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

Ladies and gentlemen, good day, and welcome to the Vardhman Special Steels Limited Q1 FY '21 Earnings Conference Call hosted by IIFL Institutional Equities. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over Mr. Urvil Bhatt from IIFL Institutional Equities. Thank you, and over to you, sir.

Thanks, Vikram. On behalf of IIFL Securities Limited, I welcome you all to this 1Q FY '21 results Call of Vardhman Special Steels Limited. From the management side, we have Mr. Sachit Jain, Vice Chairman and Managing Director; Mr. Sanjeev Singla, CFO; and their team. Without taking much time, I would like to hand over the call to Sachit for his opening remarks. Over to you, Sachit.

Yes. Thank you, Urvil. Ladies and gentlemen, good afternoon. Thank you for coming here to our call. Along with me are Sanjeev Singla, CFO; Sonam Teneja, our Company Security and Compliance Officer; Akshay from our corporate -- Akshay Jain from our Corporate Finance; and also, we have Bridge Investor Relations, our Investor Relations team. Of course, these are crazy times. Since this COVID pandemic, it has caused a lot of disruptions to everybody's life, day to day. And as I discussed a bit in the June call, we used this pandemic to do many good things. We've connected a lot to our people, invested a lot in training, training on PPM, training on 5S. We got in also training on our Japanese approach of our Aichi partners. So we also found several cost-saving initiatives, several improvement possibilities. So I would say we have used this time well. And after the plant started up, we have seen the advantage of that. Of course, the first quarter, as you know, is -- the results are just in front of you, pretty bad situation because April, we had hardly sales. We just started some marginal production on 22nd of April. May was a little better. June was a little better. So -- but overall, first quarter was bad, but the good thing is the worst is behind us. What we have also seen is suddenly, there is a big jump from July. So in fact, I would say that second quarter, we should be making a profit in each of the months and, of course, cumulative for the quarter. So in that sense, suddenly, we are seeing an improvement. This improvement is because of big jump in tractor sales, which is not a traditional market because we normally don't sell in the tractor segment, but lot of the component manufacturers are located in the north, and we have good relations with them. We could use that old relationship of the group and the family to be able to get some business. Also, 2-wheelers are doing very well. Within 2-wheelers, it is a rural segment dominated 2-wheelers doing better. So I guess, Hero Cycles is doing pretty well, which is one of our customers. Also, export some of our components, which are exporting -- some of our customers exporting components, they are doing well. So overall, we were pleasantly surprised with the big pickup in July. August is even better as it seems as of now. So it looks like moving ahead, the worst is clearly behind us, and we seem to be headed for okay times. We've also used this time, this opportunity to talk to our banks to help reduce our interest rates. We've also raised -- we are raising money in the CP market at very attractive rates. So all in all, our financing costs are also going to be lower than what was anticipated. So -- and lastly, I would say, our working with Aichi, our partners is going very well. We are on track with -- on all our projects despite the fact that we had to send the Aichi team back. So we've been working remotely over calls on Zoom and other media calls. Regularly, our various teams are in touch with various teams specifically. And they are also working with their -- with the OEMs in Japan and in Southeast Asia to see how to get sales moving in Southeast Asia. In fact, I would go so far as to say that the strategic alliance with Aichi is exactly in line with the Prime Minister's Atmanirbhar Bharat scheme. I mean the kind of thing that he has announced in his vision that to make industry competitive as well as to become part of global supply chain. So thanks to Aichi, the plan is, over the next few years, to become part of the global supply chain of the Japanese automobile manufacturers in Southeast Asia. As well as it's also talking of making us competitive to be able to work in import substitution. So some of the critical steel that are still getting imported into India from Japan, those are the steels which are going to be targeted to Indianized and localized. So we are working with some of the auto companies in this area also. So overall, I am -- we still don't know how the COVID pandemic will shape up because as Delhi and Mumbai seems to be pulling off a bit. This is moving to the smaller cities and lockdowns are coming and happening in the various spaces. So we don't know the impact of all those. But unless we have a major problem somewhere else, I would say we can start looking to better times. And I also hope there could be some -- as the other sector of the economy pick up, this will lead to a bigger boost in the auto requirement as well as subsequently steel deployment from us. So at this point, I will stop with the opening remarks. Sanjeev, if you can take us through a little bit of the financials. I mean nothing much to look at, but still whatever you can take them through. And after that, we are open for questions.

Thank you, sir. As Sachit, sir, has explained, in quarter 1, because of COVID-19 situation, it has severely impacted our financial performance. As you will see from the results itself. Almost all the figures, absolute in terms are not comparable with the last quarter or even in the full year because the volume is very less. It's almost 1/3 of the volume as we have achieved in the immediate last quarter of the last year. So as far as the variable figures are concerned, those are almost close to 1/3, whereas wherever there is a fixed cost component, it's almost close to same level as was in the corresponding quarter of the last year. Volume for the quarter was 12,487 tonnes, its year-on-year decline 65%. And in revenue side, it is INR 68 crores of revenue in the first quarter, as against INR 240 crores in the quarter 1 of the last year, a decline of 71%. The little more impact here it is because of the decline, which happened in the second half of the last year -- decline in prices, I would say. EBITDA margin in the current quarter, it is minus INR 7.68 crores as against INR 16.03 crores in the corresponding quarter of last year. The decline in profitability is mainly because of the fixed cost where we are incurring the full fixed cost in terms of salaries, finance costs, administration costs in the current quarter, but because of the no production in April and partial production in May and June, the allocation could not be done on that. So that's on financial side. So now I will request for any questions, we are open for that.

[Operator Instructions] We have first question from the line of Dewang Sanghavi from ICICI Securities.

My question is regarding volume. We had almost a washout quarter for Q1, but we have a better July and August as you have suggested. So what kind of volumes are expected for FY '21? Any guidance on the same?

Sir, we are not giving any guidance because we don't do that. But overall, I would say that last 3 quarters will not be way off from last year's 3 quarters. So we are seeing volume recovery.

Right, sir. And in terms of pricing, are there any negotiations going on with auto players because we have a 6-month pricing policy and I think it will delayed at the moment?

We are talking to the auto major -- all the auto majors for price increase starting April.

Okay. With [indiscernible], is it?

Yes, that's the way it is. If any prices are with effect in April, but we have not taken any price increase in our results of first quarter presented. But if there is any price increase, it will be with effect 1st April.

Right. And in terms of finance costs, we are expecting some decline as you have suggested in the opening commentary. So what kind of savings we can work with?

Again, we don't share specific numbers out, but we have been able to negotiate with the banks to reduce the interest rates. One is interest rates of the banks reduced. We have a margin over their, MCLR or whatever their lending rates. And we've been able to negotiate those downwards. So that is an addition, which will come in the subsequent quarters. And also, as the market rates have gone down, because we are -- because of our strong rating, we are AA with a negative outlook, of course, but AA-rated company by CRISIL, long term and short term is P1+, we are able to raise CP. So overall cost of borrowings because of CP is lower than what would otherwise been. And CP rates have definitely come down. So we will see cost of our borrowings go down.

Right. And we are seeing a higher traction in the tractor segment and 2-wheeler segments. So do you expect somewhere in second half something from the CV side because as far as the...

Already, we are seeing that the demand in August is higher than in July. For each month, the demand is higher. So we are seeing that as a traction in the car segment also. And the way we see it, that in the car segment, the lower-end cars which will benefit the most as people would like to stay away from shared mobility. So Hyundai and Maruti would be 2 big beneficiaries. And we are approved by -- in both the companies, we will -- and even Kia, Kia a little higher end, but we were approved in all 3 of these companies, so we will benefit as these company's benefit.

We have next question from the line of Jeetu Panjabi from EM Capital Advisors.

So 2 -- I'm going to ask you 2 broad questions. One, in the -- it's fantastic to hear that you're saying that in this current quarter, we're going to say profitable months every month, which is excellent to hear. The question I have is, if you take the next 6 months or so and assuming the demand side is there, assuming it picks up, is there any challenges in the path to normalization on the supply side for you?

Jeetu, I'm sorry, I couldn't understand your question. Can you repeat that, please?

So the question is -- I'm sorry, the line is a little bad. The question is that in the next 6 months, assuming the demand side is positive, will there be challenges for you from supply side -- from a production side to meet the demand?

So yes, we are -- that possibility cannot be ruled out. So we have 2 strategies we are working on to overcome this factor. As you know, that we -- our application has moved ahead with the Ministry of Environment to increase our production capacity. We are reasonably hopeful that within this -- maybe within this calendar year, we may get the approval to increase our capacity. And we have everything in place to ramp up production. So let's say, coming -- maybe first quarter of next year onwards, we should be able to increase our production. Secondly, we are also talking to other suppliers if needed to source billets if it comes to the crunch. And third, we have certain nonstrategic businesses that we can shed as more attractive businesses -- the demand for more attractive customers comes in, we can shed some of the less attractive businesses. So we have these 3 methods to attack this current problem.

Right. And would it be fair to say that we should get back to 85%, 90% of normal volumes by the last quarter of this financial year?

Yes. Again, let me say, Jeetu, at this point in time, to predict how will demand continue if there's another lockdown happening somewhere or not, but I feel reasonably confident in saying that at least in 1 of these 3 quarters, the remaining 3 quarters, we will see fairly normal business volumes.

Okay. Excellent. Excellent. And one last question. You talked on the Aichi and the interaction, is there any chance of an accelerated demand side originating from their relationships?

Oh, yes. In fact, they are working at breakneck speed. There -- when their Chairman was here in February and -- in fact, we had a visit from their Chairman as well as from the President, both visited in February, and both have conveyed to our teams that they are in a hurry. For a Japanese company to push that they need. So it's up to us, our teams together to work that if you can get the right quality levels which is required by the Japanese. And let me explain what I mean by the right quality levels. So normally, on an overall basis, they find our quality reasonable. The problem with Indian quality is sometimes the variability is higher. So they are working with our teams to improve to reduce the variability in our quality, so that lot-to-lot consistency. We are already amongst the best in the country. But from the Japanese perspective, the variability needs to be even lower. So we are working on that. And two, they feel there is reasonable scope to cut costs because their idea is Japanese quality at Korean costs to the Southeast Asia market. So we are working -- we have found areas to reduce costs. We are working together and any cost reduction that happens will also benefit our Indian operations. So we are reasonably confident that, again, we have said that our EBITDA margin -- normal EBITDA margin is between INR 4,500 and INR 5,500 a tonne. We will hit this range within, again, at least 1 of these 3 quarters moving ahead.

[Operator Instructions] We have next question from the line of [ Venkat Raman ] from Orion Securities.

I just wanted to know regarding Aichi deal in terms of the exports to Aichi's group companies abroad. How big is the differential between their current pricing and expect promise and what is our cost structure?

Sir, those are things that are...

Are we within reach or is it taking years to...

No. Everything is within reach. So one good thing about these Japanese partners is they look -- always look for a win-win situation. So when they're looking at a competitive price, they are looking at ways to reduce the cost also to see that we benefit as well as they benefit. And from what I've seen working with them and the targets that we have got for us moving ahead, I am reasonably confident that we will be able to serve them at their prices and at our desired profit margins.

Okay. That's nice. That's nice. Do they have operations in China, which they are planning to shift because of the U.S...

No. No, no. They only have a plant in Japan. And this is their investment in India, is their second investment anywhere. And as far as steel-making is concerned, however, since they also are probably the world's largest second -- amongst the largest forgers in the world. So their forging operations are present in several countries.

Okay. And second, one question which I wanted to inquire was now that the iron prices are going up, what is the situation regarding scrap? Are we seeing an increasing trend?

Yes, prices are rising. So clearly, we will see in the second quarter, the average prices would be higher than in the first quarter. Singla, am I right? Please correct me.

Yes, sir. [Foreign Language] You're right. And it will be marginally higher than the first quarter. But the real impact will come from the third quarter.

And the price increase from OEMs will come only from the third quarter, from October?

No. So as of now, we are still talking about the April price increase.

No, for this increase, the increase in the raw material prices for the July month?

No, no. We have asked for a price increase from the OEMs with effect 1st April.

Okay. Okay.

Whether we -- that's in a process of negotiation, how much we get, whether we'll get, et cetera, all that is a part of negotiation. So those discussions are going on. So just now we are talking about April to September prices, and we have asked for a price increase, where as the OEMs have asked to maintain prices. So there's a discussion going on. The current price increase, which is, as Singla said, will primarily affect us in the third quarter. For that, the price discussions will be from October to March of 2021. And those discussions will start sometime in November or December. Unfortunately, this industry, the discussions drag on for much longer, and -- but they are always the back date.

[Operator Instructions] We have next question from the line of Urvil Bhatt from IIFL.

Sachit, can you hear me?

Yes.

Great. So can you just provide us some update on the debt position and overall working capital, whether you've seen some increase in inventories or receivables? Just some color on that.

So we've actually seen a major reduction in receivables because the business was hardly there in the first quarter. So in the first quarter, we have been quite cash positive. And as volume has started going up and sales are going up from July, so the receivables started increasing again. But on the overall basis, we are quite comfortable on the working capital front. One interesting thing that we have done, as you will see that we have deposited -- made a large deposit with Punjab State Power Corporation Limited. So we have paid our energy bill in advance up to March because they were giving a very good scheme that if you pay in advance, you're getting 1% per month.

Okay. That's good.

Yes, our cost of borrowing is lower than that. And therefore, we have deposited a large sum of money there. Of course, we made an estimate of what our power consumption is going to be. And from that, we have -- a large proportion of that we've paid. So which is why you will see that income coming in as other income where the interest cost is higher than what it should be. So clearly, it's a letting part. So there's an asset side. And the other income is that you'll see in the first quarter and you'll see more of the other income in the second quarter. The large 2 components of the other income is, first is the interest on the FD that we have, the INR 50 crore FD that we have, which is the money put in by Aichi, which is meant for CapEx. So that is one component of the other income, large component. The other large component of the other income will be the interest received from Punjab State Power Corporation.

Okay. And overall, debt and cash position is largely stable?

Yes. It's very comfortable. And we will be -- we should be below 1:1 net debt equity, definitely below -- well below 1:1 by end of the year.

Okay. Okay. And any update on -- any color on cost-saving initiatives that you must have taken given the COVID? And just want to understand how much of that is sustainable going forward?

So all the cost savings you're talking about is all sustainable cost. One of the reasons of the cost saving is that we are talking of coming to profit.

Okay. Okay. And I mean, just wanted to understand, I mean, where exactly things have moved? I mean whether it is -- I can see employee cost has gone down. There must be some benefits in other expenses as well.

See, first quarter, you can look at nothing because really you will see the impact of this in terms of the profitability that we are talking about. So we are able to absorb the technical fees of Aichi, which are reasonably high, and we're able to absorb that and yet we are saying we'll be able to stick to INR 4,500 to INR 5,500 EBITDA margin -- EBITDA per tonne that we have said earlier, which lasts 1.5 years, we are not able to achieve.

Okay. That's great. That's great. And finally, any guidance for CapEx? Or how should we look for FY '21 and '22?

So CapEx because we now have a partner. So all CapEx plans, we have still not finalized our CapEx plan for this year. So we will be finalizing it in the second quarter -- before the second quarter meeting. So I hope we'll be able to announce and give a guidance for the next 3 years' CapEx plan in the next con call. So -- but just to keep everybody informed that the INR 50 crore cash that was invested by Aichi was based on their estimate of what would be the approximate CapEx required in this plant. So that is that they made an approximation initially. Of course, now we'll make a more detailed plans and so on. So -- but next quarter, we should be able to announce our CapEx plan for this year. I mean the thing that we will start this year, maybe some that will get completed in the next year. But better than that, more than that, we will give a guidance for the next 3 years.

[Operator Instructions] We have next question from the line of Ankit Merchant from Reliance Securities.

Hello?

Go ahead, please.

Yes, yes. My question is related to the current pricing. Can you shed some light, what are the current prices right now? And how much sort of an increase are we seeing in the next quarter to come? And how much would be the impact of international prices? Other question is related to the working capital. So are you finding any problems related to working capital?

So let me answer your second question first. We have no problems as regards getting working capital. We have very comfortable banks. We have HDFC Bank as a bank, ICICI Bank, SBI, Axis, and I think IDBI. So between our 5 banks, we have no problem at all of any kind of working capital requirement. So that's one. Two, pricing, we have 400 different grades. So we don't share prices of any grades because that price is also different from customer to customer. Third, the price increase that we expect, it's very difficult to say that. We have asked for a particular price, the OEMs are saying a rollover of price. So the price will settle maybe at where we have asked or maybe at or somewhere in between. So very difficult to give the guidance. We are discussing and negotiating with companies which are much bigger than us. So it's very difficult to give -- and they're all suffered in this period. So it's not -- these are not normal times. In normal times, we would be reasonably confident of what we could get. But in these time, very difficult to make an estimate.

Sure. And are you facing any delay or -- from their side -- from your customers and your payment?

Marginal. Nothing to -- nothing -- Singla, you'd like to add anything out there?

Yes, sir. Most of the customers have made the payment on due dates, but of course, during lockdown some of the payments got late. But broadly, we are in line that we are getting payment in time. And on the working capital front, I would just like to add that we have not availed any moratorium or extension as was given by the banks during the lockdown period. Rather, we have made a part prepayment because of the availability of funds due to timely utilization from our customers.

Sure. Just a follow-up question...

Singla, if you can share how much is the prepayment that we have made in -- since April? How much is the prepayment we have made?

Since April, we have made a prepayment of INR 10 crores of -- in term loan. And also, we have made INR 25 crores of payment of working capital loans.

That's great.

And can we also share the deposit we've put with PSPCL at this point in time, so at least, they will know how...

Yes. Apart from this, as on 30 June, we have a total deposit of INR 43 crores with Punjab State Power Corporation.

Okay. And that would be sufficient enough for a year?

No, no. We've added some more.

Yes, we have added in July -- in August, we have added something more...

Let me answer...

Sorry, sir.

Yes. So actually, we're sitting in different places, which is why there is this...

No problem, sir.

Okay. So basically, we made an estimate of what our production would be and then we made the payment accordingly. And suddenly, as the demand has gone up, the expectation of power consumption has gone higher. So when we made an estimate in June, the amount that we have paid was sufficient to last -- up to March, with a little bit of cushion because if you spill up over into April, we get 0 interest on that. So you have to balance it very well that it has to finish in March, okay? So as the demand is higher, suddenly, the power consumption also has gone up. And therefore, we have made further deposits in July. And it looks like we may have to make a further deposit in August also. We may be able to.

Okay. And on your procurement of scrap steel, are you finding any difficulties related to sourcing or anything?

No. See, on business front, we are facing no problem from any part. As we shared in the first -- in the annual call in June, we paid our workers full salary. We paid our managers full salary. We also ensured our contracted workers were paid full. So we would be one of the only companies in the steel sector or the allied engineering sectors in the North, which has not faced any worker shortage problem.

That's great to hear.

Yes. So in fact, we also offered some workers to some of our customers that if you need some workers to get your plant started, but then suddenly the demand shot up, so we could not keep up with our offer. So -- but as of now, we are working hard and -- to meet the requirements of our customers because the market is pretty strong at this point in time. And just for the -- when I'm saying pretty strong at this point in time, we are seeing at this point in time. I have no way of showing whether October will remain strong or not. So -- but as of now, August and September seem to be reasonably strong. I guess all the OEMs are preparing for the Diwali -- stocking up for the Diwali sale. So we have no way of knowing what's going to happen afterwards.

We have next question from the line of Dewang Sanghavi from ICICI Securities.

My question is coming import substitution. We are working on that particular thing. Can you throw some light on the same? What type of products we are planning to substitute in this year?

High-end gas and for certain other parts of automobiles that the steel still gets imported from Japan.

Right, sir. So this thing...

Yes. Go ahead.

So when would this be materialize in the next 12 months or something?

It's very difficult to say. So that is where the advantage of Aichi comes in. Since they understand the Japanese OEMs requirement, and they have contact at the head office level also. So we get an advantage in terms of having their technical know-how to how to improve our quality to reach those levels as well as to work -- their ability to work with the OEMs directly at the head office level to get us preference. So we -- but I don't think we will see any major impact in the next 12 months. This is automobile industry so anything takes longer in terms of development process.

Right, sir. And what is the maintenance CapEx we have to incur every year for maintaining our plant?

There's nothing fixed because see, this is an old plant, and we do keep changing the equipment as and when it's required. But as I said, again, that even the changed equipment we're discussing with our partners, so we will have a final discussion, and we'll present the CapEx plan in the next con call.

Okay. And just the last question, what is the volume of bright bar for the quarter? Just a bookkeeping question.

I don't think -- we've shared those numbers?

No, sir. We have not.

We've not being sharing those numbers. But I would say the demand is equally strong in the bright bar section also.

Normally, it ranges in 20% to 25% of our total volume.

Around 20%, 25% of total volume?

Yes.

Yes.

We have next question from the line of [ Anil Kumar Sharma ], an investor.

Sir, my question is at what capacity we are running presently?

We're running at a reasonably high capacity utilization.

Roughly around 75%, we can imagine?

We don't share those numbers because those are looking -- forward-looking numbers, but definitely higher than that.

We have next question from the line of [ Rohan Mehta ], individual investor.

Sir, just if you could shed some light on broad time estimates as to when we hope to reach our new capacity levels with the enhanced capacities?

No, no. So we have -- we need the government approval from the Ministry of Environment, which we should get, I would say, latest by March next year, but I would say within this calendar year. We have -- and we have to replace one old crane, so -- which also should happen in maybe let's say, by July -- June, July next year. So by June, July, we should be able to increase our production.

Okay. So the effects will start reflecting by next year -- FY '22?

Yes. Next year. In this year, our main target is can we get -- how close we can get to last year's volume? So make up on the loss that we've had in the first quarter, if we can. But the target for this year is really to get as close to last year's sales, total volume as possible. Any increase, we had only for next year.

Next year, right, sir. And sir, just one more aspect. You mentioned about the exports going as planned. So on that front, are we planning any combined visits along with Aichi to customers abroad in new geographies and whether we see exports picking up from the current 3% share that's there?

Yes, yes. So first of all, I didn't say exports are going on track. I said the development work for exports with Aichi is going on track. So the results of that will happen over the next 1.5 to 2 years or so. To the second question, I mean, March, we had planned a visit to Thailand. So the visit overseas to Thailand, to Philippines and to Japan, my own visits are long overdue, but because of COVID situation, nobody is able to travel. So that's the problem. So I'm ready and waiting to travel. They're also wanting me to travel. But unfortunately, no one can travel at this point.

Okay. Right, sir. So the first target markets would be Thailand, Philippines and Japan, right, sir?

No. Not Japan because the target is the Japanese OEMs, but their key supplier -- vendors are all going to be in Thailand, Philippines, Indonesia, so basically ASEAN region, really.

[Operator Instructions] As there are no further questions from the participants, I'd now like to -- so we have one question in the queue. Next question is from the line of [ Anuja Patel ], investor.

I had a few questions related to the capacity. What would be the bright bar capacity till 2022?

So our capacity is -- it's a combined capacity now because we've also had a drawing line to it, which shares capacity with the bright bar or certain equipment. So overall, I would say, about 40,000 tonnes a year, Singla?

Yes, sir, by 2022, it will be 40,000 tonnes plus.

Yes.

Okay. And how would we enhance the melting capacity and the rolling capacity to higher levels?

So melting capacity, we already have all the equipment, just we need a crane. And we are in the process of negotiating that crane. So it will take roughly a year for the crane to come in and get installed. So that is one. And two, we need to put in a gas line. So we were waiting for the gas line, but since that has got delayed. We are putting in an LPG manifold. So that should get done in the next 5, 6 months. So we will be ready to increase our capacity once the approval of the Environment Ministry comes in.

Okay. So we hope to reach our new capacity level, the enhanced capacities by say...

Next financial year. Next financial year. So starting June, July, we should be able to -- based on a monthly basis from the capacity point of view.

Thank you. Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to the management for closing comments. Over to you.

So ladies and gentlemen, thank you very much once again for being with us and showing patience. I know last year and that has not been good as well as the first quarter not being good. But I assure you that the full management is fully geared up. And thanks to our partners now. We are on a much stronger footing than before. And I am confident that we will not disappoint you in the coming years. All the best, and I'll see you again next quarter. Thank you.

Thank you very much, sir. Ladies and gentlemen, on behalf of IIFL Institutional Equities, that concludes this conference call. Thank you for joining with us. You may now disconnect your lines.