Vardhman Special Steels Limited (VSSL) Earnings Call Transcript & Summary

Welcome to the Q3 FY '20 Results Call of Vardhman Special Steels Limited, hosted by Emkay Global Financial Services. We have with us today Mr. Sachit Jain, Vice Chairman and Managing Director; and Mr. Sanjeev Singla, Chief Financial Officer. This conference may contain forward-looking statements about the company, which are based on beliefs, opinions and expectation of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kamal Kant Sahoo from Emkay Global Financial Services. Thank you, and over to you, sir.

Good afternoon, everyone. I would like to welcome the management and thank them for giving us this opportunity. I would like to now hand over the call to the management for the opening remarks. Over to you, gentlemen.

Good afternoon, everybody, and thank you for coming to our call. I would like to put 2019 as annus horribilis. It's been a very tough year. And -- but -- and third quarter, of course, we are seeing the worst period is over. We had -- if it wasn't for the tax write-back, there would have been a loss. But with the deferred tax changes because of the impending reduction of income tax at the appropriate time, and we will do that, there was a reversal in deferred tax rate, and therefore there's a write back on that account. So at least we are not in the red, we are back in the black. And as we move ahead, we look forward to the positives of this bad time. I think this tough time has given us a lot of opportunity to look inside us because markets were down and therefore, volumes were down, and our costs have gone up significantly. Manpower cost, for example, has gone up by INR 1,000 a tonne just because of drop in volume. So you lose profitability because of extra margin as well as other costs lower per tonne because labor is not really a variable cost. It's a fixed -- it's a semi-fixed cost, so also power, so also oil, many of them are semi-fixed costs. Refractory is semi-fixed cost. So all those costs per tonne go up at a lower volume level. The positives -- other positives are, of course, the progress with Aichi has begun. From October, we started working with them. Money from Aichi has come in, they have become shareholders. Mr. Takashi Ishigami has become the Nonexecutive Director, is representative of Aichi. We've also had other income. Some government incentives in the second quarter had come INR 4.14 crore, that has come in the second quarter, part of the 9 months results. And the other part I wanted to share with you is how is the impact of Aichi. One, very clearly, we are seeing change in the culture of...

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Sorry, I think the line got disconnected. So I'm back. I was just sharing with all of you with Aichi Steel as our partner what are the changes we are seeing. One, we're seeing a change in the culture of our people as they're seeing a much more systematic approach of the Japanese; data orientation become much stronger; analytical skills becoming stronger; ability to solve problems; the confidence that you have a big partner by your side, all that's changing. These are the changes I am personally seeing. The second change we're seeing is in terms of the access to customers and markets. The senior level at which we are able to have access in customers is because all the OEMS -- the customers are mostly Japanese or Japanese oriented, whether it's Maruti Suzuki, whether it's Toyota, whether it's -- so these are 2 main customers we have targeted so far. And some other Tier 1s who are supplying to Honda and the others. We are seeing the change in this and the way they look at us and the access we are able to have at far senior level than what we were able to get earlier on our own. So clearly, that change is happening. And now, as I said, from February onwards, they have now come in and now they are here for -- to stay. The big picture that they have, the vision that we are working out together is to produce Japanese quality steel in India at competitive rates to fight in the Asian market as well as Indian market. So we are -- the vision is to become a big support to Toyota Group, form a base outside of Japan. Of course, Toyota comes in as well as other Japanese OEMs that will drive away with service in India as well as outside. So on the first phase will be to reduce our costs and improve our quality. Projects have been formed, project teams have been formed, and we are working on all those areas. Some results initially that is small -- some problems have already begun to come in. But really, more the results will come in later. As we improve our systems, new products will also come into the company as and when they feel we are ready. So overall, I am very enthused with this relationship, it's going in the right direction. On our own, we have also looked at our own systems, our own areas of cost savings. We have found areas that we had perhaps not looked at earlier. So we have found areas to improve our competitiveness. You will see the impact of that coming in from fourth quarter and then in the next quarters and so on. So we expect the worst is behind, fourth quarter performance should be better, but real improvements would happen when the price increases happen from April. As you are aware, commodity steels have gone up by INR 5,000 to INR 7,000 a tonne. So we do expect that we'll also get some price increase in April. So after that, I do expect next year to be significantly better. The concern that we have for next year is still with the BS VI coming in, the prices of autos are going to be high. So the first quarter, we don't know how sales will pick up. But the feeling, as we talk to our customers, is really second quarter onwards things should be better as far as the sale pick up is concerned. And the other uncertainty, of course, is with the Coronavirus and -- which might affect supply chains from China. Many of the OEMs don't know at which level, Tier 2, Tier 3, Tier 4, some part may be coming from China, which may have an impact. So we are not aware of that as of now. But that -- otherwise, the worst is behind. Another factor, which has led to poorer performance in the third quarter is because of the prices of raw material came down as well as graphite electrodes came down, so there was inventory devaluation. And since we had a huge amount of inventory because of our shutdown as well as some stocks that were left, billet stock and rolled products stocks, which have still got left, which are getting consumed slowly. So we had a very large disproportionate inventory write down. Fourth quarter, we are finding that raw material prices have gone up again sharply. In fact, prices went up by INR 3,000 a tonne in the matter of -- course of 1.5 month. So that has led to a price -- cost push in the fourth quarter. But the cost saving that we found out, we've been able to work on internally, will ensure that, looks like, at this point in time that we may not be in the red in the fourth quarter. And of course, of this tax write-off -- tax write back, 3/4 of it was done in the third quarter and 1/4 of it will be done in the fourth quarter. This is all I have to say at this point in time. We are open for questions.

[Operator Instructions] The first question is from the line of Manish Sehgal, he is a retail investor.

Sir, I just wanted to check what is the kind of volume you are expecting in Q4? And also, what kind of price hike do you see coming through starting Q1 next year?

Volume could be difficult to say, but were about 32,000 tonnes to 33,000 tonnes...

33,000 tonnes to 34,000 tonnes.

Around that figure, maybe marginally higher than third quarter.

Okay. And the price hike?

Price hike. We would hope for INR 4,000 to INR 5,000 a tonne, but we don't know what we'll get.

But it'll be due from 1st April.

It will be due from 1st April, not from...

In quarter 1.

Correct, correct, correct. One final question, sir. Last time, you had mentioned the...

For your clarification, I am repeating. We don't know what will be the extent of the price hike.

Understood, sir. This is just a ballpark, I wanted to understand. Another thing was that you had applied for environmental clearance for the expanded capacity. Any developments there?

Yes. In fact, I think there are some positive developments on that front. One, I think the MoEF has clarified -- the NGT has clarified to the MoEF that for companies that are within the norms, there is no intention to disrupt industrial production. I mean I don't have the exact wordings of the order, but August, this order came in. And after that, we have got the terms of reference from the MoEF, which means, I think these things are progressing well. Looks like we hope to get the approval by the end of this year, we should be able to get the approval. But things are looking far more positive on this front than what they were during our last con call.

Okay. So you said you'll be selling -- we'll be selling 32,000, 33,000 tonne. What is the kind of capacity we have if there was demand?

If there was demand, we should be selling about 45,000 tonnes a month.

Okay. Long way to go then.

This quarter. Not this quarter, sorry. Quarter, quarter, quarter.

Yes, yes, yes. So which means a long way to go still. We're running at about 60%, 65%?

Yes, about 65%.

75%.

And I know, I mean market is very uncertain. Any line of sight of when we will be able to fill this capacity?

Sorry, we have 75% utilization, sorry. About 75%. Not 65%, about 70 -- 75%.

When we'll be able to fill the capacity fully, if you have some sense? I know market is uncertain, but still you would have some...

If the OEMs themselves are not able to comment, how can we have an idea.

Right. I mean still we're trying to diversify the product base and as well as the...

The diversification that's going to happen is only to the Asian market through Aichi. That process is going to begin. They will be taking us to the Asian customers and all that process is going to begin from March. So it's at least 1 year out.

The next question is from the line of Rikesh Parikh from Barclays.

Sir, can you just throw some light on what are the debt levels right now?

Right now, the total debt as on December 31, it was INR 260 crores.

Okay. And about inventory days?

Inventory, total inventory, finished goods, we are carrying about 40, 45 days.

So broadly, the buildup what we had carried at the time of -- so we have now reduce -- will be able to reduce or...

Yes, significantly reduced, though still some of the billets that we have -- see, this 45 days includes billets as well as rolled products. Billets, we count as finished goods. Otherwise, billets is really our internal good, that's semi, because they -- we'll be rolling them. We don't sell billets outside. So -- but when we had the shutdown, we built up stock, those stocks are built up on the basis of estimates. And because the markets were down and sales of some products have got left over, which will take another 3, 4 months. By March, we should be down to normal levels.

And can you just throw some of your light and suggest what kind of a market improvement over your interaction with the dealer -- sorry, with the manufacturers. So what kind of scenario we are seeing down the line as such over the...

No one is able to tell anything. See, the best people to answer this question is the OEMs themselves. But we are seeing a slight pull, which has come in, in the fourth quarter. Whether it will sustain or not, we don't know. But most people are saying that, really, it's the Diwali season when things will pick up. But most people definitely seem to feel that the worst is way -- is really behind us. That seems to be the consensus when I talk to people.

Okay. And in -- with...

But let me tell you one thing. For the next financial year, in our forecast, we are not taking any improvements from the market, but we are taking improvements in our results. So we are very clearly -- because of the internal improvements we've had, we feel that next year, even if there's no change in the market, we'll be much better off than where we are today. And the results that we have shown in third quarter have been after providing for Aichi's fees. This is a new element, which has come in. So we have been providing for full -- providing for all Aichi's fees. The benefit of Aichi will come later, but the fees are coming in from October onwards. All charges, I believe.

Okay. And then -- and any improvement or -- basically you've broadly touched upon the improvement, means looking into the product diversification operation improvement from the Aichi side. But any material thing we can foresee over next 1 year or so?

No, no.

Nothing on the immediate future?

No.

Yes.

[Operator Instructions] The next question is from the line of Abhijith Vara from Sundaram Mutual Fund.

Sir, first question is, what is the installed capacity as of now?

Installed capacity is 180,000 tonnes of rolled products.

2 lakh tonnes of billet.

I mean it's 2 lakh tonnes of rolled -- of billet as well as 2 lakh tonnes of rolled products. But with billets of 2 lakh tonnes, we can do 180,000 tonnes of rolled products.

Okay. So billet is the bottleneck as of now?

No, the environment constrained is the bottleneck. Yes, and so billet is the bottleneck. Correct. But as of now, the market is the bottleneck.

Sure, sure. And sir, can you please explain this Aichi fees? What is the fees? Is it a percentage of revenue and...

No, we are not disclosing the fees. But I think, the entire fees -- the fees has 2 components, 1 component is the fees we're paying to them quarterly as technical fees -- sorry, half yearly. But -- and the second fees is the fees for the technical people who are deployed here or who will come on short-term basis as and when required. But it's reasonable fees. That's what -- I can say that.

Right. Right. Just on the balance sheet, you have mentioned the gross debt number, but what is the net debt number? And also in your expectations, let us say, when will the debt peak out? It is a big debt or do you -- do we expect the debt to increase from here on?

So the net debt would be about INR 210 crores, roughly. There's INR 50 crore FD. The Aichi money is reported into a fixed deposit. Yes. That is meant for specific CapEx as and when Aichi and Vardhman together approve that CapEx. So that money is meant for that CapEx. So the balance sheet is in a healthy position, I can say that.

Right. And do you expect the debt to increase from here on?

Debt equity is 0.6.

No. He is asking if debt will increase. Unlikely to increase.

Okay. Sir, despite the volumes being down and OEMs themselves not seeing an improvement there in the market, your working capital is not deteriorating, right? Just to clarify.

No. So we have, in fact, used -- we had very high working capital because of the buildup of stock, which has got gradually, largely brought down. Some still remains. So there will be further improvement in the working capital by March. And -- yes, go ahead.

Sir, just one -- no, please continue.

No. Please go ahead, I'm waiting for you now.

No, sir. Those were my questions.

[Operator Instructions] The next question is from the line of Rohan Mehta, he is an individual investor.

Just a couple of questions around Aichi. So the INR 50 crores that you mentioned, which are in an FD right now, when and how do we plan to utilize that?

Those plans are being formulated with Aichi. And then as and when each of those plants get okay, we'll draw down money from this.

Okay. Okay. So no particular focus area where we -- that has been narrowed down right now, where we will be utilizing those funds?

The focus area is for quality improvement and cost reduction, those are the 2 focus areas. Especially the projects, they may have on their agenda, but they will be discussing with us shortly and those plans will be made.

Okay, sir. Okay. So -- and to build on what you explained about how the synergies are coming along with Aichi, when roughly can we expect these positive effects to reflect on our books as well, on a financial front?

The cost savings that we have been able to brought -- bring about is very difficult to say that only we have brought about or some of it has been triggered by their coming in. So the impact of that, we will see partly in fourth quarter and largely in the first quarter of next year. These are what our people have brought about, but have they been influenced because of Aichi's thinking or not? Difficult to set that aside. But I can say that the team has done a good job to find out areas of improvement that in the fourth quarter, despite a hefty increase in raw material prices, we are expecting to be out of the red zone. And this despite the hefty increase in raw material prices.

Right, sir. And sir, if you could just shed some light on what we are expecting, what kind of EBITDA levels or EBITDA margins for this full year?

This year is -- I mean is just about barely breakeven on a net loss level, little marginal profit. We are in that zone. So this year, as I said, annus horribilis, I called that in the beginning. But next year...

Right. So Q4, improvement should begin?

So next year, definitely, we should be back on track.

[Operator Instructions] The next question is from the line of Manish Sehgal, he is a retail investor.

One question I forgot asking was impact of potential scrappage policy on the whole -- business as a whole, starting from raw material costs to eventual product. So I believe...

I think this is a very, very positive move from the government. This can be a potential game-changer. So it will have 3 impacts, 2 directly on our business, 1 is with the scrappage of vehicles coming in, clearly, old vehicles get scrapped, there's demand for new vehicles. So that's one positive. Two, since we are based on scrap, these old vehicles, when they get scrapped, with the new shredders coming up, we will get shredded steel available domestically, which should be at a lower price than what's available from imports. So we should see a reduction in our raw material costs. So we see a double benefit based on the scrappage policy. And this is a norm world over. So...

Environmentally better.

And it is better for the environment.

So do we see structurally our EBITDA level increasing going forward from whatever we used to have from INR 5,000, INR 6,000 a tonne to slightly higher level because of this?

We were not at INR 6,000, but we were at about INR 5,000, INR 5,200 levels. I mean we were targeting INR 6,000, but we never reached there. Yes, I think we can see those figures, if this happens. But it will take a year or so for this to -- for the full impact to come in because still enough shredding capacity is -- has not come up in the country. It is coming up, being set up, but not enough has happened so far. But moment this scrappage policy gets announced, then this will happen.

Do you realistically see, sir, us going to INR 8,000 a tonne EBITDA any time after all this is in a stable state?

Difficult for me to say. It's too high to forecast just now. But 3 years -- 3, 4 years from now, I can see that possibility because once the capacity increase happens, that's when the real impact on EBITDA will happen. But we haven't calculated that far. But on the current capacity levels of 12,000 tonnes, INR 8,000 a tonne is unlikely.

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

Okay. I like to thank everyone for being on the call. We've had a very tough year. But as I said, this tough year has taught us a few lessons and opportunities to improve and, of course, the big thing opportunity for us is Aichi as a partner going ahead. I would say 1 or 2 years more for -- to really start seeing the benefits of Aichi, but our own improvements should show that next year -- we're looking at a much better performance next year. All the best, thank you so much. Bye-bye.

Thank you. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.