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

Ladies and gentlemen, good day, and welcome to Vardhman Special Steels Limited Q3 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Amit Sharma ] from Adfactors PR. Thank you, and over to you, Mr. [ Sharma ].

Thank you, Jensu. Good afternoon, everyone. On behalf of the entire management of Vardhman Special Steels Limited, I thank all the participants present on the call, and I wish you a very warm welcome to be present here for the Q3 and 9M FY '26 Earnings Conference Call. To guide us through the results today, we have with us the senior management team of the company, represented by Mr. Sachit Jain, Chairman and Managing Director; Mr. Sanjeev Singla, Chief Financial Officer; Mr. R. K. Rewari, Executive Director; and Ms. Soumya Jain, Executive Director. Before we begin, please note that this conference may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. We will commence the call with an opening speech by Mr. Sachit Jain, followed by the financial highlights by Mr. Sanjeev Singla. After this, we will open the forum for the Q&A. With that, I now hand over the call to Mr. Sachit sir. Over to you, sir. Thank you.

[ Amit ], thank you. Ladies and gentlemen, a very good afternoon to you on behalf of my team and myself, and thank you for showing your continued interest in our company. Last quarter has been very, very interesting. We've had good volumes, but price reduction has happened primarily because of lower prices of raw material. However, the trend has changed in raw material prices and raw material prices started rising in the last week of December and continue to do so in the beginning of January. The impact of this in terms of prices, some impact may come in the fourth quarter. Otherwise, first quarter of next year, the impact of this cost increase will come in. Overall, availability of raw material continues to be fine. Demand continues to be strong. And the other significant events have been is that we have renewed the third technical assistance agreement with Aichi for the next 3 years as well as we have announced our forging project. We had earlier indicated we will decide by January. As things happened, we decided -- we had a special board meeting in the month of December, and we announced our forging project. Now a little bit about Aichi's forging abilities. Aichi, as you know, is a Toyota Group company, which is very strong in special steels, in automotive steels as well as they are also very strong in forgings. Almost their entire production -- and they are the largest forging company in Japan, and almost their entire production is consumed totally by Toyota Group, so partly Toyota and partly by Toyota Group companies. So all the Toyota manufacturing systems, all the production systems, all those capabilities are part of their skill set. And those capabilities are going to be transferred to the new plant as we are putting it up. The target date of commissioning of this plant is going to be July of '28. So 1 year before our new steel plant. So the forging business will start production before the new steel plant. The investment proposed is INR 475 crores, which includes land and buildings, some extra buildings will be made. But most of this CapEx would also take care of the second line, which will come in. So second line of forging, which will come in, will take lesser investment than this one. As far as Vardhman Steel is concerned itself, the reheating furnace CapEx is in progress. It is likely to get commissioned by March, and we should get the full benefits of it from mid-April onwards. So let's say, May onwards, we'll get the full benefits of the new reheating furnace. Two benefits that we are expecting from this is, one, a large part of our job work outsourcing will go away and will come in-house. Second, we will be able to improve our yield, and therefore, that will add to the bottom line. And third, we will also improve our servicing to the market, which will lead to inventory reductions as we go along. And of course, the entire job work will not go away. Some job work happens because of our bigger size billet, which we don't have the rolling capability and some job work happens for our bright bars. And really, the profit that we are passing to our vendors and the transportation costs to our vendors for job work, that and our relative better efficiencies, that is going to be addition to the bottom line, not the entire job work item if you're expecting that kind of increase happening. It will be part of that job work, which is going to be the increase. As regards to the greenfield steel plant, land purchase, we are in the final stretch now. We should be able to complete the purchase of land if all goes well in this quarter. And discussions with machinery suppliers are going on full swing. We hope to come out with a very robust plan. And we are sticking with our date of July '29 for the commissioning of the new steel plant. The new steel plant is expected to have a capacity of about 500,000 tonnes. It's going to -- we believe we'll be able to produce more from it than the stated capacity of 500,000 tonnes. As of now, it's too premature to say what we think we can produce from here, but definitely more than 500,000 tonnes. The second, with the new plant coming in, we are going to add to our product mix portfolio. Currently, we are restricted to smaller sizes and medium sizes. For larger sizes, which is 90 mm and above, which is required for some crankshaft materials and for some specialized gears and for products required for commercial vehicles and off-highway vehicles, we don't have those capabilities. In the new plant, we will have those capabilities. In addition, as of now, we have almost 100% automotive steel business. We don't have the technical facilities to produce nonautomotive steels. And some of you who have read my annual reports -- letter to the shareholders in my annual reports of 2016-'17, I have been expressing my desire to get into other specialized steels apart from auto steel. So with the new plant, we will have those technical capabilities into the machinery park, which will enable us to get into those areas. And just for your attention, the nonautomotive space is a very vast space. And I'm not saying we get into all these spaces, but I'm just -- to give you an idea of what it covers: Bearings, railways, defense, aerospace, tool and die steels, oil and gas. So it's a -- and a few others, the turbines and the shafts for shipping, shafts for windmills. So there are massive areas, which are nonautomotive. In fact, globally, the nonautomotive steel segment is 60% of special steel. In India, it's lower. And in Vardhman, it's close to 0. So in the next 10 years, we expect to have a reasonable nonautomotive steel portfolio, too. This will entail, of course, a lot more thinking, and we'll be ready for some announcements maybe in 1 year, 1.5 years' time. But just now, the focus is optimizing the current steel plant to take it up to 300,000 tonnes of billet making and 270,000 tonnes of finished product. The second is the new forging plant. And third is the project implementation of the new steel plant. And as I said, simultaneously start looking for avenues to create technical capabilities in terms of machinery park to be able to make the nonautomotive steels. As regards the solar plant, we are, again, in the final stretch now. As we had shared earlier, the plant has been ready since June. The connectivity to the substation was a problem as some farmers had gone to court in between. All those cases have been resolved and the connection, the last tower has also been put. The stringing has been done. So in the next week, 10 days, everything going well, we should have solar power coming in, so which will reduce our carbon footprint from 0.73 to 0.48 as well as lead to cost savings on account of the solar power, which is going to be cheaper than our existing power. Anyway, that's a very long update from my side, one of my longest. And I'll leave it to Mr. Singla, our CFO, to take you through some numbers, and then we're open to Q&A.

Thank you, sir. Good afternoon, ladies and gentlemen. Happy New Year. This is first call in 2026. So on financials for the quarter 3, Y-on-Y basis, we have achieved 55,000 tonnes of sales as against 52,600 tonnes if we compare with rolled versus rolled, leaving aside the billet part. And in terms of revenue, it is INR 430 crores as against INR 426 crores, a marginal increase only because as Sachit sir has explained that it has been mitigated by a decline in prices. EBITDA for the quarter is INR 56 crores as against INR 42 crores in the corresponding quarter of last year, registering an increase of 34%. So this EBITDA per tonne is INR 10,200 per metric tonne. In this quarter and the previous quarter, in other income, normally, we are having the income from electric duty exemption and GST refund from the state government, which is operational income. But this quarter, we have interest income received on unutilized funds, which were invested by Aichi. And secondly, the interest accrued income, which has been booked by us on the advanced deposit given to the PSPCL, Punjab State Power Corporation. So these 2 incomes if we exclude, then our EBITDA per tonne is INR 9,263 for the quarter. And similarly, for the 9 months ended, the EBITDA excluding these incomes is INR 8,600 per tonne. And as a result, for the 9 months, our total PAT is INR 88 crores as against INR 73 crores in the corresponding 9 months of the last year. So this is the ever highest PAT, INR 88 crores for the 9 months. And hopefully, after completing this fourth quarter, we will be registering ever highest profit for the full year also. So that's all on the performance. And now I request for the question-and-answer session.

[Operator Instructions] The first question comes from the line of Amit Agicha with H.G. Hawa & CO.

Congratulations on a good set of numbers. Sir, the INR 475 crores forging and machining CapEx, like can you just explain the expected peak revenue potential, EBITDA margin and ROCE from this facility?

Those details will come in. But once both the lines are established, we should be able to get a decent return on capital employed.

And sir, second question is like what will be sustainable EBITDA per tonne that investors should model like excluding the nonoperational income?

We have said that for this year, it was 7 to 10 and from next year, 8 to 11.

This year INR 7,000 to INR 10,000, next year INR 8,000 to INR 11,000 per tonne?

Correct.

[Operator Instructions] The next question comes from the line of [ Nishita ] with [ Sapphire Capital ].

I just wanted to ask, with all of the CapEx that we are doing and -- so how do we see our revenue growth in the next 3 to 4 years? And also on the EBITDA front, what margins do we see going forward? And what will be the sustainable margins in, say, once all the capacity is commissioned?

So the sustainable margin as of now will remain at INR 8,000 to INR 11,000 a tonne. Aspirationally, we have said we'd like to target INR 12,000, but we are not ready to reach that level as of now. And once the capacities are fully commissioned, we will have about 8 lakh tonnes roughly of steel production, which will mean about 7,20,000 tonnes of finished steel. So this year, we are targeting about 2,15,000 tonnes, so we will go up more than 3x from the current level as far as steel production and sales is concerned. In addition, there would be forging business coming in. Now when we say the new steel plant is getting commissioned in July '29, it will take a few years to reach full capacity utilization unless the government's policies on green steel kick in, which is on the anvil, but it's very difficult to predict when it will kick in. But moment they kick in, then, of course, there will be a very big pull for [indiscernible]. And in the next 3 years, we should reach our full potential of 2,70,000 tonnes before the new steel plant comes in. So from 2,15,000 this year, in the next 3 years, we will reach 2,70,000 to 2,75,000 tonnes. Sorry, 2,25,000 this year, my -- pardon me.

[Operator Instructions] Next question comes from the line of Amit Agicha with H.G. Hawa & CO.

Before that, just a clarification. Again, if some of you are new out here, we always give our sales in tonnage, not in rupees because pricing is in the hands of what is the raw material movement. So if prices go up, the sales will go up. If prices come down, the sales will come -- the turnover will come down. Volumes is in our control. And this is why we don't look at EBITDA margin as a percentage, we look at EBITDA per tonne. So just for clarification, why we are speaking here per tonne and otherwise, what is reported, of course, is rupees. I hope that clarifies our thinking. Yes. Go ahead, Amit, for your next question.

Yes. Sir, which export geographies are likely to contribute meaningfully?

Export, as we've shared earlier, for us, our direct exports, the biggest market is Thailand. And a little bit exports go to Philippines, a little bit Indonesia, a little bit Malaysia. So all those are tiny bits. So exports primarily -- Thailand is 70% of our total exports, more than 70% of our total export. As far as indirect exports go, which is our steel, which is getting converted into components in the hands of our customers, exports are going primarily to U.S. and Europe, some partly even to Mexico because ultimately, again, going to the U.S. as far as -- but that is from our customers, customers like Sona Comstar, GNA Axles and others. So just to give you an idea of that.

And sir, as far as automotive steel is concerned, I think so we are the #1 player in India.

I'm sorry, repeat that as per green steel?

As far as special steel for automotive segment is concerned, I think so we are #1 in India.

No, no, we are not. So size-wise, JSW would be bigger and Tata Steel is -- in fact, we are amongst the smallest players.

From the market share point of view.

OEM-wise, I would still say, as far as -- we would consider ourselves #2 players in terms of width of OEs. So I would consider ourselves as the second best player. It's too presumptuous to call ourselves as the best. Our target, of course, is after the new plant is commissioned, then we should rightfully in a few years' time, become the #1 special steel player in India. Again, just now we're talking only automotive steels.

And sir, I think I also heard like you are also thinking about the nonautomotive steel as well, like what could be the size of that?

In the next 10 years -- I've just put a number out here because we're not even there in that business. But in the next 10 years, we expect to be about 30% of our business, just as a rough guidance, I would say. Please take it as just a very rough guidance, but that's what we would like it to be. But it will take some time because just now we don't have the machinery to make it, right? That knowledge is there, the technical knowledge is there, the knowledge -- Aichi, our partners, have the know-how. We have the knowledge, our own technical people have the knowledge. We just don't have the equipment to make those kind of products. And the CapEx required for some of those products is not as much. And for some, the CapEx required is higher. But again, nowhere near the terms of these large CapEx amounts of INR 2,000 crores. So once we do this INR 2,000 crores CapEx, our incremental CapEx is never going to be in that kind of sizes. This is a strong word, but unlikely to be in that kind of sizes, yes. Sorry, go ahead.

Can I ask one more question?

Can you just get back in the queue? If there's nobody else, you can come back.

The next question comes from the line of [indiscernible] Securities.

I wanted to ask, is the reheating furnace project on the track for Q4 FY '26 commissioning? And what are the expected fuel and yield benefits from it?

So it's on track in Q4. It's supposed to -- we are taking a shutdown end of February. It may spill over into March. And 1 month or so of stabilization. So which is why I said in the first half of -- second half of April onwards, we should get full benefit of the reheating furnace. We have not shared the benefits of the reheating furnace, but a couple of -- the benefits would be -- I'll give you an idea and you can do your own calculations. Currently, our billet sizes are 4.2 meters and you take some end from both sides that are cut as waste, which goes into scrap and we reuse that scrap. That billet size is going to go up from 4.2 to 5.2 meters. So that's where the yield benefit is going to come in. Also, the yield benefit partly will come in, in our continuous casting machine because of longer-sized billets. And again, cuts -- the burning loss when you do the -- when you cut the billets. In addition to this, because of the quality of the reheating furnace -- the kind of reheating furnace, the quality of our product is likely to improve, which should reduce our rework and rejections. Now we don't have any number in mind as to how much will it reduce. It will definitely improve the quality. And hence, we expect the rejections and rework should come down. But those are the 2 improvements. And it is on the back of projects like this that we have raised the guidance of EBITDA by INR 1,000. So from 8 to -- from INR 7,000 to INR 9,000, we've raised the guidance to INR 8,000 to INR 11,000. So it's on the back of these kind of projects.

Okay. I got it. I just wanted to ask, the Kocks Block operation has been operational for like a whole quarter now. So I wanted to ask what improvement visible in the premium...

Yes. Very clearly, we are getting all the benefits that we had envisaged. So the first benefit is the roundness of the bars is better, which enables superior quality and especially some of the products that we are trying to -- we are targeting as import substitution from Japanese steels. Those products will be better served because of this better roundness. Second, we can give exact diameters. So whatever the customer wants. So normally, today, a rolling mill, you have 42 mm, 45 mm, 48 mm. But if somebody needs 47.3 mm, he has to take 48 mm and 0.7 mm is wasted and their yields go down. Now we can give exact to the 0.1 mm. So that's the second advantage. And the third advantage is the change of size time goes down, which increases our flexibility to give better service to customers. And you will see the impact of that in working capital reduction in the future. Within the next financial year, you'll see the -- within the first half, you will see the finished goods stocks coming down.

Next question comes from the line of [ Saket Kapoor ] from [ Kapoor & Company ].

Sir, firstly, if you could just explain, once again, the metrics, sir. Currently, our melting shop is 3 lakh and that this will go up to 5 lakh in 2 years? Yes.

No, no. This capacity will remain at 3 lakhs. We are applying to the government to increase our license -- to the Environment Ministry. If we get that license, then the capacity, we believe, can go up in a year's time. We have to make some more CapEx for that. But as of now, please take 3 lakh as our capacity. Rolling mill today, our capacity is 2,10,000 tonnes and this will go up to 2,70,000 tonnes from April. So moment the reheating furnace is commissioned, then the capacity will go up to 2,70,000 tonnes. Then we will not have the capacity constraint except for the bigger billets, which is 240 mm by 260 mm, which we -- our rolling mill does not have the capability to roll those products. These have to go outside for rolling or a double rolling process. So in the new plant, we will not have these limitations, the 3,00,000 tonnes and 2,70,000 tonnes. The 5,00,000 tonnes you're talking about is a new plant. The 5,00,000 tonnes is a new plant. And the new plant will come up by July '29.

Okay, sir. Because I think so in the earlier CapEx -- okay, fine, sir. In the April announcement, there was about the new billet production capacity of 5 lakh was also announced, I think, so in the...

In the new plant. Yes, yes, it was announced in April, correct. Yes, I'm referring to the same announcement. That 5 lakh tonnes, which is the billet capacity, it will come up by July '29. That will be in addition to the current 3 lakhs. It's a new plant.

So sir, just to have more basic understanding. Our end products, which we are selling to our customers is the bright bar and how do we label that...

Black bars and bright bars. Black bars -- so we call it hot rolled bars. So our rolled capacity, as I said, is roughly a little over 2,70,000 tonnes. And then because some part goes into bright bar, so our bright bar capacity is about 50,000 tonnes. The capacity goes down if the diameter of the material coming in becomes smaller. So if the trend is towards smaller diameter as currently we see that, then the capacity of 50,000 tonnes goes down to about 40,000 tonnes. So it varies between that depending on the product mix.

Okay. Sir, the tonnages, which we have done for the 9 months, we are now averaging in this 55,000 tonne per quarter. So this will be how we'll be exiting the fourth quarter also in terms of the deliverable schedule?

Around the same figures. I say, our target is 2,25,000 tonnes for this year, and we hope to make that target.

Okay. And sir, how has this tariff part has impacted your customers? You did mention name of GNA Axles and all. They have been exporting to the U.S. So has any off-take...

There was a reduction in off-take earlier, but there seems to be covering up now. So slowly covering up, which is why we are able to sell what we are able to sell. Our sales haven't gone down. We are on track with our budget. If at all, if we had capacity, we could have sold another 5,000 tonnes at least, in the full year, not for this quarter.

Not for the quarter. Okay. So this 2,25,000 would have gone to 2,30,000.