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

Ladies and gentlemen, good day, and welcome to Vardhman Special Steels Limited Q3 and 9-month FY '21 Earnings Conference Call hosted by IIFL Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Urvil Bhatt from IIFL Capital. Thank you, and over to you, sir.

Thanks, Nirav. Good afternoon, everyone. On behalf of IIFL Securities, I welcome you all to Vardhman Special Steels Limited 3Q FY '21 Results Conference Call. From the management, we have Mr. Sachit Jain, Vice Chairman and MD, and his team. Over to you, Sachit, for your opening remarks.

Thank you, Urvil, and good afternoon, everybody, and thank you for coming to our call -- our Q3 call today this afternoon. With me on this call, we have Mr. Sanjeev Singla, our CFO; Sonam Taneja, Company Secretary and Compliance Officer; Mr. Mukesh Srivastav, our COO; and we have a surprise out here, Ms. Soumya, my daughter, the fourth generation of the business family is also on the call. And in addition, we have, of course, Bridge, our Investor Relations team. So I'm happy to report we had a decent quarter in Q3. The results are a little better than our forecasted range. EBITDA per tonne, we have revised the range now upwards to INR 5,000 to INR 7,000, a normal EBITDA per tonne, and this quarter has been a bit higher. In addition to EBITDA, we are adding now a second performance parameter, return on capital employed, and we report it as EBITDA on total capital employed. And our first target will be 16%. This year, we hope to cross 14%. But 16% will be our first target, then 18% and then 20%. So by 2025, we hope to reach 20%. At present, we are running at full capacity. The demand in third quarter has been very strong and continues to be strong in the fourth quarter. Impact of COVID seems to be normalizing. All businesses seem to be -- more and more businesses seem to be opening up. This year's economy is definitely doing better than before. In the overall market situation, commercial vehicles have been a little behind, but they seem to also be picking up. And demand -- overall demand is robust. So we are expecting a strong fourth quarter also in terms of volume. However, on the negative side, raw material prices have shot up dramatically in the last couple of months. This has happened globally. And that -- because of that, we expect our fourth quarter performance to be below our third quarter. But at this point, we are also asking our customers for an interim price increase because all commodities have gone up sharply. Steel prices have gone up dramatically. So we are asking our customers that normally, as you are aware, our price setting is every 6 months, that we are asking our customers for interim price increase from January. And that, of course, discussions are on. I think one OEM has already given some price increase. Others are in the process of examining it. So we are likely to get some price increase. Even if we get no price increase at all, we will still be in the profit zone in the fourth quarter. But as I said, much lower than third quarter. If we get a price increase, then fourth quarter should be definitely -- may not be much worse -- may not be significantly worse as the third quarter. But all depends on the quantum of price increase. As regards our partners, Aichi, working with them is going on fine. As we have said earlier, 2021 is the year of preparation in terms of quality levels. We've lost some time last year because of COVID that our Japanese partners had to go back to Japan. We've been working with them through Zoom calls, e-mails and so on. But there are limitations because of that. And we are expecting our Japanese full-time people to come in by January end or first week of February, and then we hope to meet our targets on quality levels. Sampling orders have come in from various Japanese customers in Thailand and Philippine. They're on track for that. So 2022 is when we start seeing business coming up with them. The other area, of course, is expansion of capacity. So we are working with the Ministry of Environment and it depends on them, but we hope in the next few months to get clearance for expansion of our capacity from 200,000 tonnes of melting to 280,000 tonnes. Overall, company is doing well. The morale of the people is very strong. Motivation is very strong. In these COVID times, I think we've been able to build our teams much stronger together. So we are feeling optimistic about the way the future is looking. And the other question our analysts and investors have been asking us is our investment plan over the next 5 years. So that is still being formulated. But rough idea we have now from our -- with our Japanese partners. It will be between INR 150 crores to INR 170 crores over the next 5 years, including normal CapEx, including replacement CapEx, including safety -- investments regarding safety, investments regarding quality and CapEx capacity expansion projects. So those are the kind of money we're looking at. Some of these investments will have payback on their own. So those are things that will come up in due course. And we hope in the next quarters to finalize more details, and therefore, we will have a more precise number. At this point, I will stop my opening remarks and ask Sanjeev Singla to go through some financials. And after that, we are open to take your questions. Singla, over to you.

Thank you, sir. Good afternoon, everyone. During this quarter, we have achieved total sales volume of 45,964 tonnes and year-on-year growth of 45%. And in terms of revenue, in rupees, it's at INR 287 crore, which -- reporting at a growth of 53%, mainly because -- one is because of the increase in volumes by 45% and the remaining is because of the increase in price, which we have received from the customers from 1st October 2020. Apart from this, other income is continuing to support us -- to support the bottom line and is adding good numbers. In other income, there are 2 main incomes. One is interest income received on FDR, FDR funds which we have received from IT last year. And secondly, this year, we have deposited advance electricity bill up to March 2021. And on that, there was a scheme from the State Electricity Board that they will be giving us interest at the rate of 1% per month. So resulting all this, our EBITDA, including other income during the quarter is INR 42 crores and year-on-year growth of 400% -- more than 400%. And during this quarter, the EBITDA margin is INR 9,300 a tonne, which is beyond our guidance of normal range. Last range which was INR 4,500 to INR 6,000, and last quarter, it was revised to INR 5,000 to INR 7,000 a tonne. And the net profit stands at INR 21 crores as against INR 1.81 crores last year. So that's all on performance side. And now I request for the questions.

[Operator Instructions] The first question is from the line of Dhaval Joshi from Sundaram Mutual Fund.

Congratulation for the good set of numbers. Sir, just a couple of questions from my side. Though you have said the increase in the -- your negotiations with your OEMs is going on, automakers is going on for increase in the contract price. How much increase required in terms of real essence part? Do you see to offset the cost given the higher HRC prices or higher product per raw material prices of last quarter? So can you give us some guidance on that?

Just 1 minute. So we have asked our OEMs for a price increase of about INR 7,000, INR 7,500 at the interim level because cost increases from product to product is very different. So the cost increase in the range of INR 10,000 to INR 12,000 a tonne. That's a cost increase. However, that is as far as spot prices are concerned. And then each company will have its own levels of inventory and so on. And the price has also increased over time. It's not that it suddenly increased to 12,000 -- by INR 12,000. So we've been purchasing at various levels and also seeing the commodity increase, but we did cover a little bit more than our consumption. So it is a very -- we don't share what numbers we have covered. I am just saying the spot prices, overall, the cost increase is around INR 10,000 to INR 12,000 per tonne based on -- I mean product to product.

Got it. And you have asked for INR 7,500 per tonne sort of increase in the realization?

Yes. That's roughly INR 7,000 to INR 7,500 we've asked. What we -- anyways, and we need to understand that this is not new to us because the price settlements are for 6-month purpose. So the real increase is due from 1st April. But because of unprecedented increase in raw material and the dramatic increase in commodity steel prices, we have asked and the indications we have got from most customers is that they understand the situation and they are willing to look at some reasonable numbers. And some customers who are not linked to OEMs, et cetera, or even who are linked to OEMs have started giving interim increases. So a bigger -- below what we are asking, but a reasonable number, irrespective of whether the OEM gives the price increase or not. So those kind of things have also happened. We are in a state of plus at this point. But as I said that we believe that even without any increase, we will still be in the profit territory for fourth quarter.

Yes. Yes. But per tonne benefits will be not as high as the current level of -- if at all, assuming that price increases will not happen then?

Yes, of course. We have already indicated that in the past also that fourth quarter will be below third quarter. We already indicated that. But it depends on what price increase we get. So very difficult at this point to predict that. The only thing we can say is, is we -- if we get INR 7,000, we will match our costs this quarter. And without INR 7,000, we will still be in profit zone. So we are somewhere in between that at this point.

Okay. And sir, just basic question, I wanted to understand from you. What is the problem -- or what is the issue with the -- your automakers, carmakers to have quarterly contracts where they also enjoy better pricing or they also -- yes.

I think the reason for this is, I guess, there's so much time that's wasted in negotiation. So once you fix the price and even though this is reasonably clear, it is cost basis and so on, so with the lag, we anyway get the benefit or you pass on the benefit, with the lag.

That's the only thing? No, no other, no other...

I doubt there is any other reason because this industry has been going very well. Only this is the first time in my 10 years that we are seeing this kind of unprecedented increase. I mean within 2 months, the price increase was this much. I mean I remember one time in a week's time the domestic scrap went up by INR 3,000 a tonne in 1 week. So this has been a crazy time.

And I mean, how do you see the trend for the next 2 quarters, especially from your large customer in terms of -- it's order book that's been pretty strong or in terms of back-to-back orders are still getting...

See, we only get some kind of indication. We don't have firm orders, and so on. So this fourth quarter, current quarter we are in, the volume is very strong. We are not able to meet the requirement. Yes. And so demand is very strong. And as of now, the indication for next quarter is also not too bad. So nobody sees contraction starting for the next quarter, but...

Q1 you're saying, Q1?

Yes, Q1. So -- and Q1, very clearly, we will have the price increases from 1st April, whether we have it from 1st Jan or not, we don't know at this point. But from 1st April, maybe we will have the price increase.

And sir, last one, what is the net debt at this level?

Net debt would be around 240 -- INR 250 crores, roughly. Singla, can you answer this question, please?

Yes, it is INR 250 crores.

Oh, it is INR 250 crores, okay.

Next question is from the line of Dhaval Shah from Girik Capital.

Sir, couple of questions. First is that, as you mentioned, we have visibility of orders from the OEMs and we're seeing a good pickup in the auto cycle also. But from the past, I think what we saw in 2018, '19, I mean, how do we kind of be better placed in terms of if there is again a slowdown situation emerging? How are we preparing ourselves in terms of protecting our volumes, margins better, given we have a Japanese partner also? So any sort of more focus on exports to hedge the loss in volumes in the domestic side?

Yes. So from -- as I said in the opening remarks, from 2022 onwards, our exports to the Japanese Tier 1s and Japanese OEM-based business in Southeast Asia will begin. Sampling already has begun, and there'll be more sampling orders coming in 2020 -- in this year. So from 2022 onwards, we are fairly protected with our export business picking up. So if at all, the risk, so to speak, of volume is only for this calendar year. This calendar year or I may say at best to financial year '21-'22. In any case, volumes for the first quarter of this year are very strong. And as of now, even Q1 of the next year is okay. So we -- then you begin in through Diwali quarter, so which anyway remains strong. So in all probability, the risk at all of a volume slowdown -- again, these are all just my ideas, there's no way of to ensure them -- something like Rajiv Bajaj says, he doesn't know where sales will happen. So I guess if at all, would be only Q3 and Q4. So second half of next year, there'll be some risk. But by that time, we expect heavy commercial vehicle to pick up. Two, component demand is picking up. So export of components requires our speed. So that is going quite strong also. So that may overshadow these drops in demand, which is on.

So this -- yes, so 2 questions. First is, so you said we are almost at full capacity for the -- for third quarter, we did some 46,000 tonnes.

Yes.

So 2022, when we start exports, how much -- to start with, how much -- what should -- what sort of volumes are we expecting in the export side?

It's very difficult to say exactly. But over the next 5 years, our target is 50,000 tonnes to 70,000 tonnes of exports.

Over 5 years, okay.

By '24-'25, we'll be at that level.

Okay. Okay. Okay. And sir, the -- and the other question that you mentioned about the export of components happening out of India. Now that is something which is -- is it because of this change in supplier by the customer? Or what is the reason you see?

So see -- again, we are 1 level removed. So best is to ask this question from the component exporters. But my reading is as the larger OEM and the big Tier 1s are looking at diversifying their supply chain a bit from China. So China Plus strategy would mean that people are looking at India a little more positively than what they've been looking at it in the past.

Okay. Okay. And sir, as the commercial vehicle sale...

I'm sorry, sorry, one more thing. And there also seems to be a commercial vehicles upsurge in North America and so on. So there's a demand from of our customers like GNA Axles, for example, who exports parts for trucks in North America, their demand is very strong.

Correct. Correct. We spoke to them. Correct. They've mentioned it very strong.

Yes, yes. So their demand is strong, which means, again, so we are indirect exporter. So demand for us is also strong.

And sir, India also has more commercial vehicle trucks are sold. So your volumes logically should be higher. Am I correct, sir?

No, we don't -- they don't sell much to commercial vehicles in India.

We are more of India.

We are, yes, cars and 2-wheelers, primarily. And so whatever commercial vehicle business that we have is indirectly through customers like GNA Axle for exports and for some customers like Sona BLW, which going to supply to all products or Shriram Pistons, customers like them. So yes, if commercial vehicles improve, we will get some spin-off from that, but not too huge an impact.

Okay. And sir, this PLI scheme which government has floated, so can you give some thoughts on this?

Unfortunately, it doesn't cover our product category. And this is surprising because it has some commodity schemes also covered in it. And specialized steel, we've got a segment of special steels that they haven't covered automotive steel. So we have, as a steel industry, as ASPA, Alloy Steel Association, we have represented to the Ministry that this is a big lapse that has happened, and that needs to be covered. Let's see -- I mean, the Steel Ministry seems positive. But as of now, we are not covered.

The next question is from the line of Tushar from Athena Investments.

Yes. I was going through your presentation, and I wanted to understand what you've mentioned on Page 31 that you will start making advanced steel for auto. So what kind of product would this be? I mean are you -- it also mentioned something about setting up a forging facility. If you can throw some more light on this.

See all those things -- see, first of all advanced -- when you say -- talk about advanced steel, so when you are making steel for Toyota and Toyota requirements, you need newer grades of steel and better qualities of steel than what is being used in India at this point in time. Also, Maruti, for example, today, even now imports some steel, which are specialized steel, which doesn't source from India. Now those are the kinds of products that we hope to make in our facilities with the help of our collaborators, so that gets covered. And when we talk of forging, et cetera, those are all in the future course because our partners are already -- they are the strongest forging company in the world. So -- and they have a desire eventually to put out forging plants in India. So those are the kind of other things that can happen in the future. But that is a futuristic thing, and it's not something that is happening today or next year.

So I have one question on this. So when you say steel for auto, is it not HR coils...

No, no, no. The same bar what we are doing today, bar. Alloy steel bars that we are making today. So the focus is more and more on cars in the future and less on 2 -- so 2-wheelers will remain in India and maybe a little bit for export. But really when we're saying 50,000 tonnes to 70,000 tonnes of export that we're looking at, that is mostly cars and some for trucks.

Okay. And my second question, sir, was on this -- your plan to increase ROC. So how do you reach that goal? Would you be increasing EBITDA per tonne or...

So EBITDA per tonne, anyway, we have said that we have already upped our guidance to, as I said, INR 5,000 to INR 7,000 a tonne. And we've also said that in another couple of years we'll raise this guidance upwards again. We are waiting for 2 events to kick in. One, our expansion to get okayed from the Ministry of Environment, once that happens, and the second, once the Japanese business starts. So when these 2 events start, our EBITDA per tonne will go up further, and then we will revise the range from the current -- new range of INR 5,000 to INR 7,000, we'll revise it upwards, maybe from INR 6,000 to INR 8,000 or maybe even a little bit more. We'll see at that point in time. But we'll definitely revise it upwards in about 2 years' time. So one is EBITDA going up per tonne. Second, volume will go up. And third, we are working on our capital employed. So our net capital employed, you will see by 31st March, we plan to have a reduction in net current assets from the current levels. And we want to -- we plan to keep a very tight check on that. So it's a combination of volume, EBITDA per tonne and reduction of net current assets.

The next question is from the line of Ratish Varier from Sundaram Mutual Funds.

So just a couple of questions. First question, pardon me, if you would have answered that. With respect to PLI, do you see any opportunity in this segment for us? And if that comes -- and if yes, what CapEx guidance you're talking about in your initial 5-year plan? Will that -- can that be revised and accordingly?

So as of now, as I said, our segment, the entire segment that we are in is not covered in the PLI, and this is a gross mistake made from the Ministry at some level. So there is a realization that there has been a big lapse, and there is an attempt to include our sector. So once that gets included, then, of course, we are covered. But as of now, we are not covered. And to answer your second question, no, all our investments are already in line to -- for exports. So nothing has changed.

Okay. Okay. Sir, just 1 more question. Some data keeping question. For this 9 months and this quarter, what will be the mix for us? You mentioned something we supply as indirect export. So between domestic, indirect export, 2-wheelers, 4-wheeler...

We don’t have those numbers. We don't track those numbers. We just have a general idea that customers like GNA Axle, for example, produces axles for exports, but they also make axles for domestic market. Then Sona produces for domestic market and exports. We don't track all those things separately. Each of our customers produces some for domestic market and some for export. We do know that they are producing for exports, but what proportion and so on, we don't track in that way.

And 2-wheeler will be what percentage of our business currently?

2-wheelers should be around 30%. Singla?

Yes, 33% is 2-wheeler and about 35% is passenger vehicles.

And remaining?

The remaining is off-highways and commercial vehicles and tractors. Again, we don't supply to the tractors segment, as I said earlier, on the commercial vehicles segment. But through customers like Sona, et cetera, for some critical components or some Shriram Pistons, so some of the critical components our steel will be going. But otherwise, we don't supply steel for components for the tractor industry or the commercial vehicles on the domestic market. But for international market, yes, for the component, we do supply. And the reason for that is very clear, it's that the quality standards of commercial vehicles and tractors in India is very low. And therefore, anybody and everybody can compete in those segments. And therefore, it's a price war. And then we being a smaller player, like to stay away from businesses where price is the main determinant.

The next question is from the line of Dewang Sanghavi from ICICI Securities.

Congrats on a good set of numbers. Sir, my question is regarding this CapEx we are planning with Aichi of INR 100, INR 200 crores. Have we identified any product-specific details in terms of early assessments, which certain products we are going to invest in?

No, no. Our product line is going to remain the same as what we have today, which is alloy steel bars meant for the automotive sector, which is cars, 2-wheelers, trucks, tractors, the same segment. So there's no change in the product segment. However, with Aichi -- so let me tell you what are the areas in which we'll be investing. One is for capacity expansion. Second is safety requirements because the requirements of Japanese on safety are much higher than what we have internally. Third, is for replacement items because it is anyway part of normal CapEx. So normal CapEx is also part of this. For example, some sales are 30 years old and will be replacing some sales now. So that is also part of this. Fourth will be for quality enhancement -- for improvement on quality, some R&D equipment will be required and maybe some process equipment will be required for improving the quality. And there will be certain investments which are good in itself for just their own share payback.

Sir, did you say in this particular...

Sir, sorry to interrupt you...

I couldn't hear you, sorry.

I was asking in addition to exports, do we also focus on import substitution out here with this particular CapEx...

As I said earlier, we will be focusing on import substitution for Maruti, for Hyundai as well as for Toyota in India.

Okay. And my question is given the CapEx for 9 months what we've incurred up till now and what you planned for balanced 3 months for this current year?

9 months, it has been miniscule. But again, Singla, can you answer that question?

Sorry, can you come again, that one?

In 9 months, so far, what is the CapEx -- what has been the CapEx?

In current 9 months, there is very nominal CapEx of maybe INR 1 crores [indiscernible].

Okay. Okay. Right, sir. And what is about the repayment schedules we have? Are we planning to pay -- because you have good cash flow in current fiscal year, do we have any...

We plan to prepay. We already prepaid earlier in this calendar year, I don't remember in this financial year or the previous one. We did prepay some loans.

Last year, quarter 4, sir.

In February. Yes, so in Q4 last year. In this Q4 also, we'll be prepaying some loans.

Yes.

Any quantum value prediction, sir?

INR 15 crores to INR 20 crores or something like that, a rough ballpark.

[Operator Instructions] The next question is from the line of [ Anil Kumar Sharma ], an individual investor.

First of all, congrats, heartiest congrats.

Thank you so much.

Sir, I want to know about the -- main thing is raw material. On raw material front, how much current is going on? And whether the prices of manganese, chrome and electrodes have risen up to what level and what is -- will be impact?

So raw materials are rising across the board. So various raw materials have risen between INR 10,000 to INR 12,000 a tonne. Graphite electrodes have risen by about INR 20, INR 25 a kilo, but we covered that well in advance. Even refractories have gone up. And all the alloying elements have also gone up about 20%, 25%. Singla, please correct me if I'm wrong.

Sir, it's about 10% to 12%.

10% to 20%, sorry, my apologies.

Right. So sir, what will be the impact -- what do you think this current quarter and in future, how much impact on the -- our realizations...

It is very difficult to say that because, as I said earlier, we have -- we, in advance, bought the inventories. We've covered some raw materials. So for us, the -- and the price rise also has been not on 1 day spent up like that. So it has been going up and we're just covering at various price levels. So for us, the impact is not -- because if you just add, say, INR 12,000 into 45,000, it gives about INR 45 crores or the EBITDA is beyond INR 50 crores, if you take the yields into account. But for us, these are not going to be that.

Right. Next year, sir, how much -- I know it is difficult, but next year our target will be above INR 12,000 at least -- INR 1,200 crores?

I'm sorry, we don't look at sales targets. But in terms of volume, we will be targeting beyond 150,000 tonnes.

150,000 tonnes. Right sir.

The sales amount will depend on the price increase that we get in January and then again in April.

Right. So we are never saying that -- you are hopeful that we will get the revised price?

Oh, yes. Because very clearly -- and let me give you something that already happened in the public domains. Mahindra & Mahindra has given, to my understanding, INR 7,500 increase for flat steel. That is my understanding. But for our products, they have not yet given. Though we don't deal much with Mahindra, but some of our customers, their orders are linked to Mahindra pricing. So -- but the flat steel have risen -- another OEM has also given INR 7,500. So INR 7,500 for flat steel, 2 OEMs have given. For 14 quality steel, the negotiations are going on this now.

The next question is from the line of Anupam Gupta from India Infoline.

Congrats for the good set of numbers. Just 1 query I had. On the margin guidance, you said and you have upped the margin guidance in the coming quarter. So wanted to understand with respect to what we have seen is, whenever raw material prices are on the uptrend, your margins generally don't expand. And you also said that you had basically built up inventories of various raw materials, electrodes and others as well. So why should -- so you said that fourth quarter margins should be below third quarter, but what is basically underpinning the expansion in the margin guidance for you in this scenario.

No. We are not giving an expansion of margin guidance for fourth quarter. We are saying for the full year as a whole our guidance now is INR 5,000 to INR 7,000 range, but not for fourth quarter. We are not giving any guidance for fourth quarter, except that we will make a net profit and the fact that volume will be strong. So volume-wise, we are expecting similar to third quarter. We don't make an exact prediction, whether it will be a little bit higher, a little bit lower, but we are running at full capacity. So it should be very near at third quarter level, a little bit lower or similar ballpark. And the margin depends on the price increase. So just to give an example, if you get a full INR 7,500 price increase, which is what they have given for flat, I'm not saying that's going to happen. But if that happens, then please multiply 45,000 or, let's say, 40,000 tonnes into INR 7,500. So that will give 1 number. That is one extreme. And if you get 0, then we have anyway said we are making a profit. And depending on the increase whether I get INR 4,000, INR 5,000, INR 6,000, these numbers will be in between. So at this point in time, it is very difficult to give any guidance for fourth quarter.

Understand. So let's say, if I were to assume that -- if I were to say that the raw material and the steel price -- if steel prices everything remains same here, on a sustainable basis, what is...

No, no. On a sustainable basis, we are saying that between INR 5,000 to INR 7,000 a tonne is going to be our EBITDA margin.

Okay. So the question basically was...

We are not saying that third quarter where we got INR 9,300 is the sustainable number. We were lucky. And we are also saying that in a couple of months -- in a couple of years, we'll be revising our guidance, of course.

Yes, right. So a couple of years, basically when Aichi processes come in, that obviously will aid your margin?

Yes. Processes have come in and some costs have already started coming because of Aichi. But business, see, are 3, 4 parts of Aichi. One is safety area. A lot of work has already happened on safety. Our accident levels have come down. Two, there is quality improvement. That work has already started, and some improvement is already happening. Third, cost reduction because of process improvement. That work has started. Some gains have already come in and more gains are coming in every quarter. And then the fourth is productivity and volume. So that is also happening. Then there is analysis of problems, breakdown analysis and so on, which will reduce our consumption of spare parts as well as improve uptime and therefore, increase in production. And then once the volume really comes in because once they are satisfied with the quality level, since their own group companies are consuming, so they don't have to put in a marketing effort. It is Aichi's group companies, which will be consuming our steel. So marketing effort is not required. Once we reach the quality level that Aichi is satisfied with, then the volume will come.

Right. So that should help, sir. Just 1 request, in that if you -- so whatever improvement in metrics you mentioned, if you can highlight that in the presentation, that would, let's say, some statistics for that, that would help to build that confidence in terms of how your margins tend to proceed or all other things.

Sure. And the other -- other metrics we are seeing is that on return on capital employed, EBITDA on capital employed, first target 16%, then 18%, then 20%. So within the next 5 years, we hope to touch 20% EBITDA on capital employed. So every year we'll be improving that metric. Earlier, we were not as focused on this metric because we were focusing on volume and profitability per tonne. Once we've reached full volume, then the focus is shifting to other metrics also. And third metric is going to start working on a major, will be return on net worth. That will be the third metric to start working on 2 years from now.

[Operator Instructions] The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

Given the volatility that you're seeing in analysts, like sales last year or in terms of margins this year, how do you view your financial profile, especially in borrowings? You have net debt of INR 250 crores. Would you look to bring that down over a period of time to provide stability in financial profile?

So we are not giving any guidance on debt equity, but we are saying that we will be below 1:1. And two, we -- our rating is AA. And we were at a negative outlook earlier, which has been revised upward by CRISIL to being stable. And we are going to retain -- we're going to work to retain that rating. So we are not going to allow that rating to slip. Now within that rating parameters, we will always look at what should be the debt level, what should be the debt equity, what is the gross plan, those cost of debt and all those things, we'll see. So we are not giving -- we are not having any plans to further reduce debt. However, in the short term, as we keep reducing our net current assets, the debt will fall in the short term. So it is not -- then our cost of borrowing just now is 4.5% on CP. So it does not make sense to reduce that and increase your component of equity, so -- as long as we maintain our rating. So rating is going to be AA. We will not -- we don't aspire to be AA+, and we will not allow it to fall to AA-. We are very happy with AA rating.

The next question is from the line of Rohit Ohri from Progressive Shares.

Good to hear that Soumya has joined the call, and you have a vision of ROC 20% for the next 5 years. Sir, I had 2 questions. With this capacity augmentation which might happen in next 5 years or so, and we are targeting 3,000 -- 300,000 metric tons and the Japanese would be focusing on hybrids or maybe the electric vehicles. So do you think that the management needs to chalk out a plan for the dividend distribution policy as such?

So Rohit, I think that's a very valid point, and we were waiting for performance to come in. In fact, if you recall -- if you've been following the company from bit earlier, we were expecting maybe not this kind of performance but a much better performance in 2018-'19. We were expecting a record performance in 2018-'19. And unfortunately, when the auto market just crashed, then so we were first absolutely embarrassed, like our entire estimate had gone wrong. And then, of course -- so '19-'20 was a washout again before auto markets remain crashed. So we are happy that we have come back to -- because when we did our QIC, at that time we had given a reasonably rosy performance. And we have finally come to that level. So we actually are behind what we had said. But as a risk factor, we've always said that we are linked to the auto industry. If the auto industry does badly, there's no way we can do well at that point in time. However, with the Aichi partnership and Aichi sourcing from us, now we will be relatively insulated from the domestic market disputes in the coming couple of years. Now as regards dividend, I think it's a very valid question. So once we are reaching these kind of profitability level, I think dividend distribution should be a point of consideration by the Board. And so -- but this is a decision of the Board, I can't comment. Other than the fact that as a management, we are now satisfied that we are at a level that we can start recommending to the Board that the Board should start considering dividend. But this is not my purview. This is a purview of the Board.

That's good to hear. Some positive light over there. Sir, one request as to what would be the promoter shareholding because this was not updated to the exchanges. So I just was wondering what is the promoter shareholding for the quarter end?

It will be roughly 57% or...

59-point-something, sir.

59%.

It was 59.34% last quarter, and there has been some nibbling by the promoters.

That's miniscule. I'm buying in my personal account. So we are one of the few companies where promoters may not have so much of money. The companies have a lot of money. So I'm buying on my personal account and -- so small quantities only at a time.

Okay. So that helps a lot. Sir, last question. With this vision and target of the exports which are currently around 3%, in next 5 years is it quite ambitious to say that you will try to reach 20% exports after the expansion happens and Aichi and everything falls in good for us with the auto segments and the auto...

No, it is not ambitious. In fact, it's -- on the other hand, the requirement is much more than this. So the biggest problem that Aichi has is we don’t have enough capacity. So you see, the critical part was for them was to find a partner in India, which they found in us. The second part was to find whether they could trust the partner. One is trusting in discussions, which they had. Obviously, that's why they came in. The second was seeing the working of the company after coming in and seeing that they trust the company that they are having confidence in that. The third part was developing the production capabilities and smooth working in production, which has been achieved. The fourth part is there is a safety -- okay, that's up earlier. There is safety in line, so safety has improved. The next part is there is quality. Once quality levels come, the demand from them is way higher than what we have seen. The 50,000 to 70,000 tonnes that we're talking about is not ambitious. It is bare minimum.

Okay. So will the Japanese psychology would be to...

Sorry, sorry, sorry, if I may add to that, if Aichi was not our partner, then, yes, your point is right, from 3% to 20% is crazy.

Okay. Okay. So with the mindset of the Japanese, will they be first looking at capability building? Or will they be first looking at capacity building?

Oh, yes. So all that we've been doing since last year is this capability building. Yes. So that comes first because they like smooth working. They like smooth working. What is the plan and what have you achieved. And there any deviations where people -- our people have to answer a lot. Any accident that happens, near miss, there's a lot of discussion on near miss, where nothing happened, the accident could have happened. There are serious discussion on that. A small scratch happens on somebody's fingers, that discussions happen a lot. So all that part is part of the detailed working. And our people are running a lot with the Japanese.

The next question is from the line of [ S. Mitra ], an individual investor.

My question is that -- just want to understand your dynamics -- raw material dynamics, like we use both imported scrap and DRI. So the mix -- can you disclose the mix between these 2?

So we use DRI, we use imported scrap, we use a lot of domestic scrap also, local scrap. And we don't share our mix.

Okay. So let me just frame it in a different way. Like in way back in 2012 when it was compulsory to share, the imported component of raw material was around 35% and domestic was roughly 65%.

Yes. The import component has come down.

So it was on the same level?

No, no. The import component has come down. We are relying far more on domestic local scrap, which is why it gives us more stability in terms of -- the quality is better. And two, we are getting daily raw material coming in, where we can work with lower inventory. And three, at times the cost -- I think the cost was also lower using local scrap.

Okay. Okay. So with this Aichi thing, are you -- can I do some more improvement on this raw material mix? Can I expect something on that front?

See, they work in a holistic comprehensive manner. So their improvement happens on all aspects. So it's not that there'll be improvement only in this area. They work comprehensively. I mean I have always been an admirer of the Japanese. But this time -- and Vardhman Group has been working closely with the Japanese since decade. But this time, the personal experience I'm getting of directly handling them, myself, has been phenomenal. I mean my respect and regard for them as a country and as people has gone up several notches after my own personal relationship with them. And let me add one more thing. It is difficult to work with the Japanese. They're not easy to work with. So if you have the skill to work with them, it's a huge competitive advantage.

[Operator Instructions] The next question is from [ Aniket ], an individual investor.

First of all, congratulations for the good set of numbers, sir.

Thank you so much.

Yes. I have a couple of questions. My first question is actually, as I can see, the interest cost is lower. So can you throw some light on it?

The interest cost is lower as our borrowings keep coming down and the cost of borrowing has also dropped. As interest rates have fallen in the market, so the interest cost is lower. And last year, we had a huge inventory buildup because we had a shutdown. So interest cost is higher on working capital account because of shutdown also.

Okay. Okay. Okay. My second question is, sir, where do we see our...

Sorry for the interruption. Singla, you have to add anything to this?

No, no, you're right, sir. Nothing to add.

Thank you. Yes, go ahead.

Yes. Where do you see our EBITDA per tonne ending by this year?

We don't make that quote. As I said fourth quarter, we have no idea of making a forecast as now. The profit will be in the range of INR 0 to INR 45 crores -- sorry INR 0 to INR 30 crores -- INR 35 crores. That's the range. INR 0 to INR 35 crores.

It's at PBT level, sir.

At PBT level, yes.

Okay. Okay. Okay, sir. Can you throw some light on the current working capital cycle? And how are our inventory debtors and the creditor days trending?

So inventory finished goods is normally about 20 to 25 days, normally. It will go up a bit because we have, again, a shutdown coming. We had built inventory in the middle, which is required for our rolling mill. Then you have raw material inventory. The raw material inventory is again about 15 to 20 days. 20 days, that's it?

Yes, it ranges between 15 to 20 days.

And outstanding varies, is normally around 60 days.

Yes, around 60 days, yes, sir.

Yes, yes. It will vary -- because some customers are longer credit terms, some customers are shorter and it varies in between that mix, approximately that.

Okay. Okay. Okay. And once exports kick-in, how do we see the working capital cycle moving?

We haven't made that forecast as now, but we expect working capital to be much tighter managed than what has been in the past.

Okay. Okay. Sir, last question. Have you done any traveling, had consequent meetings with Aichi support to develop our clientele in other regions?

No, no, no. Because of COVID, no travel has happened.

Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Mr. Sachit Jain for closing remarks.

Ladies and gentlemen, thank you very much, again, for being with us on this call. Your support and confidence gives us a sort of encouragement. And we are sorry that we are 2 years behind in our performance. But finally, we are getting there. And with Aichi's partnership, we expect the medium-term future is going to be very strong. And the short-term future on our own theme, we should be doing okay. And beyond that, the partnership is going to make us much stronger. Having the world #1 in your business as your partner is tremendous thing. And not only being the world #1, the kind of people they are, the kind of openness, the kind of understanding we have, I'm very satisfied for the future. And we are looking for better financial performance from our accounts also to see that once all the foundations are in place, ultimately the business has to generate good returns, good free cash flows and as some of you raised the question, eventually rewards for the shareholders' dividends, all that should come in to make a holistic company, which serves all stakeholders. Thank you very much, and hope to see you again at the end of the financial year. Thank you.

Sir, you can also share about onetime incentives.

Oh, yes. Oh, yes. Okay. Yes. So sorry, thank you, Singla, for reminding me. In the third quarter results, our personnel costs are higher than normal because we gave a large onetime incentives to employees across the board because of the way they valiantly fought COVID and the way they were able to ramp up the production capacities and squeeze the requirement. Many companies faltered in the supply chain when the demand came up. Because our team did not worry about COVID, they worked hard, so we gave a onetime reward. We've also declared increments for the year. So as a steel company, I don't know how many other companies have given increments. And this onetime reward, of course, has been given to employees across the board, including contracted workers also. Yes, thank you, everybody.

Thank you very much. On behalf of IIFL Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.