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

Ladies and gentlemen, good day, and welcome to Vardhman Special Steel Limited Q3 FY '22 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. Anupam Gupta from IIFL Securities Limited. Thank you. And over to you, sir.

Thanks, Faizan, and welcome, everyone, to the Q3 FY '22 results call for Vardhman Special Steels Limited. From the management, we have Mr. Sanjeev Singla, CFO, with us for the call. I'll hand it over to Mr. Singla for the opening comments, and then we can have the Q&A. Over to you, Mr. Singla.

Thank you, Anupam. Good afternoon, everyone, and thank you for joining our earnings call for the quarter 3 and 9 months period ended 31st December 2021. Mr. Sachit Jain is not able to join the call because at the last moment, he was not feeling well, and he has apologized for that. With me is Sonam Taneja, our company Secretary; and our Bridge IR Investor team. So I must say, though the profitability in the quarter 3 is comparatively lower than quarter 2 as well as corresponding quarter of the last year, but still, considering the overall market scenario in the passenger cars as well as the 2-wheeler industry, I must complement with my team that we have done wonderful. During this quarter, we have been able to achieve close to 45,000 tonnes of sales, slightly lower than the corresponding quarter of last year, but again, higher than quarter 2 numbers. Total revenue is on the higher side, INR 3 59 crores, as against INR 2 87 crores over the corresponding quarter, mainly because of the high realizations, price increases we have received from 1st January then 1st April then 1st July. So on a quarterly basis, we are regularly getting the price increase. So finally, we ended up this quarter at INR 19.47 crores of PAT as against INR 21.67 crores in the quarter 3 quarter earnings last year. So coming to the major developments happened during the quarter, that during this quarter, we had successfully completed the planned shutdown of 15 days in our steel melt shop upgradation. In this shutdown, we have been able to remove the debottlenecks in the CCM concast machine. So this has been completed successfully. After that, it took a little stabilization period. And now the things are getting stabilized. So most of this CapEx in this SMS has been funded through a redemption of FDR's INR 15 crores, and to that extent, our FDR investment has come down. So with this, I must say that our capacity of steel melt shop now stands -- increased to 250,000 -- in a year. Corresponding to this, we have already undertaken the expansion plan for our rolling mill to match the production capacities. And for that, necessary capital orders have been placed. And hopefully, we will be taking a shutdown for our rolling mill in the month of November and December 2022. So here, I must say that during the shutdown of steel melt shop, a good support from Aichi Steel's operation, their senior team, their operating team all were here -- all were there posted VSSL. And apart from that, they have also sent one person, [indiscernible], who was expert -- who is expert in CPN. So the entire project work of the CPN upgradation was under the supervision of Aichi team. And our team have learned so many things from the Aichi we are working, which we are talking always. So practically, our team has learned many things from Aichi we are working during this practical implementation of project execution. Overall, industry scenario is still low. Factory seasons haven't went into well during quarter 3. I will say that quarter 3 more than 20% -- delivered more than 20% decline in 2-wheeler industry demand, and more than 12% is a decline in the percentage of vehicles. So one is the demand factor and other is because of the chip shortage also. We had already built up the inventory for this shutdown, and most of the inventory has been [ eaten up ] but still some more inventory reduction will happen in the quarter 4. So in quarter 3, considering the inventory buildup, we were operating almost at full capacity. But in quarter 4, we will have to take maybe 15% to 20% of capacity shutdown because of the lower orders. Still, we are expecting that with the ease of this chip shortage and going forward because of this Omicron variant specification, then we are expecting that now the sales momentum will again pick up. So that's all from our side on the performance as well as on the major developments happened during the quarter. And now we are open for the questions. Thank you.

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

Congratulations, given everything, has been great performance. My question was on the inventory levels and borrowings. You had -- in your remarks also in the presentation, you said that the capital employed has been higher. And so when will the inventory level and borrowing normalize to what we saw in March '21? So do you expect that with the planned shutdown and slowdown in capacity utilization, it'll come back to March '21 levels by end March '22?

Yes. In terms of quantity, I agree with you that by March '22, it will be at the same level as we ended at March '21. But in terms of value, it will be higher because since then, more than 20% values have arisen in raw material as well as in metals. So to that extent, it will be higher. Otherwise, in quantity, it will be almost at the same level as we ended in the last year.

Excellent, sir. And just one more follow-up question on IT, and I'm glad to see the progress. Did you -- in terms of the export plans and so on, what you guided in the beginning of the year that it's like a 2-year time frame still holds, right? Nothing gets accelerated significantly, correct?

Yes. That's -- the process is already owned, and our samples are going to the Southeast Asia companies. They are subsidiary companies in the Southeast Asia. So we are awaiting for the approval of our samples, then bulk samples will go. Then I think by next year, '23, '24, we will start supplying.

The next question is from the line of [indiscernible] from One-up Financial Consultants.

Sir, first, a clarification. You mentioned that we will have to undertake 15%, 20% capacity shutdown in Q4 FY '22. So will this impact our sales volume in Q4 FY '22 or the inventory that we have will be sufficient, and that's why we are looking to reduce production? So if you can clarify on that.

Yes. There will not be any impact on our revenue because we will be heating up from the inventory.

Okay, okay. So a follow-up on this, you mentioned that scenario is still soft for 2-wheelers and 4-wheelers to some extent because of chip shortage. I believe Q2 and Q3 was also -- also had the same situation. So despite this, we are selling all our volumes. So have we gained some market shares in existing customers or new clients that we have added or new applications like rails, which you have been mentioning, has started increasing the volume? So if you can throw some light because despite 2-wheeler and 4-wheeler soft, we are doing well on the volumes front especially.

Yes. You're absolutely right. We have already started working to add some more customers because immediately, it is not possible to add any major customers, which are OEMs. But yes, on tractor market and commercial vehicles, there is always an option with us where we can sell, though it is on the lower margins, but definitely we can safeguard our revenues...

Volumes.

Volumes, yes. We can safeguard our volumes, but at the same time, little -- lower margins.

Sure. So basically, we have been selling to tractor and CV as 2-wheeler and 4-wheeler was soft, and that has compensated for the volumes.

Yes. Going forward, as and when this chip shortage and the momentum in the demand will be coming from the quarter 1 next year. So again, we can discontinue because that is a business, which is on order base of the business only. So we are not bound to continue that type of business.

Okay, okay, okay. So once demand comes back, will shift back to 2-wheeler, 4-wheeler, which is higher margin for us.

Yes, yes. Definitely. And in this quarter, Maruti has started operating at a higher capacity. They were operating at a lower capacity up until quarter 3. So from this quarter, they have increased the capacity utilization also. So with the further chip shortage -- ease out pressure of chip shortage, we are expecting that the momentum will again be built up from quarter 1 onwards.

Sure, sure. Okay. That's encouraging. Sir, second question is on the pricing. Mr. Jain has mentioned in the press release that we did not get as much as price increase that we had asked with the OEMs. So would you quantify what is the price increase -- cost increase for us and how much we are not able to get from the OEMs? And what is the negotiations currently going on?

All the negotiations with the OEMs have been closed, except one. And as far as the quantum is concerned, I must say that the quantum, which we have received less is depicting in the quarter 3 results also. So by INR 2 crores or INR 3 crores of profit, which is lower. So that is because of the lower price increase received from the OEMs. Not a major setback.

Yes, yes. Not a major setback. Sure. And so for current quarter versus the last quarter, current spot prices versus the last quarter's average, do we need to take any more further price increase or we are good currently at current levels? Like have the cost run up after December?

Okay. After December, the raw material prices have started increasing. There is a shortage of scrap also in the local market. And we are expecting that whatever the price increase we have received less from 1st October, we will definitely get it from for 1st April.

Yes. From 1st April.

From 1st April. Because now 1st January, I don't think that there will be any further negotiation because most of the negotiations happened for the 6 months this time.

Okay. This time happened for the 6 months. Okay. Sure. Okay. Sure. And sir, one hypothetical question, if you can give us some color on this. There has been a lot of questions previously on transition from ICE to EV. Sir, would you hazard or guesstimate or some side of estimate from your end whenever -- when and if the shift happens from ICE to EV as a sector, as specialty steel, as alloy steel globally and even domestic, what would be the kind of volume impact that we could see? Because as we understand in a limited way, you would require specialty steel in EVs as well, and that would be higher precision. But do the volumes get impacted for the overall industry?

Yes, you are right. Overall volumes will be impacted, but EVs will take a longer time maybe. For the 2-wheeler industry as well as for the 3-wheeler industry, yes, they will be taking over in a faster pace. But for the passenger vehicles, because I think and in our opinion, it would be taking a longer time to replace with the EVs. And the volumes definitely will come down with the coming up of electric vehicles. But by the time, again, the growth rate is also coming 8% to 10% every year, and no capacity increase is happening in the alloy steel industry. So by the time these electric vehicles will be replacing the existing vehicles, by that time, growth rate will also be mitigating that much of demand of electric vehicles. And some of our customers have also started manufacturing components for the electric vehicles, and we have started supplying steel. On the back of us, Aichi Steel is always with us, and they have a better idea always for the next 5 years, 10 years down the line what will be happening. So from that to next year, our most of the supplies will start going to their Southeast Asia subsidiary companies. So from that point of view, and we will start manufacturing some more typical grades with the help of Aichi. So from that point of view, I think that we are quite secure.

Right. Okay. Okay. And lastly, you mentioned the rolling mill capacity. We have placed orders. So how -- like if you can give us some time line on this for the rolling mill.

Within this '22 calendar year, by November and December, we will shutting it down for 20, 25 days. I don't know the exact number of days. And by that time, it will be implemented. So our existing rolling will be having the higher manufacturing capacity from 2 lakh to 2 lakh 50,000 tonnes matching with our steel melt shop.

Sure. Okay. So with that, our volume or brownfield expansion would more or less be completed in 12 months' time?

Yes. Definitely.

[Operator Instructions] The next question is from the line of Sachit Kapoor from Kapoor & Company.

Sir, firstly, what percentage of our sales are to the OEM out of the total sales market? What percentage was to the OEMs? Or is it completely the OEM only, we have interested?

As of now, yes, our more than 90% volume is going to the OEMs. So whatever, 5% to 7%, 5% to 10% volume, that is also going indirectly to some OEMs, but that we don't know. But more than 90% volume is directly going to OEM, which is known to us.

Okay. And what portion is domestic and sale and how much is the export and direct export.

Export -- we are doing direct export. So export volume is very less as of now. It's, I think, 3% to 4%, and the rest is domestic. In domestic also, some of the customers are ultimately doing the exports after meeting the comp -- but that figure is not with us.

Okay. And sir, is this further divide between the automobile, the 4-wheeler, 2-wheeler and the tractor, if you take the percentage of volume of steel sold, what should be -- which should be garnering the higher percentage in that top selling model if you will?

It's a passenger vehicle about, I will say, 40%, 34%, 35% is going to 2-wheelers. Rest is to the various maybe commercial vehicles, tractors, off-highway vehicles, some engineering applications and so on.

We have also mentioned in your presentation about this casting part. So we are doing casting for tractors that is to be understood.

No. We are making a steel. And in making a steel after melting it is to be casted in a billet form. So that is the process, which we are doing. So whatever steel we are making, it goes to 2-wheeler, passenger vehicles, commercial vehicles also. So we are not casting like that we are casting for tractor industry. So casting is a process through which we are making the billet.

Okay. Correct, sir. And sir, what are the benefits of the debottlenecking exercise, which you have talked about? How -- by what percentage we -- the volumes will go up with this? And how much has been spent? And what is the time by which this money we will recover?

Presently, our steel melt shop capacity was 2 lakh tonnes per annum. And by making -- by removing this debottleneck in the steel, sorry, concast machine, our capacity now stands to increase 2 lakh 50,000 tonnes per annum because increasing the capacity in the existing, [ cause ] is that we can only reduce the melting time of a cycle, melting time of per heat. So with this, this was a debottleneck. We were taking more time than melting time. So now with this automation implementation, we have been able to reduce the melting time -- overall melting time of 1 heat. And along with this, we have done some -- we have changed some cooling process also. So that's all with the help of which we will be making 2 lakh 50,000 tonnes in a year.

Okay. So can you quantify what would be the annual savings with this debottlenecking? Because it will definitely increase the turnover as...

Yes, yes. Having 50,000 tonnes of additional capacity by making investment of, I must say, INR 40 crores, INR 45 crores or rupees on this steel melt shop, we can very well calculate that the payback is very fast.

Okay. And you're also speaking about this cold roll mill being now the second one, which is to be installed in the next coming year.

No, no, no. No, no, no, we are not reinstalling any cold roll rolling machine, new rolling mill. Rather it's an existing rolling mill. And in existing rolling mill also, we are adding some stand. So again, in rolling mill also, we are saving on some times, which are getting used for some maybe maintenance activities or maybe some changing of rolls and other activity. So by reducing that time, our existing rolling mill capacity will then increase. So we are not putting any new rolling mill.

Okay, sir. And sir, coming to the raw material basket, sir, if you could give the split up of what constitutes the raw material market. And power and fuel also, what is our current component? And any kind of savings that -- any steps we are taking to lower the power and fuel cost? I think that, that is also a significant portion of the total cost of manufacturing.

Yes. Because we are into electric car format and power-intensive industry, so we are consuming much of power cost power. So with the implementation of this concast machine, automation and changes in cooling process, so we will be saving on time per heat we were using earlier. So with the saving of time, definitely some indirect costs like overheads, I must say. So within those overheads, we will be having the higher production capacity and also some of the variable costs. Some variable costs are definitely 100% variables, but some variable costs are partly variable and partly fixed costs. So by increasing the production capacity of the existing steel melt shop, to that extent on the fixed cost, directly fixed cost and partly fixed costs, we will be saving and adding to the bottom line. On the raw material side, we are continuously doing efforts as already conveyed in the previous con calls by Mr. Jain that we have made substantial changes about 1.5 years back when started using more of a local scrap and replaced with the shredded scrap, which earlier we were using in our -- quantities. So with that, definitely, we have -- we are gaining more than INR 1,000 rupees a tonne. So apart from that, last year, as guided by Aichi, we have started a new 3R; reduce, reuse, recycle. So under that drive, we have received a lot, many suggestions from all the employees. And definitely, that has also added it to the bottom line. So that is why on all the basis of these changes in the raw material mix, we have revised our guidance from earlier 4,500 to 6,000 to -- earlier, it was 6 to 8 down. Now it is INR 7,000 rupees to INR 9,000 rupees. And still in this quarter also, we are at the upper end of this guidance range.

And sir we feel very likely that we will be maintaining this brand even for this year-end and then improving upon it going forward?

Yes. That's always our -- yes.

Sir, for the raw material part, last question, sir, you were just saying that the imported scrap, I missed -- your line drop at that end.

Yes, we have reduced dependence on imported scrap and increased our dependence on the local scrap, which is easily available also. And we have to have more and more of a hedging. So it's easily available and at a lower price than what is for shredded scrap. In case we would have been using a shredded scrap at the earlier rates which we were using. So we got to have been losing more than INR 1,000 rupees, 1,500 rupees a tonne nowadays.

Right, sir. And sir, our dependence on pre-guidance purchase, to what exchange? And any update on the PLI schemes around the special steels, that has been announced by the government? How can -- how are our company going to benefit also for the same? And any collaboration with Aichi going forward on that front, sir?

First part on pre-guidance also, we have reduced our dependence and replaced with that much of dependence also with the local scrap mix. On the second part of PLI scheme, still, we are evaluating and in discussion with the MECON Limited, who is appointed identity by the government of steel. So still, we have not finalized that we will be going ahead with this PLI scheme, but still we are valuating. By the next conference call, we will be able to clarify on this. Because under the scheme, there are some capital investment requirements, some incremental growth rate. So all those things we are evaluating with internally our team as well as with Aichi Steel.

Because in your presentation, you have articulated what are we expecting going forward with Aichi Steel, especially phase 1, phase 2, the advantages and all. So where are we in terms of -- we have given some time lines, 2020, '22, what we are expecting and then going ahead. So what kind of investment? And everything will be stabilized in this company itself or...?

No, no. Yes, we are in the line. Whatever we have given it in the phase 3 presentation slide. So we are in the phase 3, and we are in time.

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

My first question is regarding the contracts with OEMs. For last few quarters, you had a quarterly contract, and now you shifted to 6 months contract. So what could be the reason for the same?

This is again because it is negotiated by the entire industry. And the overall demand is very -- demand is on the lower side, flatness in the demand of 2-wheelers as well as passenger vehicles. So this time -- because of this, the OEMs were not in a mood to give the price increase. But still with the insistence of industry, they have given this price increase but agreed for 6 months, not with all the OEMs. With some OEMs, it has been agreed for 6 months. With some, it is for the quarter 3 only. But going forward, with the increasing demand, we are expecting that again, we will be getting the new price increase from 1st April.

Right, sir. And you have mentioned that the scrap cost is increasing. So what kind of inventory you carry for scrap? And what could be the impact for this quarter for higher scrap pricing?

Normally, in raw material, we are carrying inventory in the range of 30 to 40 days of consumption.

Okay. All right. And thirdly, on the CapEx front, for example...

Sorry, just to further clarify, in terms of physical inventory as well as in terms of contract, for the quantity, we are holding in the range of 30 to 40 days of consumption. It's a normal range.

Okay, okay. And thirdly, on the CapEx front, what sort of CapEx or income in 9 months? And what is the target for the next 3 months and FY '23?

In current year, our CapEx will be in the range of INR 40 crores -- about INR 40 crores. And going forward, in '22, '23 and '23, '24. So we have a total CapEx plan of INR 150 crores. Where it will be involving an increase in capacity for the rolling mill and complying with all the requirements of Ministry of Environment, and then we have also planned one installing new NDT line, nondestructive testing line.

And you have shifted from the imported scrap to the local scrap. And I think we believe you are doing for this quarter only. So is there any cost sales which you can quantify?

Sorry.

You have shifted from imported scrap to local scrap as you are indicating the earlier questions. So I was asking that what could our cost usually have this particular quarter because of this shift? Because we put it will be a higher side and local will be on a lower side. Plus the...

As I have explained earlier also that not for this quarter from last 1, 1.5 years, we have shifted -- we have decided that we will be shifting to this local scrap. And because of this, we are gaining in the range of INR 1,000 rupees, INR 2,500 rupees a tonne.

Any other ballpark, raw material, how much is imported at the moment? And how many is local at the moment?

No. That is not possible. But overall, raw material mix side, we can say that on raw material mix, we have been able saving in the range of INR 1,000 rupees to INR 2,500 rupees a tonne.

Right. And I was asking how much is at the moment is local and how much is imported on a current mix?

Yes. Imported as of now we are using only in the range of 10% maximum, and rest all is domestic.

Okay, okay. And is the increase in trend over the last few quarters? But then local...

Last I think 2, 3 quarters it is almost the same mix we are using.

Right, sir. And on the CRM front, by when we can expect some further details in terms of are we participating? What kind of products would we have? Because we are also working on import suppression and export increase. Maybe any color on the team.

Next conference call -- by next conference call, we will be able to clear on this.

The next question is from the line of Vivek Chaturvedi, Individual Investor.

Sir, just wanted to check one thing. You responded to the previous participant's question saying that we were saving INR 1,000 rupees to INR 1,500 rupees by using domestic scrap, and you've been doing it for the last 1, 1.5 years. So just wanted to understand what has changed in the last 1, 1.5 years that we have been able to do this. I'm sure we would have evaluated this opportunity earlier as well. And is it that because of COVID, this saving has arose in the last 1 year? And is this a temporary thing and -- which will go away? Or you think that this kind of a differential, which is there between domestic and imported scrap prices, would remain in the future business?

This is not linked with COVID. And before COVID also, we have started doing some experiments on changing our scrap mix. So in local scrap mix, there are different components, which we are buying from the local market at different prices. And each raw material, which we are buying, is giving us some yield, maybe some 90%, some 94% or some -- giving 85%. So it all depends upon the mix which we are using and the impact of that mix on our operating parameters. So taking together is constituting our total cost for making a steel billet. Going forward -- as you said that going forward, also, the gap, which is always there in the different components of raw material, going forward also, this will continue. And this is a market trend for the last 5 years, 10 years and going forward also. I must say that all the components move in tandem, maybe some time lag of maybe 15 months, 15 days or maybe 30 days here and there. But overall, that much of gap between different components continues. So in future also, we will continue to get this much of benefit.

And sir, who are the suppliers of this domestic scrap? Whom do we purchase it from?

Many suppliers, the local traders also. There are many suppliers. Some are buying steel from ourselves who are making components, and then we are buying scrap from them. Whatever is getting [indiscernible] in manufacturing components.

Okay. And -- but these would be procured locally in and around our plant distance, right?

Yes, yes. Within Punjab mostly, I must say that within Ludhiana and that Mandi Gobindgarh is also nearby 40, 45 kilometers away. So this scrap is procured in Ludhiana as well as Mandi Gobindgarh.

Okay. Sure, sir. And sir, second question, was with regards to the composition of our customers, so a major portion I'm assuming is the automotive sector, whether it is 2-wheelers, 4-wheelers, tractors. So how much would be the breakup between the auto component and the non-auto component as of today?

More than 97% goes to auto components. And out of this also, major share is to passenger vehicles, about 40%, and 35% is to the 2-wheeler industry.

So sir, is it that -- our products are not particularly useful for non-auto businesses or that we've specifically chosen to focus on the auto segment because...

Yes. Our -- this is our focus. We are focusing on auto components only. And going forward in the future, we are more focusing towards passenger vehicles because Aichi is our partner. And so our focus is most -- more and more focus on passenger vehicles.

But sir, wouldn't it be -- wouldn't it make some kind of a diversification? Or wouldn't it smoothen out the economic cycle because our dependence on the passenger or the commercial vehicle? The auto industry is so high. So wouldn't it make some kind of a sense to have some kind of diversification in the customer base? Or is that overall looking at the strategy of the business, it doesn't make sense?

No. From that angle, we have a diversification also because we are also -- we have also started supplying to some railway requirements. And going forward, in the next 2 years, 3 years down the line, our exports will start increasing. And we are targeting more than 20%, 25% of our turnover in terms of exports. So that's always our focus that we have to diversify. But with that diversification, our main focus is towards passenger vehicles. And in passenger vehicles also, we have the possibility to develop and supply various critical grades with the help of Aichi, which presently are getting imported from Korea or maybe Japan or some other countries. So we will be replacing those imported critical grades of steel within India.

The next question is from the line of Rohan Mehta, Individual Investor.

Sir, I just had a couple of questions. Though you touched upon this, but despite a little pressure on volumes, there has been good growth in revenue, so probably because of higher realization. So is it just plain market dynamics? Or is it because of the different product mix that we've had this quarter?

No, it's mainly because of market dynamics, higher input costs led to the higher prices from the OEMs.

Right, right. So has bright bar sales also benefited our EBITDA margins because, I mean, EBITDA, in terms of your numbers...

Not much. As much in the same range. 80%, 20%. 80% is our black bar sales, and 20% is the white bar sales.

Okay. Okay. So not much change in terms of that ratio.

Yes.

So our 9 months EBITDA in terms of value has really shot up. So any other factors that help this?

9 months -- in case you are comparing with the previous 9 months, it's not comparable now. Because last year, it was only 6 months working.

Right, right. No, but that would affect the revenue. But even on an EBITDA level, because of the lockdown, it's purely because of that. Is that what...

Yes, it is because of that because in the first quarter, there was a heavy loss on account of fixed cost salaries, power and other expenses, which we have paid. So that has been offset by the 6 months working, in case we'll compare the last 6 months results. So I think we are almost at par.

Got it, sir. Got it. So -- and sir, in terms of the expansion plans, the CapEx would be funded by any combination of internal accruals and debt? Or any other source of funding CapEx is there in the plans?

Still, we are having the fixed deposit of INR 31 crores as on 31st December. And first, we will be funding from this FDR. And then of course, we are having the internal roles. I don't think that there will be any need of taking additional debt to fund this CapEx of INR 1 50 crores in the next 2 years.

Got it. Got it. So sir, then there won't be any chance of any equity dilation also -- dilution?

Yes. As of now, there is no equity dilution.

Okay. Okay, sir. And sir, as a result of the upgradation, do we have -- like in terms of total capacity, is there any -- has there been any incremental capacity at our disposal? Or it's just in an application only?

As of now, yes, we have increased our production capacity of steel melt shop. And going forward, in the next financial year, we will be increasing production capacity of rolling mill also to match with the steel melt shop. So for the shorter time until the market demand again picks up, which we are expecting that it will happen from quarter 1 onwards. So until then, we will be having some small spare capacity.

Okay. What would be the upgradation level right now, sir?

Right now, it is in the range of 85% -- around 85%.

85%. Okay. And sir, just -- you touched upon this during the presentation also, but if you could just shed some light on the Aichi involvement during this upgradation. And you said that the team learned a lot. So has -- is there any difference in terms of their processes and ours? And what kind of intangible learnings have come in? I was just kind of curious about that.

There are a lot of learning because the way they are working, the way they are doing the planning, most of the time, they are devoting on planning, then they start execution. But it's the natural tendency of us that we immediately come to the conclusion. So their Aichi way of working quiet our working phase that we have to devote more and more time on the planning part and analyze all the pros and cons, which can happen this way or that way, which can go against us. So writing all those points, discussing with the team and making everyone whosoever is in the projecting at the same platform, how it can be -- how the communication gaps can be reduced. So a lot many things we have -- our team has learned that with the implementation of project through Aichi way, many gaps, which sometimes we notice later on, those can be avoided at the time of implementation of the project itself.

Okay. Okay. Right. So in terms of process flows and the way of operating, that's become a little more streamlined with the Aichi's involvement.

Yes. Because our team has practically learned that otherwise, sometimes it is a theoretical learning. But this time, their experts were there in the plant physically. And our team has learned physically from them that how to do the project implementation step by step.

Okay, sir. So sir, this would translate into like better project time lines and maybe even cost savings in the long run, would that happen?

Yes. Definitely, yes. In the future, project implementations, all these learnings will be implemented. And also, we are horizontally deploying these learnings in the operations also that -- how all these learnings, which happened in project can be implemented in the operations.

Okay. Got it, sir. And sir, just a couple of other questions on the financials. Our power and fuel expenses also as a percentage reduced slightly. So is there just -- is it due to the upgradation or...

Yes, it's mainly because of the 15-day shutdown of steel melt shop. There was no consumption of power in the steel melt shop. So that is why it will be lower.

Got it, sir. It's likely to be similar? I mean will it be back to the normal levels in the next quarter because of the shutdown? The inventory was already there like you said. So sales continued, but the power and steel expense...

To some extent, it will continue in quarter 4 also because in quarter 4, we will be eating up some more inventory. And to that extent, we will be having maybe a smaller shutdown of 5 to 7 days additional as what was planned earlier. So to that extent, some lower fuel -- power and fuel consumption you can observe in quarter 4 also. But going forward from quarter 1, it will be at the same -- at a normal level.

Understood. And sir, raw material also, would you expect to -- it to continue at this current level?

Yes.

Raw material price.

Yes. Raw material prices are always volatile, and we are dependent on the market. So it's the international market who is impacting the prices on a daily basis. So that is not in our hands.

The next question is from the line of Aniket Redkar, individual investor.

Congratulations on the good set of numbers.

Thank you.

Would be the export contribution for the 9 months FY '22?

Our total export contribution of the total turnover is around 4%.

Okay. Okay. Okay. And sir, what is the current capacity for steel melting shop, rolling mill and the bright bar?

As of now, after this CapEx of steam melt shop, our steel shop capacity stands at 2 lakh 50,000 tonnes per annum. And rolling mill capacity is still at 2 lakh tonnes. And bright bar shop capacity is 40,000 tonnes in a year.

The next question is from the line of Sachit Kapoor from Kapoor & Company.

Sir, firstly, our facilities are in the landlock region. So how was -- how is the ecosystem affected to being landlock? And what are the disadvantages currently? And any steps that we are taking for -- to letting this thing out?

Yes, we are in a landlock location. But about 3 years back, we have purchased adjoining 8 acres of land. Earlier, we were operating at 20 acres of land. And now this 8 acres additional adjoining land has been purchased. So with this land in our fold, I don't think that we will be facing any problem reaching to our new capacity of 250,000 tonnes. So for this existing plant, this much of land is sufficient. So any more expansion will be requiring additional land and additional setup. Within this setup, I think we will be reaching at the optimum level.

Okay, sir. And the steps, which we are taking with Aichi going forward, all will be housed in this 8-acre and the current existing facility only?

Yes, with existing facility only.

Sir, of I late I think the graphite electrode prices have also moved up sharply. So what have been the price trends for the electrode prices for this -- for the quarter ending December? And how have the prices shape up for this month?

Graphite electrode prices are slightly marginally increasing from last, I must say, from last 9 months or 1 year. And we have a good coverage on this front. More than 1 year coverage is there. And as of now, in case we will see the price differential between existing price and the cover price. So we are fairly covered. And going forward, it is difficult to say that whether it will be -- it will continue to further increase or it all depends upon -- because the market -- overall international market in which China dominates. So as of now, I must say that we are fairly covered for the next 1 year at a good price.

Okay. So what is our annual requirement in the price trends? Can you give, sir, what are the spot prices for the December quarter in the market and for the month of January? How are the spot prices moved? I think so there has been a significant increase in the spot prices.

The current prices are moving in the range of INR 300 rupees to INR 325 rupees per kg.

This is for the month of January.

Yes, current prices, which are currently available.

Okay. And what is our annual requirement, sir, of graphite electrodes?

Annual requirement is approximately on a production of 2 lakh tonnes per annum. It will be about 8 lakh kgs of electrodes required because 4 kg is required for producing 1 tonne of steel.

Right. And any number you can give for the December quarter? And I just wanted to understand how the prices have moved for a month. There have been significant -- [indiscernible] 20% the price have moved month-on-month.

No, no. In the last 9 months or 1 year, we can say that the prices have increased 40% to 50%. But in last 3 months, I don't think that the prices have moved so fast.

But when we look at this Aichi part of the story unfolding. Sir, how will the revenue mix look like? Currently, with optimum levels of operations at 2.5 lakh tonnes on an annual basis, I think this should be optimum going forward. And then the further new growth -- the incremental growth rather will come from the Aichi JV that we are conducting currently going ahead. So how should the revenue mix look like going forward for 2025 or way ahead. If you could give some more color on it, sir?

In FY '25 or '26, we are seeing that we will be able to achieve sales volume of more than 230,000 tonnes in a year. And in that, 20%, 25% will be exports, happening towards the orders, which we will be getting with the help of Aichi Steel Corporation.

Sir, but currently only we are doing 2 lakh, I think. So there will be an increase of only 30,000? I missed some...

Actually, what happens is -- tonnes is our steel melt shop capacity and then some material is getting wasted. And finally, we can -- we got salable 1 lakh 80,000 tonnes only. So going forward, on achieving 2 lakh 50,000 tonnes of billet production, the salable will be 230,000 tonnes. So there will be 50,000 tonnes of salable product from present to the future in '25, '26. Or maybe '24, '25 also, we will be able to achieve that target.

Right, sir. And that -- on that mix of 20%, 25% will be export related to the Aichi JV.

Yes. 25% in exports and the rest will be the domestic.

Okay. And that will be a higher margin accretive product, sir?

Yes. Yes.

Significantly higher margin.

Yes.

Out of this band of -- it will be much higher than the band of 9,000, which we are currently running, 7,000 to 9,000 band.

Definitely, because in earlier conference call also, Mr. Jain has confirmed that in next year, once we will start receiving some bulk orders, so we will revise our guidance, which is presently 7,000 to 9,000. But in the future, we will definitely raise this guidance in next year.

And then, what are the key reasons for the slackening of this demand? Is it only the monsoon factor? As you have told that November month, we have seen at that November month particularly for all industries November onwards, whether it's cement or whether it is automobile, there have been a slackening of demand. The utilization levels have dropped significantly. And then again, our uptick was seen for the month of December. So what factors have really played out there for industries, particularly for you wherein you have seen that slackening of demand? And what -- how are the reversals going to happen, sir, going forward?

Though it is difficult to say. But to me, it -- I think that it is because of the various reasons. One is that the COVID second wave, which happened -- started with March, April and then continue until June, July, maybe some effects continue until July August also. So then some chip shortage. That is really hampering the demand overall worldwide in the passenger vehicles as well as in the 2-wheelers because in some 2-wheelers also the chip is getting used. And thirdly, because of, again, coming out a new variant, Omicron, then translating -- spreading so fast. So that is again bending on the demand part. That is why during this festival season, demand was not as was expected in the normal festival season or I must say that as it happened in the last year also after that COVID 1 wave. So there are various reasons. So going forward with the ease of this chip shortage and Omicron variant effect is getting over, everyone in the industry is expecting that from quarter 4 onwards, we will start seeing momentum in the volumes.

So this has happened just reversal. You have seen the momentum gaining traction for this month. We are already 1/3 into the quarter.

Yes. In January, we are seeing some positive response from the customers and a slight increase in the volumes. Earlier, it was depressing. And now this month some increase, it started -- some increase has started happening in the month of January.

Since we are an OEM-oriented business model, so there should be a forward program from your OEM wherein the supplies have to be met as per their production schedule. So you must be having a better idea of how their schedules are planned, and that has been dependent on the chip shortage. So that chip shortage ease out, their production going -- marching ahead, you would be having a better schedule. That should be the way...

Yes. On the basis of discussion, that's what I am saying that on the basis of discussions with OEMs and on the basis of schedules, which we are getting through Tier 1 suppliers. So definitely, there is a positivity. And overall, volumes have also started increasing from January, though it is marginal, but this is a signal that volumes have started improving from January. Onwards, we are expecting much more increase in the volumes and relate to the prior level of second COVID wave.

Right, sir. And sir, the seasonality factor also played out, sir, for our investor for the sort of...

Yes, yes. In our industry, seasonality impact is there. Always, there is more demand. And a smaller demand in the quarter 4 during Christmas time, most of the companies are taking the shutdowns. So during the second quarter, the demand is always on the high side because everyone is building up the inventory for the festival season.

Okay. And how much seasonally we generate to March quarter, sir? The fourth quarter...

I think just March quarter, we should be marginally better in terms of volume than quarter 2 or quarter 3.

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

Thank you for joining the conference call. And we are fully dedicated taking Vardhman Special Steel to the newer heights with the support of Aichi because this is a good -- this is a great opportunity with us that Aichi Steel is with us. And with this, we will be able to substitute some of our imports, which is happening to our country in India. And we will be adding the new milestones in the coming years and with the PLI scheme, which has been introduced by the government of India, yes, in overall steel industry will be doing better, and we will be having a major share in the steel industry. We will be improving our share in the steel industry as in India, overall, especially in the alloy steel industry also. So thank you all. See you in the next conference call.

Thank you.

Thank you.

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