can we see in Q3, the realization will increase because of prices now is nearby more than USD 112. Can we see?

Yes. Average realization should move up from this level definitely. This is what we see.

Sir, any guidelines for full year? Or how much realization for full year in pellet part?

Very difficult to give in the prevailing scenario, but we foresee the realization should be -- move up slightly from here -- from this level.

Sir, regarding one question because this quarter, your pellet plant is closed nearby 1 month, 24 days. So every year, this same quarter or same month have happened, they are shut down for 24 days or 1 month?

No, no, it is not like this. It was shut down for refractory relining. And refractory relining in a particular part happens generally over in 5 to 6 years. So it may happen over a period of 2 to 3 years, we take for one part refractory lining. So there is no particular month or particular year it's fixed where the shutdown takes place, so for basically replacement of refractory lining.

Okay. So if normal shutdown happen or this happen, so how much is our revenue impacted for this one -- refractory this one shutdown whatever...

As we stated over a period of whole year, we will achieve whatever is projected production of more than 8 lakh tonnes.

Okay, sir. Understood. Sir, regarding, sir, if I see your ferro alloys realization quarter-on-quarter, this decreased from INR 83,000 to INR 81,000.

Yes.

Yes. So sir, just now you have mentioned this realization will continue for next 3 months, INR 81,000?