Steel Authority of India Limited (SAIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Steel Authority of India Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Chandak from Motilal Oswal. Thank you, and over to you, sir.

Thank you very much, Shima. Good day, everyone, and thank you very much for joining us for the First Quarter FY '23 Earnings Call for Steel Authority of India Limited. I would like to thank the management of SAIL for giving us the opportunity to host them again for the earnings call. From the management, we have Shri Anil Tulsiani, Director Finance, and his team. So without much ado, I would call upon Tulsiani, sir, to start with the opening remarks. Over to you, sir.

Yes. Thanks, Vishal. Good afternoon, everyone, and welcome to the investor concall on the financial results for Q1 financial year 2023 of SAIL. I will briefly take you through the results of the company before we take up the questions. This was a challenging quarter causing profits to slide for numerous steel companies, not just in India but abroad as well. Let me start with the economic scenario. The global economy has been thrown into a battle with inflationary forces across the globe and the governments all around are tightening their respective fiscal policies, which is likely to impact the GDP growth rates in the coming years. Agencies like IMF and World Bank have started revising the projected GDP for various economies downwards. IMF, which came out with the world economic scenario in last week of July has reduced their GDP forecast to 3.2% in [ full year ] '22 from the earlier projection of 3.6% for the entire world. The rate is expected to further slow down to 2.9% in 2023. The major advanced economies, which include countries like U.S., Germany, Japan, U.K., France, et cetera, are all seeing projected growth rates curtailed significantly. The emerging economies are faring only slightly better than their advanced counterparts. The uncertainty relating to fresh waves of COVID, the Russia-Ukraine conflict bringing in further bad news for the inflationary forces, which have already been around and taking a toll on the government policies. Coming to India, the economy is placed much better and set to grow in the range of 7% to 7.5% in financial year '23 in the various reports like IMF, World Bank projections, RBI, MPC, et cetera. This is likely to keep India amongst the fastest-growing major economies. The domestic industries will, however, have to guard themselves from [indiscernible]. Now coming to the steel industry. The global steel industry has seen a decline in the demand and corresponding realization for past few months. With China seemingly cutting down its production in a wave of environment concerns, it has had an impact on the prices of iron ore. The coking coal, which earlier saw unprecedented high prices during February to May, following the Russia-Ukraine war, saw substantial reduction in its prices from June and July onwards. The prices which had soared to as high as $670 to $680 for HCC have now come down to around $200 levels. The forces of inflation, uncertainty, et cetera, have all had a negative impact on the global steel industry, especially the flat products. The impact has percolated to the Indian market as well. The prices of steel, which are at peak during April, have considerably declined with flat products yielding relatively much greater adverse impact than the longs since it is guided by the international market. In the long segment, secondary sector plays a major role and uses thermal coal for this year review. The price of thermal coal have not come down much as compared to the coking coal. It has kept the prices of longs relatively in a better position. Now coming to the company performance, the company has clocked its best-ever production during the quarter as compared to the Q1 of previous years. The number of Q1 financial year [indiscernible] are as follows: crude steel, current quarter, production is 4.33. And Q1 financial year '22, it's up 3.77. The sales, however, are a bit lower at 3.15 million tonnes as compared to 3.33 million tonnes in Q1 financial year '22. Sales have been affected due to lower exports during the quarter. However, home sales has been a growth -- has seen a growth compared to CPLY. The financial performance has seen a growth in the top line as the profitability has taken a hit in line with the industry trends. The revenue from operations is at INR 24,029 crores as compared to INR 20,642 crores in Q1 financial year '22. EBITDA showed at INR 2,606 compared to INR 6,674 crores in Q1 financial year '22. PBT at INR 1,038 crores vis-a-vis INR 5,145 crores for Q1 of financial year '22.

I'm sorry to interrupt, sir, sorry to interrupt you. Sir, we are losing your audio in between, sir. Could you just come a little closer to the device and speak?

Okay. PBT at INR 1,038 crores vis-a-vis INR 5,145 crores for Q1 financials year '22. And the PAT at INR 776 crores as compared to INR 3,850 crores in financial year '22 -- Q1 financial year '22. The revenue has grown higher due to higher average realization during the quarter as compared to CPLY. Profitability has been severely affected due to increase in the input cost, especially coking coal. With the coking coal prices coming down, we expect the cost of production to also correct and enable us to deliver better results in the coming quarters. With these words, I hand back to Mr. Chandak for opening the question-and-answer session. I'm sure you all have a lot of queries on the performance. Thank you.

[Operator Instructions] We take the first question from the line of Mr. Amit Dixit from Edelweiss.

I have 2 questions. The first one is essentially on the finished product inventory level. So if you can let us know the finished product inventory level at the end of the quarter. And due to high inventory, is the company advancing maintenance shutdown or taking prolonged production cut? So what is the plan on production in Q2? That is my first question.

Sure. I regard the finished steel inventory is at 1.336 million tonnes. And regarding the production cuts, we don't have any plans of having any production cuts in the coming quarter as well.

Sir, you said 1.566?

1.336.

1.336. Okay. The second question is on the debt level. If you can -- earlier, it used to be as a part of the debt, but this time around it is not. So just wanted to understand the gross debt level at the end of Q1 and also if you can indicate the treasury [ PAT ]?

Yes. The debt level was at INR 22,101 crores as of 30th June.

This is gross debt, INR 22,101 crores?

You can say that. Yes.

And what about cash balance?

Just marginal, INR 30 crores, sir.

Okay. Okay. Okay. So sir, there has been a substantial increase in debt level. If you can quantify there? I mean, is it working capital debt? Or is it, I mean, some other thing?

So it's basically the working capital debt because we had to give substantial payments for coal during this quarter. So it's the basic reason for which the debt has gone up.

We take the next question from the line of Pinakin Parekh from JPMorgan.

Just trying to understand the earnings trend over the next 2 quarters. So steel prices have fallen sharply over the last 3 months. So first, what would be sales blended realizations today versus what the company reported in the first quarter? And similarly, what was the coking coal cost for the company on the first quarter and what it is -- its purchase price at this point of time? And when will that flow through into the P&L? Will it flow through in September quarter? Or will it be in the December quarter?

Regarding the coal price, it's quite clear that the second quarter, the prices will be substantially lower because, basically, the prices of coal which was there during the first quarter, were -- they took the impact of basically the brunt of the supplies which are affected from March to May. So the prices at that point of time means that -- if you see the flat index, it was hovering between $500 to $600. But now once the prices are coming down, we will have to take some brunt of the -- off the month of June, which will go down till, you can say, middle of August. Subsequently, we will get -- the prices of coal will be much cheaper. It will be in the range of round about -- we can say round about $230 to $240. So the benefits will start accrual of that from [indiscernible].

Sure, sir. And in terms of prices, steel realizations for the -- at this point of time, there's a decline around INR 12,000 to INR 15,000 a tonne versus what is reported on a blended basis in first quarter. Is it higher? Is it lower?

Yes. Actually, in the month of June, it was -- in the month of June, it was around INR 58,000, and we expect -- and in the month of July, it was round about INR 1,200 to INR 1,300 lower. And there is a tendency to push long over flat -- the prices are flat, but the longs are holding on. So we expect that if this similar trend goes through for the quarter, then though the results for July will not be good -- are not good, if you see the trend, but then maybe from August onwards, our performance will be better on the financial front now.

And this INR 58,000 compares to what average price for the June quarter, sir?

For the June quarter, it was INR 66,000.

We take the next question from the line of [ Vivian Skarla ] from [ Sharay ] Capital.

Sir, I had some queries about how the COG is going to be in Q1 and Q2. So basically, you're telling that coking coal prices are going to be lower in Q2. So I think COGs per tonne as of Q4 FY '22 and Q1 FY '23 also [indiscernible]. So as coking coal prices are going to go down, so where can we expect this cost to go to?

Regarding the cost of goods, we normally don't disclose that.

Okay. Okay. So can you give some guideline as to what was the coking coal prices back in Q4 FY '22 versus Q1 FY '23?

Yes. In Q1, '22/'23, the price of imported coal was in the range of INR 37,000 to INR 38,000. In the Q4 of '21/'22, it was in the range of round about INR 29,000.

Okay. So -- yes, maybe 20% increase. Fine. Sir, my second question will be regarding the volume. So if I compare Q4 FY '22 and Q1 FY '23, so I think volume has taken -- sales volume has taken a 29% hit, and realizations have, in fact, been very strong despite of the steel prices [indiscernible]. I think from -- based on my calculations, the realizations have gone up from around 65,000 to 72,000 based on our calculation. So can you please provide some more details as to why -- what was the reason for significant 30% fall in volumes and stronger realization despite of so much correction in steel prices?

Basically, we should not compare the volumes of Q4 with the next quarter volumes because, if you basically see, it's always a trend that the Q4 volumes are always high in all the industry. And if we compare the volumes of this financial year as compared to the previous financial year, it's more or less hovering at the range of 3.1 to 3.3, 3.4. It's similar volumes all throughout in the first quarter. And Q4 volumes are not basically comparable. It should not be. It should always be high for the entire industry.

Is there seasonality in the business? So Q4 volume is going to be higher. Q1 volume going to be the lowest in all the company comparing portfolio. Is there seasonality? I just wanted to understand.

I couldn't get your question. Actually, you are not audible.

Okay. So the thing which I'm asking is, so if I should compare the Q1 volumes of FY '23 with FY '22, not with Q4 FY '22. So I was asking if there is some sort of seasonality that Q4 volume is going to be the highest and Q1 volume's going to be at the lower end of the spectrum. So is there some seasonality in this business? I was asking this.

Sir, it's a similar trend in all the years. Like, what I was telling you just now that if you [indiscernible] in '21/'22, we are leading on '20/'21 because of the growth impact that was 3.33 and now [ 2.94 ]. The lower volumes has been basically because of exports. Exports are substantially higher in the -- in Q1 '21/'22 at INR 364,000, which are now at INR 166,000 in this particular year.

Okay. And you are telling that Q4 or these are not comparable?

Right, Q4 is not comparable. Actually, if you just see the entire industry, I think you'll probably get the same trend everywhere.

We take the next question from the line of Mr. Mohit Bhansali from Bonanza Portfolio Limited.

I just want to ask that in URM, [ head ] hardened drill was proposed to be made last year. So what is the status? Do we plan to make it in this year? Or what quantity, if you can quantify. This is my first question.

This -- the head hardened drills are still in the trial. And we will be, of course, producing some quantity in this year. But once the trials are successful, then we'll be able to finalize how much quantities we can produce for the head hardened drills.

Can you give some time line, sir? 2 months, 3 months or -- I mean, if you can...

I will have to collect that information. I can give it to you off-line.

Okay. And sir, second question is on rised cost. It is rising -- and do you think it is sustainable the way you are selling or producing the quantity? And if you see the -- compare with private company, the employee costs are too high. Suppose there is a downturn, or U.K. COVID scenario like last year, so I'm concerned how we are going to survive? Can you please give us some details on that, sir?

The salaries and various costs, the employee-related costs which you are mentioning, it's -- we had a wage revision last year. So subsequently -- in the month of November. Subsequently, the wage revision last year, the expenditure is on a quarterly basis, around INR 3,000 crores. So it is a similar trend if you see in Q4 of '22 -- '21/'22. And in '22/'23, it's around INR 3,000 crores. And prior to that, in the Q1 of '21/'22, it was around INR 2,800 crores. So the rise is not much. And basically, what is happening is we are having a -- the people are at the higher end of their service career. So they're more -- many, many will be retiring in the coming years. And the recruitment will not be commensurate with that. And moreover, one thing is there that whoever is retiring is having a very high pay, and the person joining will be at the basic scale. So we don't apprehend much of an increase in the salaries and wages in the coming years.

But your sales are not rising to that level. I mean, if you're selling INR 25,000, INR 26,000 crores in a quarter and having a INR 3,000 build [indiscernible] 12% to 15%. And then [indiscernible] because [indiscernible] a downturn. That is what I was asking if a downturn like COVID like scenario, you'll be having a INR 6,000 crores expense. And it will be like very burdensome things you are carrying over, that also -- your expansions are also getting delayed. So how you are anticipating further expansion which you are planning in such a scenario?

Basically, what happens is that this manpower will come of use at that point also when we have expansion. With the larger volume and the same number of manpower, maybe even a lower level of manpower, the productivity will be much better in that case.

Okay. So you are trying to improve productivity. Okay. Sir, my last question, since I was tracking SAIL for a very long time, this time in the [indiscernible], anything not as detailed as it used to be earlier? Like, you have not mentioned the employee -- total number of employees in [indiscernible], and financial detail also, debt level and all. And second -- third thing is that in mining also where your mines -- earlier in your presentation, everything was very perceived clear. So this time it was not there. So is there any change in policy in approval or something else?

There's nothing like that. I think some additional -- a lot of additional information was given this time. So I think maybe we'll have to take up with our people that your [indiscernible] signature means -- your point is well taken. Maybe in the next time...

Like the last time, you have given plant-wise detail that where expansion has completed and what expenses are pending. Everything was very detailed. This time, it is not there.

But that is very old. I think all our expansion plans have more or less been completed, except maybe a few clusters here and there because of which some production capacities are [indiscernible]. Otherwise, all our expansion plans are in place.

Like, mining was also there. Like, where you are mining and how much you are mining and what in future you are -- how much you're going to mine, everything was there. This time it is not there. If you can elaborate it, it's better for us. That is my request, sir.

Okay. You can just otherwise talk to our people about it. If you want additional information, they can surely provide it to you.

Sir, if you can give the number in...

Mr. Mohit, I'm sorry to interrupt, sir. May we request you to return the call since we have participants waiting? [Operator Instructions] We take the next question from the line of Mr. Vikash Singh from PhillipCapital.

Sir, I just wanted to understand, in our other costs, which is inflated sharply, are there any inventory losses which we have booked for this quarter?

Come again?

Sir, any inventory losses or inventory value write-downs which we have also booked in this quarter since our other costs are very high, essentially?

No, there is no [indiscernible].

So no inventory losses have been booked?

No, no, no, nothing at all.

And sir, my second question pertains to our yearly guidance. While we have not said anything about guidance seeing that the 1Q numbers at 3.15 million tonnes. So do you really think that you would be able to recover and would be able to meet your -- meet the sales guidance at this point of time?

Your voice was cracking, Vikash, we couldn't get your question.

Is this better?

Yes, that's a lot better.

Yes. So just wanted to understand your yearly volume guidance. So given the 1Q was dull and still the export duty stays in place, so how confident are we in terms of meeting our -- at least the sales volume guidance? I know the production is not a problem. But about sales, so how confident are we meeting our sales volume guidance? Or are we cutting down the volume guidance now?

No, absolutely not. Absolutely not. We will be achieving our sales as per whatever guidance we have given because we feel that in these coming quarters, the domestic consumption is surely going to go up, and we will be surely achieving our target. I think in the month of July, we had sales of more than 1.4 million.

Understood. So volumes has been recovering for now?

And we also have a very strict target for our marketing IP, and we are planning to have the highest ever August also.

Understood. Sir, just one clarification about the earlier participant question regarding no plans to cut production. There was a news regarding Bhilai shutting down a couple of older blast furnaces. So just wanted to understand, is this a permanent shutdown of older furnaces because new furnaces have been ramped up fully? Or is that basically something -- a wrong news which we have came across?

Actually, the blast furnaces are sometimes shut down for some major capital repairs. So it is because of that. Otherwise, we don't have any plans of shutting down any blast furnace as such, [indiscernible] capital [indiscernible] has to be taken up for that.

Even after that, there's no impact on the production -- monthly production on this?

No. No impact on our production.

We take the next question from the line of Sumangal Nevatia from Kotak Securities.

First thing is on the net debt. Question one -- I mean, quarter-on-quarter, there's INR 6,000 to INR 7,000 increase. Is it possible to give the breakup of what was the CapEx in 1Q and what is the working capital increase? And also directionally, given that we have a lot of [indiscernible] almost INR 17,000 crores, INR 18,000-odd crores, do we expect working capital to keep increasing in 2Q as well?

There has been actually an increase in the working capital on automotive. And regarding the cash flows, there -- we have had a CapEx of around INR 1,000 crores in this quarter, in Q1. And regarding the cash flow from operations, there has been a rise by round about INR 8,000 crores. This is mainly on account of the full payment.

Okay. So working capital increase by INR 8,000, and cash flow is INR 1,000 crores, right?

Yes.

Okay. Okay. Understood. And directionally, how do you see it shaping up in 2Q and 3Q, the working capital requirement?

The working capital requirement will come down now because our -- just think agreements for coal outcomes are supposed to come down quite a lot in this coming month. We expect a central reduction on the working capital.

Okay. And my second question is on the coal cost. You said INR 37,000 to INR 38,000 in June quarter. What was it in July and August?

In July, we -- the cost is -- in July, it is around INR 38,000. And it's expected to come down by another INR 4,000 to INR 5,000 more in the month of August and further down from September onwards.

Understood. And the last one in terms of prices. You said...

This, I'm talking about is the imported coal.

Okay. So INR 38,000 in July, same as June quarter average, right?

Yes. INR 38,000 is in July. And in the month of August, it's going to come down a further INR 5,000. And yes, Q1, the procurement cost of this was almost INR 39,500.

Understood. Understood. And just one last clarification on the price on the...