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

Good morning to all present. I welcome you all to the SAIL Annual General Meeting of the company. The notice of which has already been circulated to all of you. Since Chairman of the Board is not present in the meeting, Mr. Sachit Jain, the MD, hereby is pointed as Chairman of this meeting. Since the requisite column as per Section 103 of the Companies Act is present, I request the Chairman to declare the meeting as commenced.

I declare the meeting commenced.

Now I request Mr. Sachit Jain to address the shareholders.

Dear shareholders, good morning, and thank you for attending our AGM today. I'm very happy to share with me -- that along with me, we have our -- the other director with me are Ishigami-san, the President of the steel business of Aichi Steel Corporation; Rakesh Jain, the Chairman of the Audit Committee; Mr. Sanjoy Bhattacharyya, Chairman of the Regulation Nomination Committee and Member of the Audit Committee; Mr. R. K. Jain; and Mrs. Suchita Jain. Ladies and gentlemen, we have closed last year as a very difficult year. We all are aware that the auto demand came down drastically. Because of that, our performance also dipped as a company. We are, as you all know, an auto-related company. All our stake is towards the auto segment, and our fortunes and our people are linked to the auto industry. If auto industry does well, we do well and vice-versa. On top of the bad situation of last year, we had the COVID problem. And we have been struggling with COVID since March, going on to currently even now we're facing the same problem. We had a complete lockdown because of which April -- entire April affected to us all. We did start some operations towards the end of April. The first quarter results are -- in fact, we had a very bad first quarter, roughly INR 90 crores of loss. But that is what has happened. What I also want to share with you is that in 2020, we have completed 10 years as a company. My own association with Vardhman Steels, started in January 2010. And of course, Vardhman Special Steels has been part of Vardhman Group since 1973. But my own direct association with Vardhman Special Steels began in 2010. So I have personally completed 10 years. And I would also say that we have completed the first phase of our organization's progress. In this first phase, we have modernized the plant; two, we've put in a growth momentum; three, we've built a culture for leadership; and most importantly, we were able to finalize our alliance with our partners Aichi Steel Corporation of Japan. Now onward, we are beginning phase 2 of our growth, which we'll continue for the next innings. In this phase, our objective will be with the help of Aichi Steel Corporation, we will improve our processes, we will improve our safety orientation. We have already seen the change in our people and the alertness towards safety. We already were a safe organization relatively, but we have seen the gaps and we are improving in that area. There are several other areas where we are learning from our partners. As you all know, we started working with them since October last year. So safety is the first area. In addition, we have understood much better data-orientation and data analysis. We have understood very well how to do problem solving in the Japanese systematic way. We have learned the PDCA cycle. We have understood also how to attack problems. We are working together with the -- with our partners to increase the spirit of cooperation and learning from our subordinates and communication upwards. We are learning from them the process of 3R, which is cost cutting steps in cost cutting. There is a lot we have covered at short distance and a long way to go. With our partners in the future, we hope to improve our market presence in India and in Southeast Asia. Late after me, I'm very pleased to share with you that Ishigami-san, President of Aichi Steel Corporation Steel Division will be sharing a presentation on what are Aichi's plans with respect to Vardhman Special Steels. We are very happy. I personally am very happy. It has taken me 8 years of relationship building for them to join us. But my wanting them to come and their coming in is only the beginning. The real test is when our people accepted and their people accept our people. I'm very happy to share that the people to people cooperation is progressing well. Our people are very happy in learning from our Japanese partners. Unfortunately because of COVID, the 3 Japanese colleagues who were here had to leave and be back in Japan. However, through Zoom and other technologies, we have been working remotely. And I must say, the dedication with which their team have been working with our team is exemplary. After my presentation -- my few remarks out here, of course, we will have Aichi Steel's presentation. And after that, we have received a couple of questions. I will be answering those questions. And even in the interim, in the -- during the course of the AGM, if there are any questions which will come on the chat or you send directly to Sonam, our Company Secretary, we will be happy to answer any questions that we have the answers to. If we don't have the answer with us at this point, we will send you a mail separately with an answer to the question. Once again, ladies and gentlemen, thank you very much for being with us today. Sonam?

Thank you, sir. Now I request Mr. Takashi Ishigami, to give presentation to the shareholders on Vardhman/Aichi alliance and future plans. Now I request event host to give presenter rights to Mr. Ishigami.

Yes, he is presenter.

Yes. Over to you, Ishigami-san.

Hi. Namaste. Hello, everyone. [Foreign Language] My name is Takashi Ishigami from Aichi Steel Corporation working as a Manufacturing Executive Officer (sic) [ Managing Executive Officer ], Managing Executive Officer. I'm in charge of this alliance. Today, in my role as Vardhman's Non-Executive Director, Executive Director, I am pleased to make a brief presentation about our partnership and plan for the future. Please forgive me for using an interpreter in the following my presentation. [Interpreted] This presentation will cover the following 3 points. One, introduction of Aichi Steel; two, background of partnership with Vardhman; and three, future plan and the procedures of the partnership. If I give an overview of our company, Aichi Steel Corporation, founded in 1940, and will celebrate its 80th anniversary this year. Sales is about $2,400 million, and we have about 5,000 employees. Next is our historical background. In 1934, the steelmaking division was born in Toyoda. Then in 1940, it became independent with the brand name of Aichi Steel Corporation. Our company was born with the principle of 'great cars are made with great steel'. Even today, we are supplying high-quality steel to Toyota, Toyota Group and other automotive companies. The following is an overview of our product lineup. Aichi Steel is divided into 4 companies and segments in terms of product lineups. Steelmaking company and stainless steel company manufacture and sale of high-grade steel products. Forging company is in the business of in-house forging for automobile parts. Smart company is our youngest business, more now during the process in steelmaking technology. Smart company offers various products, including electronic components, magnets, sensors and metal fibers. Next slide is about our overseas business. Our company has a total of 10 subsidiaries and 1 branch office in the United States, Europe and Asia. The segments operated by each subsidiaries are different, but India sale of our subsidiaries are food processing base. But we have no affiliate in steel manufacturing. This is all about Aichi Steel briefly. Next, I would like to explain the background of partnership with Vardhman. This alliance is focused on expansion and the localization in India with 2 main objectives. Firstly, we would like to build a solid supply chain by supplying of high-quality special steels to ASEAN and India. Secondly, we'd like to supply stable quality specialty steel in India where the market will be expanding in the future. From the above viewpoint, we need a partner in India who shares the same dream to make these things happen. And after a long time investigate and evaluation, we find out Vardhman as a partner. By Vardhman, of all the companies we've met in India, VSSL management's enthusiasm and willingness to improve is outstanding. Vardhman has a dream of expanding its production and becoming #1 specialty steelmaker in India. Also we were impressed by the company's steadfast management approach. Therefore, we are convinced that Vardhman is a true worth as long partners. Next, I would like to explain our passion on this partnership. Initially, we work on to improve the production and the quality, mainly through technical support. In the future, we will transplant the various technologies we have developed over the past 80 years to make Vardhman a leading specialty steel manufacturer in India. Finally, by supplying good quality, high-grade steel to India and the ASEAN region contributing to domestic technological development. Next is about the future plans and how we move forward with the partnership. The support activities within the partnership mainly consist of technical support and sales activity supports. Sales activity support, supports new customer demand acquisition activities in India and ASEAN. These supports will allow us to expand our volumes both in terms of production and sales. Next, I will explain about the target production volume. Our plan for fiscal year 2022 to be 200,000 tonnes, for the '23 to '25 to be 250,000 tonnes. And for the '26 and '28 to be 300,000. In other words, by 2030, our goal is to operate at 1.5x the current production volume. Next, I will explain about the strategic steps to achieve the planned target of production volume. We will see the table below. The horizontal axis shows the steps to be taken at each stage of production volume. And the vertical axis shows the initiative and the keywords in order to achieve them. Here is the first step. The keyword here is to increase the level of [Foreign Language], the basic ability to manufacture products. I won't go into details, but this implies a wide range of basic skills, such as fostering a safety-oriented culture and the development of human resources to carry it out. The first step is to ensure that learning this activity and improved abilities to make high-quality products. The second step where it is assumed that capital investment becomes an important issue. As shown by the arrows, capacity expansion through capital investment is essential to expand the volume further. For this step, preparation for the starting the implementation will be the keywords for second. Finally, the keyword for the third step are implementation and expansion. This is a step in scaling up the business by utilizing the capabilities acquired up to this -- that standpoint by expanding the equipment capabilities. These are the brief explanation of the steps. Hereafter, I will talk about the detail of current stage of step 1. We will carry the support to 2 major areas, improvement of manufacturing technology and strengthen -- strengthening of work-wise skill. Improving manufacturing technology is an activity to make more things under better conditions and improve technology and consist of the following 3 pillars. The first is cost reduction. The second is technical development to acquire new customers. And the third is to increase production capacity. Strengthening [ gemba ], shop floor, capabilities means that you are referring to the strengthening the organizational capabilities to ensure that the actual operating is done safely and securely. And our activities include safety management, quality management system development and human resource development. We now have a special team in place to promote the activities, and we are strongly advancing step 1. The team's name is team VA, which means value-added and Vardhman Aichi. In my conclusion, I'm pleased to announce, as the name of this team suggests, we are unified with Vardhman. We will be a company that can provide quality products in a timely manner, safely, securely and sustainably. Hereby I close my presentation. Thank you very much for your attention.

Thank you so much, sir. Now we have received few queries from Sundaram Mutual Fund. Now I request Mr. Sachit Jain to answer their queries. Sir, the query is, does Aichi have plans to further increase its shareholding stake in Vardhman Special Steels? Any specific conditions which might trigger such an event? Over to you, sir.

First of all, any capital increase will happen over time, depending on the success of phase 1 as Ishigami-san has already presented. So depending on the success of this operation and when we expand and what is the internal capital availability in the company, et cetera. So any capital raise will happen only after that. Two, the promoters of the group, Vardhman Group is committed to the company as well as our partners, Aichi is -- are totally committed to the company. So both are -- both the partners are willing to invest in the company as need be. And of course, over time, there could be possibility of Aichi Steel increasing its stake beyond the current level. However, let me be clear out here, Vardhman Group promoters do not intend to sell their shares to Aichi. We intend to stay with the company. And any stake increase, if at all, if it comes, will come with further capital infusion in the company. But that is something we will cross the bridge when the time comes. Today is the time to generate good results together.

The second query is, are there any specific opportunities emerging from the current situation, wherein the market might get consolidated with few companies having strong balance sheets? Can you please elaborate on the competition, how are the competitors able to withstand dip in demand and how market shares are moving?

See, currently I must say that this difficult time has shaken many companies and rightly mentioned, a strong balance sheet is very important. We were lucky that we had a strong balance sheet to start with, and I must complement our partners, Aichi. They've told us that in this difficult time, if you need any support, they are behind us and with us if we need any support. So that way, I think Vardhman Special Steel will come out in a reasonably strong position from this crisis. Consolidation opportunities are there in this industry, and we are hearing of some deals happening. Some companies may close down because they may not be able to handle the stress. As you also know that the heavy commercial vehicle is -- segment is not doing so well. So companies that are relying largely on that segment may face bigger pressures. Luckily for us, Vardhman Special Steel is primarily in the cars and 2-wheeler segment. So we are doing pretty well at this point because demand from this segment is strong. So -- and Vardhman Special Steel at this point is not looking at any consolidation opportunity in a very aggressive manner. Our focus, as I said earlier, is first on improving our current operations, strengthening our human resources and learning the Japanese approach of working, and we are making progress in those areas. Next.

The third query is, please elaborate on the market outlook for Vardhman Special Steels for the remaining part of the year?

So as I had said in our first quarter call, that in the remaining 3 quarters, we do expect that we will make a profit in at least one of those quarters. In the second quarter, we are almost at the end of the third quarter -- of the third month. So we have a rough idea of the overall quarter. I must say the demand has been very robust. And we have performed much better than what we were fielding earlier. I'm happy to share that we should be in profit zone in the second quarter. Also -- however, we will still be at a loss. We will not be covering the loss of the first quarter, so that at the end of September, in first half results, we will still be at a loss for the half as a whole. At this stage, of course, we are looking at a negative factor that raw material prices have gone up. At the same time, we're also discussing with the OEs to increase prices from October 1. We are getting some good indications, but till that is finalized, we cannot commit. But as of now, there is a chance that we might, for the full year also, we may reach very close to 0 or might even move into profit zone. However, all that depends on the kind of price increase that we get from the OEMs. But clearly, our performance is much better than what we were anticipating in April, our first estimate was a INR 90 crore loss for the full year. Our second estimate in June was a INR 35 crore loss, I'm talking profit before tax. And now sitting in end of September, maybe a small loss, maybe 0 or marginal profit but we are -- we will be close to 0 as things stand now.

Thank you so much, sir.

And one more question I saw in the chat, was alluding to what are the main -- the approach of the Japanese approach and Indian approach? So as I said earlier, we are amongst the best quality producers in India. But then we discussed with the Japanese and learned from them, we saw their method of operation, I must say that there is a lot to learn from them. Toyota Group is the world's foremost automotive manufacturer as well as even in overall manufacturing, Toyota Group is considered amongst the best in the world across all categories of manufacturing. And we are lucky to have Aichi Steel Corporation as our partner. We have already learned many things from them, and there's a lot more to learn from them. I feel in the next 3 years, every year, we will be improving. In the next 3 years, we will be apart from that company than what we are today. Thanks to everyone.

Thank you so much, sir. Now the last query is for Mr. Ishigami. Sir, the query is, can you please elaborate on Aichi's expectation from this partnership with Vardhman Special Steels Limited, in terms of addressable market opportunities both in -- within India and outside India, introduction of new technologies or products? Over to you, sir.

So please give us a second.

Whether you need any presentation over there?

No, I think that's okay. Sir, can you show the part of any presentations?

Okay. [Interpreted] We'd like to strengthen the ability to manufacture the steel for automobile. And the market is domestic, I mean, in India and ASEAN. Once we acquire the ability to make steels for automobile, that means that can be utilized for other sources. That's why we first made the acquired ability to make the steel product. That's it. Is that okay?

Ishigami-san, we will ask Sundaram, if they are satisfied with the answer. Otherwise, we will ask them again to send the question. Any other queries, we will send to you and get the answer back to them. So for now, we're okay, sir.

Thank you so much, sir. We have received another query from our respective shareholder. The query is, will it be fair to say that correlation with auto sector fortunes remains a case going forward as well as for Vardhman Special Steels. Management not planning to dealing with auto sector. Over to you, sir.

Yes. Thank you for this question. So if you would recall, a few years ago, we had stated that we want to get into a different kind of steels. We were trying to look for tool steels as a possibility to diversify from automotive steel. But that was few years ago. Once we have our partners, Aichi Steel with us, for the next few years, our focus is automotive steel because the opportunities in automotive steel, with our partners, we see as a pretty big opportunity, as Ishigami said, both in India as well as in ASEAN region to support Toyota Group as well as other Japanese OEMs. So we are pretty confident that the -- for the next few years, there is big opportunities in the automotive sector. Once we are able to take full advantage of these opportunities, only after that, will we examine looking into other areas of steel and other opportunities like tool steels or other such segments. But within automotive steel, there is also a second segment of railways. We have already started working with the railways and we hope, in the next few years, we will be able to increase our share in the railways. So -- but as of now, we don't have any plans to get into newer technologies and newer areas of steelmaking.

Thank you, sir. Since there are no more further questions, so I'll be proceeding with formal proceedings. So now I take the notice and auditor's report as read. Mr. Harsh Goyal from Messrs Harsh Goyal & Associates Company Secretaries was appointed as scrutinizer for conducting the e-voting process in a fair and transparent manner. This report on e-voting will be posted simultaneously on the website of the company, along with the website of stock exchanges and CDSL within 48 hours of the conclusion of this meeting. Further, I would like to inform the shareholders that venue voting on the resolutions set up in the notice will be open for 15 minutes from the conclusion of this meeting. Those shareholders who have not done remote e-voting can do voting now. So now with the permission of Chairman, I declare the meeting as concluded.

Thank you, Sonam, and thank you to my fellow directors. And ladies and gentlemen, thank you so much for attending our AGM today. Thank you so much.

Thank you, Chairman. Thank you, sir.

Can I close the session?

Yes, please.

Yes.

Take care, guys.