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

Ladies and gentlemen, good day, and welcome to the Vardhman Special Steels Limited Q2 and H1 FY '22 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.

Good afternoon, everyone. Thanks, Lisa, and on behalf of IIFL Securities Limited, I welcome you all to Vardhman Special Steel Limited 2Q FY '22 results conference call. From the management side today, 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, Urvil, and thank you for being with us on this call today. We've had a decent second quarter and though as you have seen, our performance is a little lower than what it was in the first quarter. Production was lower for 2 reasons. One, we had massive power cuts in the month of July, 10 days power cuts because of delayed monsoon and the power being transferred to the farm sector and also, we've had muted demand, 2-wheelers, as you all aware, are not doing as well as they should and cars though the demand is good but because of chip shortage, the volumes are lower from a production point of view and therefore offtake from us for cars is lower than what we were expecting. Having said that, our EBITDA per tonne for second quarter was around INR 200. We still maintain going ahead. Please do not multiply this by 4 to come to expected margins for us. We believe the normal range is INR 7,000 to INR 10,000 point as of now. And for the third quarter, we have asked for price increases. Some of you have seen my [ interview ] shortly -- short time ago. We said that, that we have asked for a price decrease of INR 7,300 from our OEMs and let us see what response we get back. What we are hearing is, of course, the chip shortage might get over by March or so, and we expect things to start normalizing beyond that. And still, as a whole, for this year, we stand by our original forecast of around 165,000 tonnes to stand by that, and our expansion plan is on track. Our relationship with Aichi is on track. Lots of developments are happening. A lot of inquiries coming from other OE -- other Japanese customers, not necessarily through Aichi, but we know indirectly they are coming because they know that Aichi is with Vardhman. So those advantages, the spin-off advantages seem to be coming in. One interesting thing that we've had in this quarter, we as you had recalled that, we were targeting EBITDA on capital employed and we were saying that our target will be 25% for the year 2024-2025, EBITDA on capital employed and the capital employed, but the net capital employed without the FDs and the deposit with electricity board, that is interest bearing. I'm happy to report that during the trailing 12 months, we have crossed the [ target ] 25%. So we have done better than what we were expecting or rather, let me say, earlier than what we're expecting we've achieved this benchmark. So I must compliment my team to do a good job out there. I will -- our CFO, Sanjeev Singla is down with dengue. So he is not on the call today. On the call are my daughter, Saumya; [ Sunil ] from our accounts department and accounts and finance department, [ Gagan ] from MIS and the company security, Sonam. So I will ask [ Sunil ] to quickly take you through the numbers and then after that, I'm ready to take questions.

Good afternoon, all present. I'm Sunil from Vardhman. I'm going to quickly show...

Sorry to interrupt, sir. We are not able to hear you clearly. Can you come a little more closer to the microphone.

Good afternoon, everyone. Am I audible now? I am presenting the key financial highlights of the company for the first half and Q2. In the Q2 of FY '22, sales volume is 43,383 as against 43,986 of quarter-on-quarter and there is little dip while comparing the half year of the '22. Volume is 86 -- 87,000 as against 86,000 of the last year. Last year, [ last October ] was completely locked down to national wide lockdown. So figures are not comparable up to that extent. Now coming to revenue, our revenue for this Q2 is INR 335 crores as against INR 247 of quarter-on-quarter and 330 of the previous quarter. And this half year revenue is INR 665 crores as against INR 314 crores of last half year. So there's a Y-to-Y growth of 111% and our EBITDA is INR 48 as against INR 36 of first quarter and INR 53 of last quarter [indiscernible] INR 102 crore as against only [ INR 19 crore ] in first half of the last year. And the PAT -- PAT remains INR 24 crores as against INR 9 crores for the first quarter and for half year, it is INR 52 and against the loss reported of approximate INR 4 crores in the first half of FY '21. So our [indiscernible] approximately INR 11,260 as against INR 6,000 in Q2 of FY '21. So there is a comparatively high increase. That's it from me and I can wind up here, and for any queries, you are most welcome.

Ladies and gentlemen, we are ready for questions. I'm here to take your questions.

The first question from the line of Shalini Vasanta from DSP Mutual Fund.

This is Vivek Ramakrishnan. I have 2 questions. First, in terms of how are you keeping the volumes going despite the fact that the production of the various auto companies are lower, it seems both in India and abroad. So that's question number 1. Question #2 is, you said that you'll be building up inventory for the November shutdown. Does that explain the increased inventory for the current quarter?

One, we have scrambled for orders when the markets are down and our team has done a good job, as I said earlier. So we found some orders which are not part of our normal market. We are not obligated to continue selling those markets and luckily, we got them at decent margins also. It's not as we had a huge margin problem. So that is the reason for the volumes being nominal and that is why we are sticking with our forecast that we should cross 165,000 tonnes for the year. And of course, there are further massive drop happens in the markets, but we are expecting to cross 165,000 tonnes for the full year, which means we are expecting the next half also to be pretty decent. The second question is regarding the shutdown. Our shutdown is going to be from 25th November to 10th December. Because of 15-day shutdown, we clearly have built up extra inventory on billets. Also, some finished old products because when flexibility goes down when your furnace is stopped, so we have built up extra stock of rolled products also. This explains part of the inventory increase. The other reason for inventory increase is we saw an arbitrage opportunity as there was a difference in various raw material prices. So we have used this opportunity to buy excess raw material, which is going to carry on into part of third quarter. And that is the reason for excess inventory. This will gradually we get liquidated partly over third quarter and fully by the fourth quarter. So by end of the financial year, we should be back to normal inventory levels of raw materials, billets as well as finished goods. And in addition, graphite electrodes with other area, it is a very large inventory. Because we saw the pricing going up, so we have some cushion in the graphite electrodes also. Yes, go ahead. I interrupted you, I'm sorry.

You answered all my questions. Sir, just one question. The last, what about the risk item. I mean the prices are very volatile. So, do you end up carrying a price risk on the extra bit of inventory and do you calibrate in terms of how much risk you can take? I'm sure you do that. It's just that I just wanted to know how you do that. For example, if the same material that you bought the prices come down, what flexibility do you have?

So of course, there is a risk of prices coming down and therefore a loss on that account. So that risk is always there but I believe this was a reasonable risk that we have taken and in any case, because of physical limitation on how much stock we can store, it's not as if we have 6 months inventory and things like that. So those inventories will only carry on into the third quarter. So by end of third quarter, we will be pretty close to -- normally, if you stop buying totally today and it will spill over partly -- part of fourth quarter if we continue buying some quantities today.

We will move on to the next question, that is from the line of Dewang Sanghavi from ICICIdirect.

Congrats on the good set of numbers. My first question is regarding the power supply concerns which you indicated in the commentary.

Mr. Sanghavi. Sir, there's a lot of background disturbance from your line.

Okay. Go ahead. You are audible. Go ahead, Dewang.

Sir, I was just asking about the power supply concerns, which you indicated in the commentary. Has that been solved and are we operating at optimum utilization?

So the power crisis is solved. That happened only in the beginning of July because monsoons were delayed. That is paddy sowing time, so the government focus was widely so was all of the farm sector. So we did not blame -- we can't blame the government for taking that action, that was a major crisis but because there was slowdown in the auto sector, we didn't get too badly affected in terms of sales.

Right. So now we are at optimal utilization.

As I said, because demand is low. So we are running at lower than full capacity, but we are pretty close to close to full but not running at full capacity.

My second question is on the demand side, sir. 2-wheelers was a weak segment in H1. Do you expect some signs of recovery out there or is it too early to comment.

As of now, when the OE leaders are not able to make those forecasts correctly, how are we to make those forecasts. So we are taking it as it comes and as I said, we do believe that we will cross 165,000 tonnes for the full year. And we hope that next year is going to be better year from a demand point of view. And in any case, towards the end of next year, some demand from our development is going to start coming from our export markets. And '23, '24 onwards, we'll see more demand coming in there. So we believe that only one year of so-called uncertainty where we had total -- largely dependent on the domestic market from '23, '24 onwards our export demand is big, and then the way I see it '24, '25 we are going to have a capacity problem.

That's good to hear, sir. On the export side, sir, what was the export percent -- volume in H1 of Q2, what do we have at the moment.

We haven't shared those figures just now but it is small. It's not big, it's not so difficult.

And lastly, the electrode pricing, what I see is the quarter-on-quarter uptick. So we have the inventory at the moment but what would be the spot pricing at the moment, a rough number on it?

See, the spot pricing today of [ scrap ] is about $552 and sponge iron is about INR 36,500 or so. So around that, those are the numbers. We don't share the price at which we bought.

And the electrode part, I was asking the graphite electrode spot.

Electrode, I think it's about INR 285, I'm sorry, I've not checked that figure, INR 295 -- INR 300 in around that per kilo.

And over 165 kg.

Take that as an approximate number.

I took the ballpark number only, sir. No ideas out here. My last question is regarding this volume guidance, 165 KT what you have given. And we've already done 87 KT in H1. So there's an upward list to our guidance if the demand recovers?

That is why I said we will cross 165. It's very difficult to make a prediction just now by how much it will cost.

The next question is from the line of Noel from Ashika Group.

Yes, I just wanted some clarity. So regarding raw material sourcing, this is primarily scrap?

We use a combination of materials. So there is scrap and there are derivatives from the iron ore routes, so things like sponge iron, tool iron, beach iron, pig iron, pig iron chips. So there are a combination of materials that we use, and then we have within scrap, we have shred scrap, heavy melting scrap, turning and boring and cuttings. So there is a whole variety of mix that we use and depending on relative prices at that point in time, we do vary the mix that we use.

So the mix is dependent on whatever is the pricing at that particular point in time.

That is one part of it, and second is the need for production because some aspects of -- some elements of the raw material mix is cheaper but the yield is lower and so production gets affected, you have lower production. So if -- like currently, production demand is lower than our capacity, we would be shifting our mix to a lower cost mix. [ And then if the demand ] activity happens when the productivity demand goes up, then we'll shift to a faster melting mix, which may be a little more expensive. So it's a dynamic decision and we take every week, 10 days, we look at the relative prices, relative demand supply -- demand requirements and availability. And fortunately, we have moved in the last 1.5 years, we have strategically moved far more to locally available scrap. So that gives us the flexibility of making those changes. Earlier, we were all dependent on long distance scraps. So even if you wanted to make those changes, we were not having the flexibility of making those changes.

Just one last question. So regarding the power sourcing right now, it's being sourced via the grid?

No, we always source from the grid. So not only right now, we are always sourcing from the grid.

So that would be whatever the rates per billing at that time, that would be the -- as for the discount?

Exactly.

We'll move on to the next question that is from the line of [ Yash Sharda from BIVA Capital ].

In the investor presentation, Page 32, you have mentioned a line stating your target to make Japanese quality steel in India for Indian auto majors. So could you throw some light on what exactly that is and how much efficiency or the reduction in cost we expect from the same?

So the Japanese quality steel that we're talking about, there are various quality parameters that those companies require. For companies like Toyota, they have very strict quality parameters and some aspects of quality that nobody else in India has ever asked us for. So those are the kind of things we have to develop and that's the whole -- that's why we have said though our partnership with Aichi started 1.5 years or 2 years ago now, and our target is only now we are making samples and even then to reach the production, the ability to make those on a regular basis will take another 1.5 years or so. That is why I said that any benefit from Aichi that we are likely to get is likely to come in only from the year '23, '24, but primarily from the year '24, '25. This is why we have said that by '24, '25, where we get the full benefits of Aichi relationship. That means the newer businesses in the [ computation ] markets as well as extra volume that we will get because of the capacity enhancement. So we have said that by '24, '25, we expect our EBITDA per tonne to shift from the current range of INR 7000 to INR 10,000, we expect it to be INR 10,000 to INR 12,000 at a higher volume by that time.

You are planning to increase your export from the current 1% to 20% to 25% in the next 4 years. So what is the marketing spend which we are doing currently and how much do we wish planning to do in the next 2 years?

There's no marketing spend.

As of now, okay.

There is no marketing spend. We are not a consumer product. Some travel expenses will increase and those are low just now because of COVID restrictions, there's no overseas travel but clearly, overseas travel will increase. And so TA bills actually those will have a marginal impact and some admin costs would increase become of that but beyond that, I don't see -- so [ lunch, dinner ] and travel and hotel expenses, those will go up.

The next question is from the line of [ Ankit Redkar ], an investor.

Sir, I have a couple of questions. My first question is, as you can see, the inventory level is high in balance sheet due to the plant shutdown in November. So have you planned to manage demand during shutdown?

That is why we have the high inventory that we will be able to cater to whatever demand comes up. So we are not expecting any loss of sales because of the shutdown.

Sir, there is decrease in the raw material cost as a percentage of sale in spite of increase in sales. So what basically is the reason?

So the reason is that when we have increased the price of materials of the finished product, that is based on raw material prices. By then there are commercial -- we've been lucky and our calls were right. So we had raw material at lower cost and that is why raw material as a percentage of sales has gone down perhaps. I mean that is one explanation I have. I don't know if it is the right explanation, but very clearly, our margins are higher than our normal margin because the valuation gains also and my model will say that my answer is correct.

So sir, as for the new expansion plan, how do we plan to fund the CapEx? Will there be any equity dilution?

So this CapEx that we have announced is around INR 250 crores in the next 5 years. This CapEx can be funded with internal accruals and incremental debt. However, we don't really need any equity dilution to fund this expansion. However, we have bigger plans, which have to be now time has come to start thinking about those. As and when those plants get formulated and we start taking decisions on that, then -- and very clearly, within the next 3 to 5 years, we will be taking those decisions and once we take those decisions, clearly those decisions require larger capital and therefore, there will be need for capital dilution at some stage. That stage is not just now. This is the second point, and the third point is that our partners own just 11.4% in the company and very clearly, it is their intention and our intention that they increase their stake because that shows more seriousness to the Japanese OEs, [ to Toyota ] Group and other countries that Aichi is more serious towards India and to other companies, and we're showing they're putting in some money, more money. So if and when they decide, not if -- when they decide to increase that stake because it is clear that they will, we are open to that. So when those discussions happen, then there could be some dilution as a preferential issue to our partners, but there is no plans to come in to the markets to raise any capital. At this point in time with the existing announced CapEx plan. If the plan changes, as I said in point number 2, very clearly, we will need to have more capital.

Okay. Got it. Sir, as per the last con call, the Japanese team was supposed to fly to India to discuss the product plans. So is there any update on the same?

Yes, so 2 members are already here, and they are the operating people and the senior people are going to come in the end of middle of November. So discussions will happen in November and December. So perhaps by the time we have our next call, clearly at the end of our -- when we have our annual call. By then definitely we'll have more updates. Very clearly, there is a need to increase that capacity beyond 2025, '24, '25. So very clearly, this is visible to all but as I said, the inquiry that I'm seeing is based on that, our export business can be between 70,000 to 100,000 tonnes. If there's currently, let's say 165,000 or 170,000 tonnes that we do now in the next 3, 4 years, the domestic market itself will grow. It may grow to cross 200,000 tonnes and you add 200,000 or 220,000 tonnes and you add 100,000 tonnes of incremental business, we are talking very clearly of a demand of 300,000 to 350,000 tons and our capacity at that side will be between 230,000 to 260,000 tonnes. So we'll clearly be short of capacity. So at what stage do we take a decision to expand capacity or the other alternative will be to start cutting the non -- the less nonprofitable, the less profitable businesses, and we start cutting those businesses. Those efficiency -- those are alternatives and in all probability, we'll go in for expansion.

Sir, one last question. How do we anticipate the demand tipping in [ mine ] as you can see the slowdown in auto industry. What are your views on the industry look like at this moment?

We are a small player supplying steel to the large auto OE. So what is the situation of auto demand, it's better to be answered by the auto OEs and SIAM and so on. From what I have read and what I've understood, India is going to start growing at the next 30, 40 years is going to be phenomenal time to be in India. That's what our reports say, all experts say. With the China Plus One strategy coming in many countries, so many companies, we are seeing a surge in exports across. If you look at our textile operation, Vardhman Textiles, our group company, is seeing massive demand in terms of yarn and fabric also, the demand is improving from where it was. So every sector, the exports are booming. If exports are booming, very clearly growth is going to come in and if growth is going to come in, demand for autos cannot remain far behind. The other part is that despite this massive increase in steel prices, Indian steel paces are still significantly lower than American steel prices, European steel prices. And therefore, very clearly, we are seeing bigger inquiries coming in from our Tier 1 customers for export orders. So the auto component exports, just one customer [ kind of my mind ] was sharing with me that earlier he used to get 3 to 4 inquiries per week. Now, he gets 3 to 4 inquiries per day and he is unable to handle this flood of inquiries. So all this is real-time happening, which means that I see demand in 3 parts. One is demand for the Indian auto sector, which will revise as the Indian economy is growing. Second part of demand is for our exports because developments are happening, [ inquiries are coming ] and seen that strong. The third part of demand would be a significant increase in auto component exports of India and therefore [ demands are steep ] and the fourth would be railways. We're already supplying to railways. Our customers are happy, and we have been trying to increase our share in the railways. And of course, we need to -- I need to mention out here. EV is, the other area, we have already started supplying for EV usage to some of the key customers. We are seeing a massive demand in that area. So very clearly, as EVs grow and some of our -- we are aligned with right customers as demand -- their demand is growing, we see a pretty big increase in our EV-related business. And hopefully, a year from now, we'll start reporting separately, at least in our annual report, what will be EV, what is our outlook for other business for the EV segment.

So sir, do we see the current volume of 43,000 tonnes sustainable in the coming quarters?

See, I'm not taking a forecast for the next 2 quarters, but these numbers are clearly sustainable. If I say next year, very clearly, I see next year also a 105,000 tonnes to 180,000 tonnes kind of pace, a very easy possibility.

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

Congratulations on a decent quarter. Sir, you mentioned earlier about export contribution being relatively small. So do you have any sort of vision as to what would be a good -- any targets in terms of export contribution to your revenue for the -- maybe the next half year or the next year?

No. Next half, there's no major change. '24, '25, we expect it to be 25% to 30% of the sales.

Okay. So that kind of growth, do you have any geographies in mind, sir, where -- because right now, you mentioned it's relatively small to reach 25% of total revenue, do you have any geographies in mind?

Southeast Asia. There is Thailand, may be the main market. There is the Philippines, a little bit Indonesia, a little bit Malaysia but Thailand will be the main market.

Right. Got it, sir. And sir, as you mentioned about raw material prices, it's been the talk recently. So the price hike that we've got, are we going to -- are we expecting another one in the near future? And what about the raw material prices, if you see it going up again because right now, our -- despite flattish tonnage, our realizations have improved quite a bit. So what do you see on that aspect? Would realizations be at the continued -- at the current levels or if raw material price continue to increase, the realizations may tend to decrease. So what are your views on that?

So my -- I'm making a forecast and that is wrong to make such a forecast but I believe, raw material prices are near their peak. A little bit of fluctuation up and down can happen but to expect that raw material prices rise significantly from these levels, I would be surprised. Again, I'm just saying I'm having, it's a pure guess work because we are near -- and I think we're already at all-time highs as far as [ shred ] scrap is concerned, not all-time high but near all-time high. So these are like really high prices. And demand is not so strong, globally. So the thing that actually can continue rising significantly, probability seems to be low. As far as third quarter is concerned, we have asked for the package of 7,000 plus. So let us what we get. Just now negotiations has -- just begun because letters have gone out to the customers. Customers are digesting this kind of increase because these are not easy for the car -- for the automobile OEs to take because demand is also strong, and they all see that the costs have gone up. So they all see that this is going to happen, right? So once the negotiations happen, we will take it all where do we reach. So realization, the way I expect realizations per tonne will be higher in Q3 than Q2 and in my view, should make up for the increase in raw material cost but not at this point in time. This is the hope and I am having real expectation.

Okay. Fair enough. I got it. So sir, this higher realization that we've got even higher EBITDA per tonne that we've seen. Is it solely due to the price increase or are there some factor of [ Brightmark ] sales maybe contribute more? Has that also played a role in this?

No. This is very difficult. We don't analyze that mix so well but otherwise, second quarter, actually, the Bright Bar sales have dropped higher than the other sales. So, it's more a result of the price increase.

Okay. Understood, sir. And sir, the ROCE levels also right now around 19%, excludes the benefit from Aichi. Is that also -- can we roughly give or take on the same level this year or can we -- maybe you're expecting a little more?

So ROCE EBIT on capital employed, yes, we should be about 20% for this year.

That would exclude Aichi's benefits, right sir?

There are no Aichi benefits at this time. So yes, huge Aichi benefits in that expense. Yes, it's true because there are no significant benefits of Aichi. The benefits of Aichi today are both cultural, safety oriented approach to problem-solving and so on, very difficult to quantify those benefits. The real benefits from Aichi will come, when this new business tracks coming in, which I've said will start from '23, '24 and really '24, '25 when it will take off. I don't know if it was your question on the previous question about exports. The only reason we are talking of such [ confidence is it ] jumped from about 4% to 5% share as of exports to 25% exports in what 3 years or 4 years and only on the back Aichi. Otherwise, if Aichi wasn't there, we'd still be 5, maybe 5 or go to 7 or something like that.

Understood. Sir, you had mentioned once earlier that we'd get access to the Southeast Asian markets that you have with Aichi.

Oh, yes. The real benefits from Aichi are in product development and for cultural change, we're obviously getting the benefits, and we'll get more benefits every quarter. Cultural change includes safety. The safety orientation is huge. So safety. Second is problem solving. Third is the data orientation, data analysis. Fourth is involvement down the line with workers. We already had a strong culture, but it's getting even stronger than that. Fifth is a term called consciousness where everyone sees the sense of empowerment, ownership, belonging. All those areas, the softer areas already benefits have come in. Lot more have -- and some will keep coming. The second aspect is the doors that they've opened for us. So for those doors to open now sampling has begun and every week samples are going to some customers or the other and the new inquiries are coming in constantly. I'm seeing the RFQs myself otherwise normally they don't come to me, but because there's a huge flood of orders and inquiries, so I'm seeing those, very heartening to see those developments. But those -- because samples are growing, the samples will go get tested and partially made and tested and come back and once approved, then we get a sample order and we get the trial orders. Once those side orders go, they get approved and so on and then after that, we'll start small orders. So really '23, '24, these small orders will begin and then '24, '25 when we'll go into the mainstream. It's a long process. And this has been -- this is a massively short cutted process because of Aichi. So another Indian steel company will not be able to reach where we have reached.

Yes, absolutely, sir. It's really great to know these benefits from Aichi, even the nonfinancial benefits, which will probably fructify in the long run.

I'm very confident that they will, not probably, they will.

That's right. Of course, yes, totally. Sir, just wanted to know your take on the PLI scheme, if we are going to benefit from it over the next maybe 5 years?

So the PLI scheme as it came out, was not going to benefit us. And then they've on several representations, and in fact, us meaning, nobody in the industry was going to apply, at least on the automotive side because the way the scheme was planned, all of us were excluded from applying for it. The conditions was such that one of us would have applied. What I learned is that they have made some changes in the scheme, but I was busy for our Board meeting yesterday. There was a call on PLI yesterday. I have not attended it. So I will come to know in a day or 2, whether the changes have been made as per -- what I understand some changes that we made, so are they beneficial to us now or not, I will come to know. So I'm sorry, I can't answer that question as of today.

No problem, sir. Just one last minor query from my end. We noticed that short-term borrowings have kind of shot up a little bit since March. So is it only for working capital or what -- where exactly were the funds wired? And it is seen interest cost has been relatively flat, if not decreased. So if you could just share some light on that, please?

Yes. So the short-term volume increased for 3 reasons. One, of course, for funding the inventory. Second is we have put in a deposit with the Punjab State Electricity Board, which gives us an interest rate of 7% on deposits, and our cost of borrowing is lower than 4%. So with a interest rate arbitrage out there. And third, we have prepaid some small term loans. So few installments of borrowings and loans. So that is also being done. Of course, it's a combination of cash accruals and short-term borrowings, which is going to fund these things.

Got it. So sir, maybe next quarter would the interest costs be relatively higher?

The interest costs are not going to be higher. Inventory levels are going to start dropping. So you will see lower inventory levels on 31st December and therefore lower borrowings on 31st December on short-term side. However, now our CapEx for this year is going to come in, and we'll figure out how we are financing that. So may be some long-term borrowings may come in but otherwise, from cash we're going to be funding it. And that's why we have the FD, the fixed deposit of INR 46 crores is still pending with us, We'll be liquidating that.

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

Continuing with the question of PLI from the earlier participant, which of these categories would be kind of comfortable with, if I can list them as coated steel, high end steel, wear resistance, alloy steel, steel wire or electrical wires.

Only one category, powertrain steel for powertrain.

Okay. And sir, if you can give a breakup between the auto and non-auto?

100% -- almost 100% is for auto -- for us.

So, are we not seeing any opportunities in special grade of steel for the defense or petrochem or energy industries.

I'm sure there are opportunities there but when we see enough opportunities in our own area. It doesn't make sense to start diversifying to other areas. We will look at other areas when we see that growth in our area is going to be muted. Just going to see massive growth and we see an impact, as I said earlier, we have seen a capacity problem coming up in other area. It doesn't make sense at this time to stage to -- waste our efforts to looking for other opportunities. So we are a focused company, and we would like to work in a focused way.

And sir, last question is relating to the thoughts of the management on patenting certain grades of steel. If you can take us through that?

As of now, no plans on any patenting.

The next question is from the line of [ Kunal Shah ], an investor.

Sir, congratulation for the fantastic results. I just wanted to know your inventory is well enough for 15-day shutdown?

Yes, we are very [ coverable ] in the shutdown.

Okay, sir. So that we can see the next quarter results also like this?

Difficult to say because, as I said, the raw material prices are higher than what they were. So it depends on what price increase we will be getting from our customers.

On sale side, on the top line?

On the top line -- oh, top line could be similar. It depends on, again, the exact volume that happens, but we'll be similar. Order of magnitude would be similar. So, I'd say it will be more or it will be same or marginally less, but similar order of magnitude. Just to give a better understanding, so second quarter volumes were 43,000 tonnes. So fourth -- third quarter will be between 40,000 tonnes and 44,000 tonnes.

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

Sir, I just wanted to know, during the first 6 months of the current financial year, what is the total quantum of price hikes that we have taken?

So we had a price hike of around INR 6,000 in Q1, so INR 5,950, some were INR 6,000, some were INR 6,700 something. So I mean around that 6,000, the majority of chunk price increase is INR 6,000. That was in Q1 and Q2, I would say 2,000. Some customers even more and some customer has not yet given any hike but I would say 2000. So I would say INR 8,000 would be a good estimation for the price increase in first half.

And the one that we are planning, we'll be averaging about INR 7,000, INR 7,500 in Q3.

That's what we're asking. I'm not saying we're going to get that.

Right. And sir, on the 5-year expansion plan, the INR 250 crore CapEx, that would take our capacity to what.

So the license that we've got is 280,000 tonnes. Realistically, we are planning about 250,000 tonnes of steel-making and rolling of 230,000 tonnes. And then we will start working on small improvements in prices and hopefully, over the next few years after that, the capacity will keep rising a bit but to the -- for precise calculations, I would look at 230,000 tonnes of rolled products at our capacity.

And sir, this license also means the environmental [ clearance ], right?

Yes. The license means environment for 280,000 tonnes. See, last time, I made a mistake that we had estimated we'll go up with 200,000 tonnes and going. it's not possible to go beyond that and we took a license of 200,000 tonnes. And once we reached near 200,000, we found we can go to 240,000 tonnes and we were stuck. So we took a license of not 240 but 280, and if we had taken the license and we already found that we could go 250 or 255, we are better than what we are estimating. So as we get slower, as the capacity gets completed and as people start working on improvements, maybe we will be able to improve further, who knows but for calculation purposes, 250,000 tonnes of the steel-making and 230,000 tons for rolled product.

The next question is from the line of [ Ritwik from Juana Financial ].

Sir, just one clarification plus confirmation on the expanded capacity. We'll be ready by December 2022, is that understood right.

Yes. We will be ready by December '22.

And then ramp up as and when it takes 3 to 6 months.

Yes. The volumes as they go up. So we expect to fill up this capacity by '23, '24 or '24 to be precise.

The next question is from the line of Aman Madrecha from Augmenta Research Private Limited.

Sir, I wanted to ask, like where do we source our guidance from, is it totally...

I'm sorry, your voice is not clear, can you repeat the please.

Sorry to interrupt. Aman, can you use the handset mode while speaking and not the speaker phone? Extremely sorry but we are unable to hear you. As we are unable to hear the current participant, we'll move on to the next question from the line of [ Avinash Gupta ], an investor.

Just one clarification. I joined a little late, so maybe it is a repetition. I wanted to know [ if there are ] raw materials and converting it. So you are able to get a certain conversion cost. So my question is that in times like this when the raw material prices are fluctuating so much, how much does our margin vary -- the conversion margin. I mean there is a -- gross margin rather, and then how much time does it take to pass on the gross increase, I mean, the drop in gross margin to the customers and where we get a kind of equilibrium. Very difficult to answer that question as to when we get the equilibrium because since October of last -- September of last year really the price is rising continuously. So normally, equilibrium happens very fast because these kind of changes don't happen. I've been in this industry 11 years. I have not seen this kind of price increases, 6,000, 4,750 that we got earlier. So these kind of price increases, we never seen before. So this is unchartered territory and very difficult to predict and when the demand is high, then the price settlement happens faster because people are afraid that the pricing to go up even further, the raw material prices and the ask that we have could increase later in the quarter. All depends on -- and today because the demand is not so strong, then the attempt will be from the auto companies to delay this agreement as much as possible, and we hope that if the raw material prices go down a bit, they will get a lower increase than what we're asking for. This is all a matter of negotiation, cat and mouse game, who blinks first, all this kind of things. Who needs it more and so on. Fortunately, for us, our costs have increased less than our competitors on the [ glass bearing group ]. So there are other people pushing for a bigger increase than what we are asking for. So we are feeling [ pretty ] at this point in time, reasonable pretty. 9 years, we suffered. This year, we are enjoying. Got the hang of it.

As there are no further questions, I now hand the conference over to the management for the closing comments.

Ladies and gentlemen, thank you once again for showing your interest in our company. And of course, nice to be talking to you every quarter. And I hope you've got a chance to see our annual report because that conveys some of my views because what we were asked today and the talks about really our thought process and our philosophy, how we are managing our business. I look at our shareholders as the part owners of the company and as our partners because I have a very frank conversation with them through that and in letter. And I hope we can have a physical conference soon because COVID seems to be over for now, and if January situation remains the way it is, there's a reasonable chance if our Investor Relations firm, Bridge, were also here, they recommend and we get a reasonable confirmation, there is a chance that we might actually do a physical conference either in January or sometime in May. So that's something that I'd like to do to physically meet some of our investors and analysts. Thank you all for showing your interest in our company, and we will see you in January, either on the call or physically. Thank you so much.

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