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

Ladies and gentlemen, good day, and welcome to the Vardhman Special Steels Limited Q4 FY '21 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Urvil Bhatt from IIFL Securities Limited. Thank you, and over to you, sir.

Thanks, Steven. Good afternoon, everyone. On behalf of IIFL Securities Limited, I welcome you all to Vardhman Special Steels Limited 4Q FY '21 Results Conference Call. From the management side, we have Mr. Sachit Jain, Vice Chairman and Managing Director, along with his team. Over to you, Sachit, for your opening remarks.

Good afternoon, everybody, and thank you for joining our call. Along with me are Sanjeev Singla, our CFO; Sonam, our Company Secretary; Mukesh Srivastav, our Chief Operating Officer; as well as our Investor Relations firm, Bridge Capital with Savli and her team; and also my daughter, Soumya, is on the call. She is getting inducted gradually into the business. A couple of things about last year. Last year has been a very challenging year, as you all know. When we began this year, it was gloom all through. There were -- with the lockdown happened, we didn't know when things would restart. There was panic. We used that opportunity, of course, to build our teams much stronger together. We -- a couple of decisions we have taken right in the beginning. One, we said there'll be no layoffs. Two, we said we will protect the salaries of all workers, officers, management. And in addition, we also said we'll protect the wages of all contractor workers. I think the last part, protecting contractor workers, we would be one of the few companies in the country that did that. Even large MNCs and very professional companies would have let go of contractor workers, but we made sure that all contractor workers were paid in full. So we looked after our people. And we also used the lockdown time to communicate with people, tell them not to panic. Please imagine somebody sitting in a 1-room flat or a 2-room flat or a 3-room flat, a small -- I mean, between 1-room to 3-room flat who cannot move out of the house and who is seeing television and newspapers talking about panic everywhere, just sitting at home can go mad. Fortunately, our entire management team -- Mukesh Srivastav, my COO, and he played the lead role out there. But all of us were communicating every day through the length and breadth of our organization not to panic. We are there with you. So those are the kind of things we did. Our team became much stronger. And by the time the lockdown lifted and the demand started picking up, a little bit coming in, our team was highly motivated because they saw the contrast of how our organization looked after its people compared to other organizations. So the sense of belongingness to the organization and motivation went high. And overall, they've contributed a lot to the organization, building up capacity because, as you all recall, demand suddenly shot up. And for many companies, supply chain bottlenecks came in because they could not meet the supply. Luckily for us, because our entire team was together united with the organization, we could meet all the requirements as and when they came. In July, we decided also that if the company moves into profit before -- profit zone, we will even declare increments for the year, and we declared increments for all our staff and offices. In addition, we also gave additional onetime incentives down the line, from senior management down to all our workers, even contractor workers. So that was a onetime exceptional item which we charged in the third quarter. Fourth quarter has been even better performance than what we anticipated because we got a good price increase from January. As you know, we have 6-monthly price settlements with the auto companies. So since we've already got the October settlement, our next price settlement was due only in April. And when the raw material prices shot up abnormally, it became too much for us to handle and we had to go back to the OEMs and ask for interim increase. Luckily, we were able to get those interim increases. We got increase of INR 6,200 from most of the OEMs. And so because of that, we were able to report a better-than-expected fourth quarter. The other highlight of the year has been that, if you would recall a few years ago I had said that we'll be targeting to reach 18% EBITDA on capital employed as our target. I'm happy to report for last year we managed 19.55%. So we are now getting ready to say that next couple of years we will stay north of 20% because the next question will come, is the performance sustainable. So very clearly, we target to remain above 20% EBITDA on capital employed, and we target to reach 25% EBITDA on capital employed by the year '24-'25. This is, of course, after our environment approval comes, and we're able to expand our capacity; and number two, with Aichi, our partners, filling up the capacity with their requirements. The second area I want to share with you is in the earlier calls, we've said we had upped the target for EBITDA per tonne from INR 4,500 to INR 6,000, our earlier target. We had moved it to INR 5,000 to INR 7,000. I'm happy to say that we are now upping that range again to INR 6,000 to INR 8,000 a tonne. Once our environment approval comes in and we start filling up our capacity, this range of INR 6,000 to INR 8,000 will move to INR 7,000 to INR 9,000. And once our -- again, Aichi capacity starts filling with Aichi products, which would take by '24-'25, we will be targeting about INR 10,000 -- INR 9,000 to INR 10,000 EBITDA per tonne. So as I've said earlier that we will be upping our targets every -- as we go along. I'm happy to note that after close of the previous year, we are in this position to say these would be our targets. The next target that I -- you'll be happy to note in this year's balance sheet, our net debt equity has come down to 0.3:1. We've also now almost finalized our investment plan along with Aichi. Again, this -- some part of this investment plan is subject to the environmental approval coming in. If that happens, which again, as I said, we hope to get this later this year, we expect to invest about INR 250 crores to INR 270 crores in the next 5 years. And in addition to this investment plan, we've also targeted that in the next 5 to 6 years, with the current capacity of this current plant and the current operations, we expect to be close to a zero-debt company in the next 5 to 6 years. Of course, in the interim, from now to then, if plans for an acquisition or an expansion or a new project comes in, situation could be different. But on the current foreseeable plans, as firm plans, we expect to be a zero-debt company, net -- near a zero-debt company in the next 5 to 6 years. Overall, for the year, INR 44 crore net profit has been the highest profit we've ever got. Also INR 116 crore EBITDA is the highest EBITDA that we got. I was also very happy to see that for the year, our volumes have been 9.5% higher than previous year. So this is something, despite the first quarter being a washout, in the next 3 quarters we've been able to cover up that. So overall, I would say I'm reasonably satisfied with the performance. And lastly, we have been able to give our maiden dividend at 15%, INR 1.50 a share. This INR 1.50 per share was just to start with. In the next 1 year or 2, we will come out with a comprehensive stated dividend payout policy. So we have not -- just to start with, we've given figure but I presume that what I would like to see in the next couple of years, that our dividend payout policy, as we stated, should be higher than this as a percentage of payout. This year, that 15% also works out to near 15% as payout, that is just by chance. I would expect, in the next couple of years, of course, subject to Board approval, we would like to -- as management, we'd like to propose to the Board that at least 20% to 25% should be the payout formula moving -- as we move along. These are some of the highlights of the previous year. And last, but not the least, CRISIL has upped our outlook from AA Negative outlook to AA Stable outlook. So that means that our ability to raise capital at better rates than before goes up. We've been able to raise rates at good rates from the commercial paper market. And this year, probably, I think we'll have to also raise NCDs as part of the government new norms. So we'll probably be coming in for an NCD issue sometime in the current financial year. The next question many people would have would be, is the fourth quarter performance sustainable. Very clearly, a INR 54 crore EBITDA that we have got in the fourth quarter is beyond our stated range INR 6,000 or INR 8,000 a tonne. It's beyond a range of INR 7,000 to INR 9,000 a tonne that we expect to get after the environmental approval, and it's beyond even the INR 10,000 per tonne that we expect to get with Aichi business coming in. So please do not multiply that by 4 and put that as an expectation for the next year. However, for next year also, we do expect our overall EBITDA and volumes to be better than 2021. Of course, with the COVID situation, suddenly which came in and hit us all by surprise, April was a very good month; May, our production and sales are going to be down a bit because of these lockdowns and shutdowns of plants by Maruti, Hero, Hyundai. So basically most of all the OEMs have taken shutdowns, long shutdowns. So clearly, demand is a little lower than what we had estimated. Secondly, our production is also a little lower. As some of you may know, that there is a massive shortage -- oxygen shortage everywhere. But as some of you would know that in Ludhiana, we have diverted oxygen from our production, and we have been sending almost 2,000 cylinders of oxygen per day into Ludhiana and some of the surrounding districts of Ludhiana. I have stated publicly that we will not allow any oxygen shortage in the city of Ludhiana. There were times we were supplying almost 60% of the oxygen requirement of Ludhiana. And this is our commitment to the city and to the state that we will continue to serve. So that will take higher priority than production as long as this current pandemic is going on. So because of oxygen shortage, availability for production, some production has gone down. Plus we've also shifted a bit some of our raw material to those raw materials that consume less oxygen. So that has also changed our production a bit. So the production goes down because of both these reasons. Moving ahead. In this year, we have a planned shutdown of about 15 days, which was earlier planned for August. But as some of the suppliers started telling us that there would be delays because of COVID problems, lockdowns, shutdowns and so on, so we have to come back and decide a new date of the shutdown. So even if there is a slowdown from the market, we will continue to run our production full steam to build up stocks to be able to serve our customers at the end -- at this shutdown. As regards to Aichi, you will again be happy to note that we have sent out our first samples to our customers, Aichi, for Aichi operations in Thailand and Aichi operations in the Philippines and to the head office in Japan. In addition to Aichi's own business, own requirements, many other Japanese companies, as they have come to know about Aichi's relationship with Vardhman, so more and more Japanese companies are approaching Aichi to source material from us for Southeast Asia. So as those materials also sampling requirements are coming in, so I would say 2020 -- '21, '22 is a year of samples; '22, '23 will be the year of trial orders and of course volumes will start coming in for exports; and really '23, '24 is the year where we will start seeing the potential of Aichi and the Japanese requirements from Southeast Asia as well as import substitutions within the country, which are coming in from Japan. So these are the overall highlights -- I'm sorry, one last figure also. We've worked a lot on working capital. So we have been able to maintain our total capital employed -- net capital employed -- when I say net, I remove the INR 50 crore FD that is there, which is meant for CapEx, we've been able to maintain that net capital employed below INR 600 crores. And despite price increases, we expect even next year we will target to keep it around INR 600 crores net capital employed. In the -- as we start this financial year, the raw materials have continued to rise exponentially. And so we are negotiating with the OEMs for the April increase. Those are still under discussions. One OEM has already settled at a reasonable price for us. We are happy with that settlement. The other OEMs, since they were shut down, the plants were shut down, I think the serious discussions really start next week. So over the next week to 2 weeks, we hope to finalize the price settlements with the other OEMs. So based on that, first quarter of this year, though not comparable to last quarter of the previous year, but the first quarter of this year should also be a reasonably good quarter. And this time, we've made another change. We are negotiating with the OEMs only for 3 months because of this unprecedented volatility in markets. So this current discussion with OEMs is only for the first quarter, April to June. Normally, it is for 6 months. And for July onwards, we'll be discussing with the OEMs for another change. And in all probabilities, because of the raw material situation, we'll be asking for an increase. So these are -- this is what I have as part of my opening remarks and comments. And after this, we'll be open for Q&A. Thank you very much, ladies and gentleman.

[Operator Instructions] The first question is from the line of Shalini Vasanta from DSP Mutual Fund.

This is Vivek Ramakrishnan. Congratulations on the performance and really heartening to know about the contractor and the oxygen, so double congratulations from us. Sir, what I wanted to know is you were talking about EBITDA going up. How does it happen? Is it because you have products which are less in competition, the value-add is so much? And in which case, what is the nature of the value-add? And second question is, you had also mentioned that you're going to look at exports from '23-'24 onwards is when it will pick up. Is there a target for exports as a percentage of sales?

Sure. So the EBITDA per tonne pricing, there are primarily 2 components and both are cost components as of now, cost-related components. So one area of cost is that as volumes go to full volume, fixed cost gets spread over a bigger volume. Also, some of the variable costs, like power, are really -- there's an element of it which is variable and an element of power which is fixed. Similarly, oil, which is a variable cost, which is used for heating. There are wastages there and losses out there. As volumes increase and utilization increases, so the consumption per tonne goes down. Manpower, which is a variable cost really, but at full capacity, those manpower increase is minimal only in inspection area and loading, unloading. So only those costs go up, every other cost remains same. So the cost per tonne goes down because we just increased volume. That's one element of cost going down. The second element of costs going down is the last 1.5 years, we worked a lot on our costs, starting from raw material, by changing our raw material mix that we did. So that is one element of cost reduction. The second element of cost reduction is internal cost reduction, where our people have worked hard. Aichi has given us a method called 3R: Reduce, Reuse and Recycle. Under this 3R, we have got more than 1,000 suggestions from our workers. And we used the lockdown period to get those suggestions, to put cross-structure team to work on the suggestions and the moment the plant opened up, we were working on those suggestions. So that is -- and suggestions have come from workers, officers, managers, everywhere. The whole culture of the organization is changing as we work with them. Some of the ideas -- one idea itself has saved us couple of crore rupees and some ideas we have saved only INR 10,000 or INR 15,000. So for us, each idea is important and that each worker participates in the idea generation. So this has changed the overall, again, as I said earlier, the culture of the organization. We haven't reached the Japanese culture; long way to go. But we have come a long way from where we were. So I would say -- and this is what I keep telling my Japanese partners also: Vardhman Special Steel will not be an Indian company, will not be a Japanese company. It will be Indo-Japanese company. So the culture will hopefully draw in the best of the Indian culture and draw in the best of the Japanese culture. That is what we aspire to be. I'm not saying we've succeeded doing that, but that is what we aspire to be. So on this front, this is the reason for the margin, where we're seeing EBITDA per tonne going up. So it has got nothing to do with product mix as of now. However, as Aichi business comes in, that product mix is clearly a superior product mix. So those when they start kicking in from '24 -- '23-'24, '24-'25, that is when I said that the EBITDA per tonne will actually go up because of product mix. And our target of exports at that time is about 20% to 25%. Currently, our export percentage is about -- is less than 5%. So almost the entire increase in capacity will basically go in for exports at superior products, where there's no competition, and superior margins.

Perfect, sir. Yes, very well. Sir, if I can just sneak in 1 more question? In terms of electricity costs, is there any way of hedging it by putting up your own solar capacities or...

No, no, no. We have -- this is an electric arc furnace where you cannot -- I mean the shocks are so high, you cannot have your own generation. And then to set up a separate plant to feed to the grid, then you get into the power business. We are clear we are in the steel business, we are not in the power business. And before we have the next question, there are a couple of other comments that I may bring in out here, which I missed in my opening remarks. In the results, you will see that we have taken some extraordinary write-downs and write-offs also. So as you all are aware that we are working to get our environmental approval for expansion. In that environmental approval, there is 1 element that we are required to have 33% of our area as green area. Now we did not have 33% within the premises of the organization. So we have demolished a warehouse, so we've written off a little over INR 2 crores on that warehouse. There was some capital work in progress that -- we have dropped that project; we've written off that. Plus there are certain other businesses already done, so this is written off in the books. And second, there are 2 -- there are 2 other warehouses that we intend to demolish once we get the approval. So they are still there, existing. But if we get the approval, we'll demolish them. So since -- as Vardhman Special Steels organization has decided there's no need for those buildings, we -- and we can't charge them off because those buildings are existing, we have used the provision of accelerated depreciation to charge-off -- to reduce the value of those buildings to 0. Roughly INR 3.5 roughly -- INR 3.43 crores, to be exact, is the amount of accelerated depreciation that we've written off some buildings. So these are little extraordinary charges of INR 6.78 crores that we have taken in this quarter. Also, there were -- as you are aware, last year, we've put in -- we've changed our furnace. So there were spare parts of the old furnace. There are other spare parts lying, some changes we had made in our reheating furnace to get in better fuel economy. So there was a recuperator and those kind of small, small items, several small, small items, roughly 1.4 crores of that, has also been charged off in this quarter. This is, again, a normal course of business, when we modernize, some spare parts, et cetera become obsolete and so have to be written off. So that has also been done in this quarter. I just thought I should have clarified this in my opening remarks. And before some questions come on that, better clarify that. Yes. I'm ready for the next question, please.

The next question is from the line of Vipul Sanghvi from Systematix Shares.

Congrats, Sachit and team for a very strong performance, the maiden dividend and really heartening to know about the oxygen initiative of the company. My questions, one is on the derisking initiatives that you talked about in the presentation. If you can elaborate a bit which new industry application is there on the drawing board and which new geographies that we will be targeting for the same? And second question. Sachit, can you help us with some guidance as far as the volume this year is concerned, FY '22, that would be really helpful? That's all.

Yes. So as far as derisking is concerned, there are 2 kinds of derisking which can happen. One is you change your product portfolio, move into nonautomotive steel. This was on the agenda a few years ago. We were looking for opportunities in those areas. However, since our Aichi partnership has finalized, we have dropped those plans as already -- I have shared this earlier in earlier conference calls, and our annual report also I have written that. So that derisking is not on the cards. The other derisking is what I answered in my first question is we move to a different geography. Southeast Asia, we are present, but in a minor way, but really not as a major supplier part of a global supply chain of a global auto major. So Vardhman Special Steel is the only alloy steel company in the country that has an opportunity to become a regular partner of the global supply chain, of an auto major like Toyota. So this is going to be the huge risk mitigation for us. And as I said earlier, we intend to have 25% -- roughly 20% to 25% of our volume in exports by the year '24-'25. So that is how we'll be mitigating the risk. And the other part of mitigation is, if something happens to our plant, you suffer production outages, so as Aichi and Vardhman Special Steel have promised to each other, we will support each other in case there are production outages because of accident or those kind of things. So one big risk for us is, we are a single plant location. If something happens to our plant for an extended period, our customers will suffer. Thanks to Aichi support, we will have alternate production available, if the customers are willing to accept that. So this is the other risk mitigation that we're going to have.

All right. Any guidance on the volume, Sachit, for FY '22?

Yes. So we are expecting between 170,000 to 180,000 tonnes for this year. Again, as of now, we don't know how much of an impact COVID would have. So -- but at this point, we believe that the COVID impact will not be too much. Like last year, we will lose a few months of demand, but after that demand would bounce back sharply. So as of now, we are expecting 170,000 to 180,000 tonnes of sales for this financial year. However, we will know better. And if there's any change in the next conference call, after first quarter, we'll come up with an update. And as I shared earlier, April had already started on a very strong note. We were, in fact, fearing we're going to run into capacity problems. Because of this lockdown and COVID situation, we'll have time to build up our -- rebuild our inventories that we are running woefully short of.

The next question is from the line of Rithvik from One-Up Financial.

Sir, I have a couple of questions. Firstly, can you quantify the per tonne basis of realization gain that you would have in FY '21? Because of lower inventory and higher price hike from the OEMs, you would have inventory gains, right?

So '21 and -- no, inventory gains don't come up in terms of sales realization. So sales realization of '21 -- '20-'21 and '19-'20, it's marginally higher. So I think roughly INR 900 a tonne higher, roughly, around INR 900 a tonne higher. So on INR 61,000, INR 900, 1.6%. That's normal fluctuation.

Got it. Okay. Okay. So that won't be more than like INR 1.5 crores for the full year? Because if we assume INR 1,000 and 1.5 lakh tonnes for the year which we did as volumes, so that will be about 15 -- sorry, INR 1.5 crores.

INR 15 crores.

INR 15 crores.

Okay 15 -- sorry, yes, INR 15 crores. Yes. Okay. Okay. And sir, you mentioned that we're having a lot of cost savings from this -- from all the benefits that we've realized from Aichi and even internally that we have done. So going forward, this INR 6,000 to INR 8,000 per tonne without any product mix change, you think there can be any improvement from here onwards or on cost savings we have plucked all the low-hanging fruits and now it will be over to the product profile changing and then going gradually towards INR 9,000 to INR 10,000 per tonne over the next 2, 3 years? Is that is the right way to look at it?

In my opening remarks, I already said that we will be upping this from INR 6,000 to INR 8,000 to next range will be INR 7,000 to INR 9,000. Yes, so we will be upping this. Maybe within a year's time or so, we'll be upping this range. Maybe 1 year, maybe 2 years. As of now, because of this massive fluctuation, it's very difficult to -- even the INR 6,000 to INR 8,000 that I've said is -- my CFO is not very happy when I shared these figures, but -- he's staring at me even now, but the INR 6,000 to INR 8,000 we expect that once this extreme volatility that is currently ongoing goes down, we should be able to move to INR 7,000 to INR 9,000. And beyond that, the product mix impact will fit in after that.

Okay. Sure. Okay. And lastly on the CapEx...

There is more scope of cost reduction. And really speaking, Aichi's help in cost reduction is still -- we've just scratched the surface. There is a lot more work that we intend to do with them to reduce cost.

Sure. Okay. And lastly, on the CapEx, you mentioned INR 250 crores to INR 275 crores once we get the environmental clearance. So would you be in a position to give us what kind of additional capacity would come up from this INR 250 crores to INR 275 crores? And how do we plan to fund it? And what would be the timeline for the same? Because we have healthy internal accruals, so...

We are targeting in the next 5 -- 4 to 5 years, this CapEx to be done. Which is -- this includes our normal replacement CapEx. It includes investment for environment purposes because a lot of investment will be done for the environment clearance. This is a big headache for us because Ludhiana comes under critically polluted zone. And if Vardhman Special Steel gets the approval for environment clearance, it'll be the first project to get the environment clearance from the center in the last several years in Ludhiana. So this is something unique that we're going to get. But there is a lot of CapEx which goes in for environment clearance. There is also investment going for safety. There's investment going in for quality purposes, because to reach that kind of product mix that we're looking at and for exports, we have to invest in another nondestructive testing line, so there's a big investment going in for that. So -- but on the whole with this, we expect to reach a capacity almost 40% higher. So from 180,000 tonnes of current capacity, we expect to reach 250,000 tonnes of rolled production.

Okay. Sure. And it's been almost a year, but we've had the pandemic in the meanwhile, and we've not got our environment clearance yet, so is there any bottleneck right now that we are not getting the environmental clearance from our end or is it from the other side -- from the regulator side?

No. So see, those are -- we've already applied to them. They have come up with -- we've had 1 hearing with the committee. So they have pointed out some shortcomings in our proposal. We have addressed those shortcomings. So I think we have a strong proposal now. But again, it depends on the approval that we get from this committee.

Okay. Okay. Sure. And how long -- assuming that we get it, say, on the 30th of June, the approval, how long would it take for us to ramp up...

It is difficult to say, because it's a long process. Once this committee approves -- this committee is the main bottleneck. But after that, there are -- if this -- this is the expert committee. If that -- this committee approves, then the probability of getting approval is almost 100%. So -- but I should -- the whole approval should take 3 to 4 months coming in from the Ministry of Environment. Once that approval comes, I think, within a year's time, we'll be ready to at least build up -- start building up our capacity. Yes, we'll be clearly going to up our target for next year. As of now, without the approval, 180,000 tonnes is our capacity limit. So if this approval comes in next year, I think market demand being there, we should be able to touch maybe 200,000 tonnes -- 190,000 to 200,000 tonnes. And then as the CapEx comes in, we'll be able to increase our capacity further.

Okay. And just, sir, taking just 1 last question on this CapEx. We have a healthy internal accrual more than INR 50 crores to INR 75 crores. If I assume INR 6,000 to INR 8,000 per tonne on our existing 180,000 tonnes, that would be a cash flow of more than INR 50 crores, INR 60 crores per annum. So would it be fair to assume that we would not require any external debt, a, and not require any external equity also for the next few years? Would that be a fair assessment?

If you look at purely balance sheet angle and our ability to fund this investment, you would be right. However, decision to raise capital are over and beyond the current requirement; there are also strategic reasons. For example, over the next few years, there could be an opportunity for Aichi, if they would like to increase their stake. If they wish to increase their stake, we as a company would welcome that. So if that happens, then as Vardhman Group has no plans to divest any stake, the only way for them to increase their stake would be for another preferential issue or something like that. So I'm answering your question in 2 ways. See, CapEx requirement and the balance sheet we would not need coming to the capital markets. And as I said that in our forecast, as of now, we are targeting in the next 5 to 6 years, without any equity infusion, we should be nearing net-zero debt -- net debt equity to 0, you've been hearing that. So very clearly, the balance sheet does not require any equity infusion. Excuse me, sorry, let me repeat that, with the current plan. We've already stated our desire that along with Aichi, over the next 10 years, we intend to reach 800,000 to 1 million tonnes of capacity. So very clearly, over the next few years there are plans to increase this capacity. So at what stage we decide to take the next step, those are things that we'll be discussing constantly with Aichi. It'll depend on how soon we are able to establish the quality for their requirements, how soon we are able to run those kind of products, and how soon we're able to gain the customer confidence of the Japanese customer in Southeast Asia. Once that happens, very clearly, we will face a capacity bottleneck again. We'll come under pressure to expand and at that stage, larger and larger proportion of our business will be moving to the superior product mix at a higher EBITDA per tonne. And at some stage, we'll also start making steel which are patented by Aichi. All that is planned over the next 8 to 10 years. At what stage those happen, at this point I can't say. This very clearly means that export as a proportion of production is going to increase further from the current levels.

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

Sachit, congratulation on good set of numbers and the initiative to supply oxygen.

Thank you.

Yes. Sir, I just wanted to know the few products you would like to develop with Aichi within the focus areas?

Dewang, your voice is a bit muffled.

Am I audible now, sir? I'm better?

Yes. Yes, that's better. Yes, please go ahead.

Okay, sir. Yes. Sir, can you throw some light on the products that you would like to be the focus area with the Aichi? Any specific product lines you'd like to focus on?

Yes. So one is, of course, the normal automotive products. So carbon steel that we produce in India for Indian customers will be carbon steel for Aichi requirements also. But the quality requirements that come in there are a much higher level. Second would be microalloyed steels. We are already producing microalloyed steels, but the proportion of microalloyed steel will increase. Then SCR steels, STN steels, [indiscernible] steels, which anyway we are producing, we'll be producing more of those. So it's not that there'll be very new products largely. But it will be -- the specifications are much tighter for the same products or similar products. And to get even a chance to approve this product, other suppliers don't even have a chance to approve these products because each approval costs $1 million, at least, for 1 component. So we are getting a chance only and only because Aichi is our partner. Otherwise, we would not get a chance. So point I'm making is the stickiness of this business is very, very high. And some of the new products we're making is, all the hybrid cars, as you are aware, that even Maruti's hybrid cars, they are going to be in a joint development with Toyota. Now Toyota's hybrid engines all have steels from Aichi. As I've seen those products which are going into -- go into hybrid cars. Then, EVs also. There are some special steels which go into EVs. We've already started supplying some steels to some of the leading EV manufacturers. Of course, we are not permitted to take their names, so we will not be taking their name, but some very well-known brands we are already supplying steel for EV. So later, if hydrogen cars become important, again, the advantage of having a partner like Aichi, which is the steel supplier for Toyota, so -- and Toyota is strong in the hydrogen cars. If hydrogen cars become the future in times to come, our partner already has the steels which are required. Those are all things that are just in the area of speculation. So largely, we should say, the product mix is similar to what we are doing. It's only that the quality specifications are much tighter. And the way some of the areas they look at quality is something no other Indian supplier or other Indian customer looks at. So those are what is going to take some time to develop and which gives us then the stability that no other supplier can knock us off and so stickiness of this business.

Right, sir. That was very helpful. My second question is regarding this negotiations. Now you all kind of shifted to 3 months' negotiation. So [ did you start there ] the negotiation that we do with the OEMs. So now we are having 3 months' negotiation at the moment scheduling. So it will be a longer-term 3 months or you will shift to 6 months when the situation stabilizes for the steel prices?

So if this kind of volatility that is rising -- I mean we have never before seen -- I mean, can you imagine, from October, we have had 1 price increase of INR 4,700; then in January we've got a price increase of INR 6,200. So that is INR 10,900, almost INR 11,000 price increase. And then we've asked for another INR 6,500 to INR 7,000 in price increase from now, from 1 April. This is crazy. So this is not normal business. Scrap is touching $515. This was $260 or $270 maybe a year ago, less than a year ago. So these are crazy pricing situation. Commodities are going through the roof. And it's a cost-based push. If you see HRC, hot-rolled coils, globally are much higher priced than the Indian prices. Secondly, China has eliminated export duties. So very clearly steel prices globally are on the rise. If HRC prices rise, the largest steel -- I mean Vardhman Special Steels doesn't do HRC, but the larger companies can make HRC as well as the commodity alloy steel. So they would divert capacity to HRC because some of them have a flexibility of moving the molten steel to either HRC or to long products. Then commodity long products have also risen in price. So they will rather make those commodity long products than produce alloy steel for the auto market. Then billet exports is also a big opportunity. So they are exporting -- the larger companies are exporting billets outside. So I see no reason for the prices to not increase. However, they have not increased, we can't say. So in the foreseeable future with this kind of volatility, I expect the auto companies will also want 3 months and we will also want 3 months. So I would say for the foreseeable future, we would stick to a 3-month negotiation.

Yes, sir. This is helpful. So are you targeting any gross margin or longer -- like say, near-term, you'd like to have this gross margin on a sustainable basis?

INR 6,000 to INR 8,000 EBITDA per tonne.

Right, right. I was talking about the gross margin...

Sorry, in the current situation, if the market demand is high, if we get higher than that, we will happily take it. We'll not [ limit ] to INR 8,000. But when I'm saying higher than that, I think this is not a sustainable number. We're getting it -- I mean, fourth quarter, we got INR 11,400. But to base your future models and forecast based on INR 11,000, then you will be valuing our company maybe at INR 3,000 crores, which may not be the current reality.

Yes, sir. Right, sir. Sir, any movement in the graphite electrode costing? Has it moved higher over the last couple of months? That's what we are hearing.

So graphite electrode has been rising continuously. So they were at INR 140 a kilo, currently INR 225 a kilo.

And what's the trend there? Still on the upper moving trend at the moment in the negotiations that you are seeing?

As of now because we wanted to buy more, they have halted supplies, so which clearly means that the prices seem to be on the rise. And the other thing is, of course, the demand has also come down. Because of oxygen shortage, many steel plants are closed. So there is the other factor. The demand is down. But again, as we believe this will be temporary. And again, you'll be happy to note in Punjab, government of Punjab has banned any steel company from production. Vardhman Special Steels is the only special steel company -- only steel company that has been permitted to run and this order has been signed by the Chief Minister.

That's very helpful, sir. And then last question, sir, this INR 260 crores to INR 270 crore CapEx that we are targeting, how much is for the volume part and how much is for margin expansion? Is there a breakup on that?

No, we are not booking up that way because the -- some part of it is for the extra volume, for the product mix that we are targeting, we need to invest for quality reasons. So really is it CapEx for expansion or is it CapEx for the product mix which will enable the expansion? [indiscernible] the 2. Environment clearance -- investment for environment clearance is required to get the approval. So is it for expansion or is it really for -- so currently, we are meeting the environment requirements.

Next question is from the line of Rohit Ohri from Progressive Shares.

Congrats for coming on the list of dividend-paying companies and hopefully this continues. So my question...

This is Vardhman Group. We take -- we are a cautious, conservative company as that is our parentage, which is cautious and conservative. So we take time to start. But once we start, very clearly dividend will be maintained or increased.

So that is good to understand that the growth engine of the company operations will continue. Sir, my question is related to the oxygen business that you have done. Can you just elaborate a bit on that? Is it that you were just filling in the empty cylinders and passing it through or were you making the entire cylinder as well?

So first of all, this is not an oxygen business. We are not in the oxygen business. We're in the steelmaking business. This is a service we are providing to society around us to save lives that we are filling cylinders as people -- as hospital send in empty cylinders. Frankly, if you ask me if oxygen was available to them, we would rather they buy oxygen from other sources, because please understand so many trucks coming in, coming from hospitals, coming with people coming in, all kind of drivers coming in, the helpers coming in and in that backbreaking work there is no possibility of wearing masks, they're coming from hospitals, so there is fear in our workers that this is corona -- this is coming from corona-tainted people, such people and so on. And yet the spirit of service is so high, our workers are working 15-16 hours a day because they are saying they are saving lives. And many workers, you'll be happy to note, are contributing the extra hours they're working out of that this is their Seva. They are not taking -- some of them are not taking overtime. And we are giving free oxygen to any individual who was coming to our gate with -- as long as he had a cylinder, he had a medical report. And we had a 2-member committee examining it, if we were convinced it was a genuine case, we were saying, okay, bring in the cylinder, we fill it for free. However, the government has banned this now. So now government of Punjab has banned this. So we are not allowed to fill oxygen for individuals.

Okay. Okay, sir. Knowing your nature a little bit, you must have done quite a lot of CSR activities and given for free to the government hospitals. My question is, were there any one-off that have come in this quarter ending March? Or should we be seeing a one-off which is having the earlier days for June?

I'm sorry I don't understand your question.

Sir, was there any one-off revenue generation that happened in quarter 4? Or is this absolutely CSR, free activity that you have done?

No, there is some revenue from this oxygen, but it is a very small part. Really, as I said, we are not in the oxygen business. I don't even count this as -- so it will not be reported separately or any such thing. It's a tiny part of the business.

Okay. Okay. Sir, last question is, looking at the commentary that you have given, which is quite optimistic and with a vision and plan with Aichi and the Japanese counterparts in future. So I'm just trying to be lucky over here, in the coming year, 2022, can we estimate growth of around 12% to 15% on the top line or try to reach the numbers of FY '19 along with improved EBITDA margins of maybe 8% or 10%?

So volume, we do expect from our current 150,000 tonnes we will touch around 170,000 to 180,000. So I would say, yes, about 10% to 15% volume increase can be expected. Also, because price is likely to go up, so there would be a kicker based on price also. So I would say 15% to 20% revenue increase is a possibility at this point as we see it now. Of course, forecasts say the commodity cycle is here to stay for some time. But if the revenues come down -- the prices come down, our prices also come down. So I only look at volume. So volume will be, yes, 10% to 15% growth in the coming year -- in this year can be seen. EBITDA margin as a percentage, I don't look at. I look at EBITDA per tonne, which we have said INR 6,000 to INR 8,000 per tonne is how you should look at our company. If it is higher than that, it is not -- it is abnormal profits. If it is lower than INR 6,000, it will be abnormal margins on the lower side also.

The next question is from the line of Parin Jhaveri from JNJ Holdings.

First of all, kudos to you for vowing to supply oxygen even with sacrifice of volumes. That's really, really appreciated.

Thank you. Thank you so much.

Sir, if you can broadly throw some light on say, 5, 10 years down the line, where we see maybe a hydrogen or maybe EV car coming in, where the use of aluminum will be a little higher, how is this specialty steel can be a component in the total weight of the car? I'm just trying to understand with changing dynamics over the next 5, 10 years, would this steel be of much more importance, relevant in terms of their weight, their -- and if you can just show some differentiation in pricing vis-à-vis this other materials, that would be really helpful?

So I don't see any competition at this point from aluminum and other metals because those parts will come in the surface and the body of the car. So not really in the engine components. Of course, engine components, et cetera, would come down. So clearly, in an EV, it is expected per vehicle, the alloy steel consumption would be lower. However, there are 2 other factors which say that for us -- which gives confidence to us to continue our expansion. One, if you look at just the Indian market, we will be a much bigger automobile market than what we are today. So even if -- and by -- as of now, the belief we have is there is no way that all cars will be EV. So there'll still be a very large chunk of either the combustion engine cars or the hybrid cars. We believe hybrid cars is the way to go forward. EV has huge other environmental consequences. The disposal of battery, for example. Where will you mine lithium from, for example. And today, Tesla and all these companies, they get huge subsidies from the government. So really at what price will it come? So those are all questions which I am not capable of answering. I'm just raising those questions. So really 10 years down the line, as you will see -- government of India at one time said, by 2030 all vehicles will be EVs. That was a statement made by the government of India about 3 years ago, 2 to 3 years ago. Those statements have stopped because they've also realized that this is not practical. So one part is that even if EVs start increasing and per car consumption will go down, there will still be a large volume for current business and overall number of volume of cars will be way higher than what it is today. So even as a proportion, I -- we believe as Vardhman Special Steels, that the volume required of alloy steel will be higher, significantly higher than what it is today, one. Two, we are talking of supplying to Southeast Asia. We are talking of replacing our Japanese partners in those markets. So there is a huge market growth for us for any hybrid cars as well as the combustion engine cars in Southeast Asia. And third, because of this threat of EVs, the chances of new people diving into this industry to get into -- if they see the good margin, if let us say, the margins what are of fourth quarter for us, if those kind of margins start coming in and become sustainable, I'm not saying they are sustainable, but I think supposedly if they become sustainable, those kind of numbers I have seen for 2, 3 years. The problem of alloy steel industry has been, we get 1 year or 2 years of good margin and new people starts jumping into this industry. Now because of the threat of EVs, the probability of new players coming into this industry goes down. I'm not saying it is 0 but it goes down. So because of all that -- and we see much stronger is because we have Aichi as our partners who are part of Toyota Group. So we are the only alloy steel company in the world, probably, to my knowledge at least, that has direct access to what a global auto company is thinking. I hope I've answered your question.

Yes, sir. Yes, sir.

We'll take the next question from the line of Krishnakumar, an individual investor.

Congratulations on a lot of social responsible activities that you've done and it's a very, very commendable performance during the quarter and the year. Sir, also in the presentation you've taken lot of pains to explain the growth strategies over the next 5 years. So could I ask you in terms of would M&A and acquisitions of some capacities which will fast-track your process also be on the cards? And any thoughts there, sir?

So is that KK who was in Sundaram earlier?

Yes, yes. Yes, sir.

Yes. So first of all, I'm at least satisfied that before you left Sundaram we made sure at least that -- I mean we don't make sure, but you didn't lose money on your investment. So that is something that I was always guilty about issuing capital at INR 140 and the share price was down below that. So at least I'm satisfied before you left Sundaram you made up the loss that you invested with us, trusted with us. M&A, unfortunately there are not too many targets available in the country because this is strictly a tool-based business. But if an opportunity comes, we could be open to it. But clearly, our first agenda is to get our environmental approval and get this expansion up and running. And as a management team, I would say that we are reasonably confident that we will get this approval. So it's not in a matter of speculation or if -- we're reasonably certainly we'll get it. So once we get this environmental approval, our first target will be to get this up and running fully and as fast as possible, one. Two, we think the requirements of quality for Aichi that -- these 2 are our main focus. So once this thing is on and when we start looking at the next stage of growth for the company, at that stage we will definitely evaluate if there's a target available.

Sure, sir. Sir, you didn't...

[ This is to say ] we are not averse to an M&A. And as you will see our Board, when the Chairman of our Board is somebody like Rajeev Gupta, who is probably, in my opinion, the #1 investment banker in the country in M&A but clearly one of the top investment bankers in M&A. So if he is the Chairman of the company, M&A is something that we would not be averse to at all.

Great, sir. Sir, now you've been constantly guiding on EBITDA margins per tonne basically over a period of time. And even today, you alluded to that, but if you look at all the great work you've done internally, there's been a lot of savings on the raw materials also. In spite of all the action that's happened around the world, you optimized it very well. And gross margins have expanded quite nicely, which gives us some feel that you probably have a lot more to deliver than what you're promising. Is that right to be more optimistic than [indiscernible] in terms of INR 6,000 to INR 8,000 EBITDA because the gross margin expansion is much ahead of all that?

So KK, when we talk of our estimates, we talk of sustainability. So, one odd quarter here and there can happen. So if I really put a forecast based on the stage of discussion going on, there's a high probability that the first quarter of this year will again be a very good quarter. And there's a strong possibility that EBITDA per tonne would be higher than my range of INR 6,000 to INR 8,000. But when we make any statements, we are not talking of the short term. So at this point in time, for me to say that we can give a relative assurance to our investors that we will be in this -- higher than this range, at this point of time, I am not in a position to do that. But I've said very clearly once this expansion happens, this environment approval comes in, we will definitely go up from INR 6,000 to INR 8,000 range. We'll even go to INR 7,000 to INR 9,000. And then to INR 10,000 once the Aichi business comes in. So we are clearly saying that there's a road map ahead for us to increase our EBITDA per tonne.

Sure. Great, sir. It's been a pleasure to have been an investor with you. And I think it's all the cycle that probably took the share price down while all the efforts were made to really run the business very well.

Yes. Thanks.

Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference back to the management for closing comments.

Ladies and gentlemen, thank you so much for your interest in our company. I give you an assurance from our management team and myself that we will remain committed and dedicated to performance. And we will also keep updating you about any significant changes if and when they happen. I remain cautiously optimistic despite this COVID problem because we see trends showing, numbers showing that in the major markets, major metros for Bombay and Delhi, it's already started going down. Maybe in the next 1 month, 1.5 months, hopefully, it will come down further. So as of now, all our forecasts are based on that. If situation turns more adverse, again, we'll update you. And we thank you for your continuing interest in the company. Thank you so much. And stay safe. All the best.

Thank you. Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.