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

Ladies and gentlemen, good day, and welcome to the Q3 and Nine Months FY '25 Earnings Conference Call of Sarda Energy & Minerals Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Sunitha from Stellar IR. Thank you, and over to you, ma'am.

Thank you, Mista. Good afternoon, everyone, and thank you for joining us today. We have with us today the senior management team of Sarda Energy & Minerals Limited; Mr. Pankaj Sarda, Joint Managing Director; Mr. Manish Sarda, Deputy Managing Director, Sarda Metals & Alloys Limited; Mr. Padam Kumar Jain, Director and Chief Financial Officer, who will represent Sarda Energy & Minerals on the call. The management will be sharing key operating and financial highlights for the quarter and 9 months ended December 31, 2024, followed by a question-and-answer session. Please note, that this call may contain some of the forward-looking statements, which are completely based on the company's beliefs, opinions, and expectations as of today. These statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. The company also undertakes no obligation to update any forward-looking statements to reflect developments that occur after a statement is made. I now hand over the conference to Mr. Pankaj Sarda. Thank you, and over to you, sir.

Thank you, and good afternoon, ladies and gentlemen. Welcome to Sarda Energy's Q3 earnings call. I hope you have had the opportunity to review our results, press release, and presentation uploaded on our website and the stock exchanges. Macroeconomic overview. The global economic growth has remained steady and is projected to maintain stability through the CY 2025. Stronger growth in U.S. is likely to offset slowdown in other economies, including Europe. The recent cease fire in Middle East should help ease the geopolitical tensions, leading to stabilization in energy prices and ocean freight rates. However, potential tariff escalations and policy shifts could heighten trade tensions, could disrupt supply chains, and weigh on global growth. In India, we have observed growth moderation over recent months. The Trump 2.0 era in U.S.A. may bring significant changes to international trade policies and climate change regulations, impacting global economic order and consequently, India's economy. The U.S. Fed after 3 rate reductions in 2024 has kept rates steady due to persistent inflation concerns. India's fiscal deficit is projected to decline to 4.4% against 4.8% estimated for the current year. RBI has rolled out plan to infuse INR 1.5 lakh crores to ease liquidity. Tax rebate for the lower middle class is expected to boost consumption and economic activity. The recent reduction in the repo rate after 5 years signals the start of an easing cycle, though banks may take time to pass on the benefits due to high deposit costs and tight liquidity conditions. Operational performance. We achieved the highest ever quarterly generation of the captive power plant at our Siltara plant in Raipur. Hydropower generation grew by 7% Y-o-Y, supported by a strong monsoon. The performance of the IPP thermal power plant improved significantly, achieving a load factor of 74% during the quarter and 67% for 9 months compared to 56% in FY '24. Various operational efficiency measures have contributed to this improvement. It could have been even better but for planned maintenance, shutdown, and lower power prices on energy exchanges. We expect further improvement with January already recording a PLF of 97%. Additional capital expenditure, CapEx, has been planned to ensure sustained operations at full capacity. Our Indonesian coal mine, which resumed operation in September 2024, produced 0.33 million tonnes of coal. In Raipur, one of the 5 ferro alloys furnaces was under shutdown for modification from 1st September to 1st November 2024. The captive power plant at Vizag also underwent a 22-day maintenance shutdown, affecting ferro alloys production there. Expansion and project update, coal mines. Gare Palma IV/7. The mining capacity at Gare Palma IV/7 is set to increase from 1.68 million tonnes to 1.8 million tonnes. Gare Palma IV/5. We have acquired another fully explored underground coal mine, Gare Palma IV/5 with 78 million tonnes in geological reserves and 39 million tonnes in extractable reserve grade G8. The vesting order was received on February 4, 2025, and we anticipate coal extraction within the next financial year. Shahpur West coal mine. The mining lease has been executed. Mine opening permission is expected this quarter with production targeted within 2 years. Bartunga Hill JV coal mine. We are preparing the detailed project report and mining plan. Rehar Hydropower project, 25 megawatts. The project has begun trial runs and is expected to be commercially operational by the end of this financial year. Captive solar power, 50 megawatts. While progressing on schedule, delays in the construction of CSPDCL substation bay and transmission line may slightly impact the time line. Mineral Wool project. This sustainability initiative is progressing well and should be operational before the financial year's end. 30 megawatt TG set replacement. Work is on track with operations expected to commence in mid-FY '26, '27. Now I hand it over to our Director and CFO, Finance, Mr. P.K. Jain ji, to discuss about financial performance.

Thank you, Pankaj ji. Revenue. The company achieved consolidated revenue of INR 1,319 crores in quarter 3 of FY '25, marking a growth of 43% year-on-year and 14% quarter-on-quarter. Profitability. Despite challenges in the steel and ferro alloys segment due to a downturn in prices, lower production, inventory losses, and lower profit from the hydro segment due to seasonal effect, operating EBITDA almost doubled year-on-year from INR 194 crores to INR 382 crores. Despite mark-to-market provisioning of INR 46 crores on investments, consolidated profit after tax grew 75% year-on-year to INR 200 crores and remained steady quarter-on-quarter. Debt and liquidity. Net consolidated debt, including working capital loans, stood around INR 1,400 crores. Long-term loans repayable within the next one year is INR 223 crores. The liquidity is strong with cash and liquid investments exceeding INR 1,400 crores as of 31st December 2024, which is in addition to loans given as part of our treasury operations. The credit rating of the company is reaffirmed at AA- by CRISIL post-acquisition of SKS. I now hand over to Sir Manish Sarda to discuss the steel and ferro alloys industry overview and outlook. Over to Manish ji.

Thank you, Mr. Jain. Global steel production declined by 0.9% to 1839.4 million tonnes in CY 2024 with China recording a decline of 1.7%. India, however, bucked the trend growing at 6.3% to 149.6 million metric tons due to a slowdown in the domestic economy. Despite the fall in steel production, China recorded highest ever steel export of 110.72 million metric tons of steel in CY 2024, recording a growth of 22.7% over 2023. Aggressive exports from China weighed on global steel prices. In December alone, China exported 9.72 million tonnes, which is higher than the average for most previous months. Many countries have invoked safeguard measures against Chinese imports. India remained a net importer of steel despite moderation. During the calendar year '24, India imported 10.82 million metric tons of steel against 9.03 metric tons in CY '23 whereas the exports fell to 7.63 million metric tons against 7.83 million metric tons in CY '23 in 2024. Ferro alloys prices remained subdued during the quarter. Merchant power prices also remained subdued due to above-average rainfall and increased generation. Power prices on the exchanges remained below INR 4 on average. The Indian coal index recorded a fall of 14.84% from INR 155.44 in December 2023 to INR 132.38 in December 2024. Domestic crude steel production in Q3 FY '25 was 37.78 million metric tons, up 3.5% year-on-year and 2.9% quarter-on-quarter. Domestic finished steel consumption grew by 7.64% year-on-year and 3.33% quarter-on-quarter to 38.46 million metric tons. Our ferro alloys export during the quarter was down to 23,250 metric tons due to a fall in production as compared to 28,200 metric tons in the last quarter and 33,400 metric tons in quarter 3 of '24. We expect a pickup in credit offtake and economic growth supported by liquidity infusion in government spending, net import of steel, and a fall in the coking coal prices, a major input for primary steel producers is expected to keep steel prices in check. Expected safeguard measures to check steel imports in India will help in improving margins for the Indian steel industry. India remains the fastest-growing major economy driven by domestic demand and favorable demography. The reversal of the interest rate cycle will enhance competitiveness and encourage capital investments, creating demand for steel and other metals. Improved PLF and sales realization in our IPP business and foreign finance costs should further strengthen profitability. That concludes the performance and outlook.

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

I just wanted to understand the RM cost even on the stand-alone level, if I see, there was a sharp uptick. So any particular reason for the same? [Technical Difficulty]

We have connected the management line. Mr. Vikash you can go with the question, please.

Sir, just wanted to understand why our RM costs on a stand-alone level has jumped up pretty sharply. So what are the main reasons behind the same?

Iron ore.

Our total raw material cost has increased very sharply. One could be iron ore. What are the other cost components, which has led to such a sharp increase in the sequential RM cost?

It's not only the iron ore cost because if we have a power plant also to them, coal purchase is also there and in case of ferro alloys, you see the selling prices has gone down. The raw material cost has not gone down. So raw material consumption includes the effect of the higher cost of the inventory of the manganese ore. And so far as total material consumption is concerned, that includes the coal consumption in the IPP.

Sir, in terms of realizations, how should we look at the spot realizations right now versus the 3Q averages? How much they are higher or they are at the same level, you could give us some idea?

More or less, prices are at the levels at which they were for the quarter 3 average.

Sir, our SKS power plant would have been 70 or higher than PLF level this quarter. So if you could tell us by when we can see the full utilization and Phase 2, any idea about the Phase 2 expansion plan because we have already utilized 600 megawatt as of now?

As already conveyed in our opening address, in January, we have achieved 97% PLF. So the machines are operating at full capacity. But in different, we are facing certain maintenance issues. So we are addressing all those issues. So average PLF will improve. But yes, we have to take certain more steps to ensure that at a sustainable level, we achieve 100%, the case as of now, the plant is operating at 10% capacity and generating a capacity of 600 megawatts.

So any plan to expand this capacity? I believe we have some already the infrastructure is already there for the next 600 megawatts.

Yes, basic infrastructure is readily available, but we have to seek all the approvals and carry out the economic viability study and all the environmental-related clearances. So it will take us some time, not in the immediate future. But yes, we will take steps one by one. Effectively, first, we have to go for the approval.

Sir, my second question is related to ferro alloys division. Are we making PBT-level losses right now? And since the manganese prices have been sharply up in the last few days, have we seen this reflected in the finished product prices as well?

The ferro alloys prices recently have moved up, and we have seen a little bit of improvement on the manganese ore side as well. But we'll have to wait and watch in the coming 2, 3 months as to what happens because there are protectionist measures that have been taken by many countries like Europe, U.S., they're both announced. So we'll have to see how the demand pulls up in the coming 2 months.

But for this quarter, we had PBT-level losses. Is that assumption correct, looking at the number right now?

No more because we had inventory losses to some extent, but not PBT losses at the PBT loss.

The next question is from the line of [indiscernible] Advisors.

Sir, wanted to understand more from the pricing point of view. So what is the pricing difference between the power that we sell from the hydropower plant and from the gas power plant as well as the profitability?

For hydropower plants, we have long-term pricing contracts. So those are supplied at a fixed price, and there are different prices for different plants to be commissioned at different points in time. So far as the thermal IPP thermal power plant is concerned, we are selling part of the power in the long term part of the power in the medium term part of the power in the short term, and the remaining power we are selling in the exchanges. So these prices are subject to market fluctuations. So comparing directly is very difficult because we have a long-term contract here, and we are selling majorly in the spot market. The part of it is going into the medium term also. During the rainy season, the price relations may be lower, during the summer season, you may get much better prices. So, there is no direct comparison between both the projects.

But any ballpark number like what would be the average realization in thermal you mentioned in the last conference call, it is close to 5 rupees a unit. So, similar to what is in the hydropower plant as well, any ballpark number?

Hydropower plant in one plant we have a tariff of 3 rupees 85 paisa, in another plant we have a tariff of 5 rupees 21 paise, and third power project is subject to cost plus formula. So, that varies from maybe 7 rupees to 5 rupees or so. So, in case of thermal power plant, we can definitely expect 5 rupees plus on average for a whole year.

And profitability will be different for both for thermal EBITDA level is close to 40 percent, in hydropower it would be more or it is in a similar range?

Hydropower EBITDA level is in the range of 80 percent. We do not have any raw material cost, maybe we have more of the interest cost. So, EBITDA cannot be compared for both projects. One has the raw material, another has the interest in raw material. So, there is no direct comparison on the EBITDA level.

And sir, last question, any update on the Supreme Court ruling for the SPS power plant?

Hearing has not yet taken place.

[Operator Instructions] The next question is from the line of Balasubramanian from Arihant Capital Markets.

So, my first question regarding this ferroalloy price, it is Q1Q 19 percent decline average re-initiation for ferro manganese, around 8 percent Q1Q in silica manganese. So, like any specific reasons, or like what are the dynamics in markets?

Can you repeat the question please because I am not able to hear you clearly.

So, like in ferro alloys price trend, I am looking at PPT, it is 19 percent Q1Q downside for ferro manganese and around 8 percent Q1Q downside for silica manganese. So, any specific reasons for it, and what are the market dynamics at this point in time?

Sorry, we are not able to hear your question clearly. The voice is very muffled.

The voice is very muffled. It is actually coming very muffled. I mean I can hear some parts of it that you want to know the silica manganese prices and the ferroalloy's overall pricing coming down and what are the reasons thereof. Is that correct?

Yes, sir.

So, particularly there is no reason. It is a commodity and there is a cycle. We have seen that there has been a bit of a slump in demand and that is the only reason.

Sir, my second question is regarding looking at this sales volume data for this iron ore pallet and sponge iron, et cetera So, only sponge and only year-on-year 48% growth. The remaining are into less than like some of the like volumes are looking at 20%. The remaining are 18% kind of downside only. So, our revenue has reported 42%, 43% year-on-year, and like how much it comes from price relations inside and volume relations inside. Can you actually rejoin because everything that you are saying is muffled up?

We cannot hear you clearly. At least I am not able to. Jain, sir?

No, we are not able to hear clearly. It is all like echoing or muffling up.

Can you just rejoin and again come back and ask the question, please?

Fine, sir. Thank you.

[Operator Instructions] The next question is from the line of [ Devang ] from EagleView Ventures.

Sir, our long-term borrowings increased from INR 1,000 crore to INR 2,400 crore. What are the peak dates we can see in coming quarters?

I think this must be the peak for the coming quarters.

So, this is the peak number for this?

Yes. Unless we go for some other major activity for at least for next few quarters, this is the peak. Now, it is getting reduced as we are starting to repay the loan taken for SKS acquisitions. So, it will go down from here.

Sir, my second question is, we have a good case on the balance sheet. We have very low debt. Can we expect a dividend payout in the coming quarters or coming years?

That is a matter to be discussed at the board meeting and decided by the board. It is very difficult to comment on this at this juncture.

The next question is from the line of Vikash Singh from PhilipCapital.

I just wanted to understand our capital allocation preferences. Given right now our debt is high, but obviously, we would be paying with the cash flow. If we have a second round of CapEx, then our choice of the business would be major, first choice of the investment would be steel power or the ferroalloy. How should we look at it?

No. We are investing in a diversified way. We are investing in Hydropower projects also. We will be taking up 2 more hydropower projects. We are investing into the coal mines also as a backward integration. We have planned even for the iron ore mine. So, generally, it is going on the backward integration side and definitely, if we come up with the expansion of the SPS power plant, that will be another major CapEx. So, the CapEx capital allocation will be distributed over all the different segments of the activities carried out by the company.

And, sir, we haven't participated in any manganese ore mining or management basically?

There is no major manganese mine that has come up in the country right now. There have been 2, or 3 auctions which are all small mines. They are 6 hectares, 7 hectares, 8 hectares, and the reserves are very, very meager. They are like, you know, some 60,000, 50,000, 40,000. Those are not viable, workable mines with low grades of manganese in them. So, we are not participating in these tenders.

The next question is from the line of Aman Madrecha from Augmenta Research Private Limited.

So, firstly, I would like to understand a strategy for the coal mines. Like, for example, the upcoming coal mine would be the capacity expansion on the Gare Palma site and the other would be the Shahpur West coal mine. So, how are we looking at the same, and what is our strategy towards the same? And how are we looking at all these mines under the underground mining thing? What is your view on the same and how much viable is the underground mining scenario in India currently?

So, in underground iron ore mines, as we go beneath the surface, the grade of the coal increases. So, the CapEx and the cost of production increase, but at the same time, the quality of coal also increases. Now, we are a little dependent on our imported coal substitute also that we are buying from South Africa. So, all these underground coal mines will help us to reduce our imports of RB2 and RB1 grade of coal from South Africa. And even for our ferro alloys units, we are dependent on high-grade coal. So, that raw material base will also come from the underground coal mines.

So, I just wanted to understand fully the underground mining thing. Like, for example, correct me if I am wrong, around 95% of the coal mine in India is from opencast mine currently and around 5-10% is from underground mines. So what was the thing that was hindering this underground coal mining operation in India and what will change it going forward because we are entering into various revenue-sharing agreements with Coal India and MDOs? So, what is your take on the same?

No, we have taken only one mine under a revenue-sharing arrangement from Coal India. Rest all others, are direct allocation to us from the Ministry of Coal. So in one coal mine, and that will not be underground as what we have planned for the MDO mine in revenue sharing, that will be an open cast mine. And underground mines, we have taken 2 underground mines. One is Shahpur West and another is Gare Palma IV/5. IV/5 was is an operational coal mine, which was operated earlier by Monnet and later on by Hindalco. Now it has come up for auction a third time, and now we have taken coal. This is an operating underground coal mine, and it has got high grade of coal near our existing coal mine IV/7. So this high-grade coal, which will be utilized for our sponge iron plant and ferro alloys plant. To that extent, the capacity of our IV/7 will be freed for the SKS Power Plant.

And just to clarify that I assume you think that underground coal mining is difficult and just has started happening, but India has been doing underground coal mining, iron ore mining, and manganese mining for the longest period of time. So there are absolutely no problems in underground coal mining per se.

So sir, going by your comments, like, for example, this Gare Palma IV/7 will gradually meet the requirements fully of our SKS Power Plant. For the Gare Palma IV/5, the approvals are under process. And the Shahpur West coal mine will be used for our sponge iron and ferro alloys operations, right, correct?

There is surplus coal, if any, will be sold in the market.

And sir, what is the expected time line for the Shahpur West? It can take another one and half years?

One and a half to 2 years. Two years, we are considering from here. Once we get the mining opening permission during the current quarter, it should take more than a minimum of one and a half and a maximum of 2 years for the time to commence. We are considering 2 years time to start the production.

So sir, as on date for the existing operations, like how much of this Gare Palma IV/7 mines we are selling outside, and how much we are consuming captively?

No, we are not selling any coal outside after the acquisition of SKS. We are falling short of the requirement. Rather, we are buying coal from the market.

[Operator Instructions] The next question is from the line of Balasubramanian from Arihant Capital Markets.

Sir, earlier, you mentioned about the overall international market has been a little bit impacted because of Australia has impacted by flood and alley market also is quite slow and also have been impacted in the international market. You have mentioned about the demand expected to pick up from February month onwards. So like what is the status on that overall in the international market side?

See, the overall international market side right now, it is subdued, and it will take some time, I guess, once the clarity on the protectionist attitude by the European Union, we have to see. We have to look at that. Again, Trump has just announced duties on steel today, but it's not clear how many countries they are going to apply the duties on to. So we have to wait and watch. Right now, the focus more will be on India's domestic demand that will come in, the infrastructure push, and the growth that we will see in India. So India will be quite in a comfortable position because I think most of the duties will be targeted towards Canada, China, Mexico, and Latin American countries. This is what we expect. So I think overall after maybe a month or 2, we'll have the complete clarity on the international markets. But right now, the demand is a little slow.

Sir, I'm looking at the sales data, and sales volume data, sponge iron only has more than 48% year-on-year. The remaining are less than that only. But our revenue has been 43% year-on-year in this quarter. So how do we understand the growth side, whether it's volume-driven or price driven?

So you see sponge iron is one of our intermediary products, which is partly consumed in the downstream production and partly sold off in the market. So when the sponge iron production has gone up, if you see there is no material change in the sponge iron production, a slight change is there definitely. So in the 9 months, we have produced against 238,000 tons, and we have produced 249,000 tons. So the higher sales is on account of the lower consumption in the steel production because the steel production has reduced a little bit because we have been selling power in the market. That's why percentage-wise, it appears to be on the higher side because we are selling a very small quantity of sponge iron in the market. So, even a slight change in the sales side. There is no material change on the production side. But yes, sales side, it has gone up because we have consumed less quantity in the production of steel. Otherwise, our steel capacity is more or less constant and stable. So except marginal improvement on account of the efficiencies, there is no material change in the production side in the steel segment.

Sir, is there any clarity on the growth of 43% in this quarter year-on-year growth, whether it's driven by price or volumes?

As stated, our steel production will remain more or less stable, except for slight improvement on account of the efficiencies. So sales of one product may slightly go up, another product may slightly go down, that may happen. Otherwise, it will remain more or less in the similar levels because if we are selling surplus power, if we are getting better realization on sale of the power, we are reducing production of the steel billet. That may result into increase in the sponge iron sales, but that may reduce the sale of the billet. But it will not affect the profitability because ultimately, we are generating revenue either by sale of the steel or by sale of power.

[Operator Instructions] The next question is from the line of Rajesh Bhandari from Nakoda Engineers.

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[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Yes. Thank you. To summarize, while the Steel segment faced pricing and margin pressures, SKS Power's operational performance improved and Hydro Power generation saw year-on-year growth, backed by a sound balance sheet, low leveraging, and strong liquidity, the company has been reinvesting surplus funds in a number of diverse projects for consistent growth. In the next financial year, a 25-megawatt Hydro Power plant, Mineral project, a 50-megawatt solar power plant, and Gare Palma IV/5 will also contribute to the profitability. The diversification strategy of the company has paid off to have consistently sustainable cash flows, insulating us against the cyclicality of the steel industry. Please feel free to reach out to us or our IR team for any further questions. Thank you to all the participants.

Thank you. 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.