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

Ladies and gentlemen, good day, and welcome to Vardhman Special Steel Q2 FY '27 Earnings Con Call hosted by IIFL. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prateek Singh from IIFL Capital. Thank you, and over to you, sir.

Thanks, Surya. Good morning, and welcome, everybody. On behalf of IIFL Capital, we invite you to Vardhman Special Steels 2Q FY '27 Earnings Conference Call. From the management, we have Mr. Sachit Jain, CMD; Mr. Sanjeev Singla, CFO; Mr. R.K. Rewari, Executive Director; and Ms. Soumya Jain, Executive Director. Before we begin, note that this conference call may contain certain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict. So without any further ado, I will now hand over the call to Mr. Sachit Jain for opening remarks. Over to you, sir. Thank you.

Thank you so much. And in addition to the team mentioned, we have Sonam, our Company Secretary with us, and we also have the AdLabs AdFactors team with us, our Investor Relations. And Mr. Rewari had to step out, so he has left the meeting. He's not there in this call. So we've had a good quarter last one. And one of the big highlights of this quarter has been the foundation stone of a forging plant was laid by the Honorable Chief Minister of Punjab Siddharadpan, and that happened in July end this year. And in this quarter, we've had record sales. Demand was strong. And partly demand has been strong because of the GST cuts, which happened last year on 2-wheelers as well as the smaller vehicles as well as SUV sales have been good and the other sales also have been good. So there has been good demand. I also -- we are getting the feeling that from the nonautomotive space also demand has increased, which has started affecting various other of our competitors. So overall material supply for automotive segment was tighter. And there were 1 or 2 shutdowns, unscheduled shutdowns from one of the large companies. That led to also a slight shortage in the market, and there was a pull. So the demand supply imbalance, we got good price increases in the last 2 quarters, which has led to good profits. Most of these have settled the prices for Q2 that we are talking about price settlement of Q3. Not all have settled for Q2, so that's still ongoing. In addition to that we have work going on in our new steel team plant. We have finalized the equipment for out -- the plant part. Land has been finalized for the [indiscernible] and we should be filing for environmental approval within December this year. And we are on track as of now to complete the project by September of '29 and stabilization by March of '30. In addition to that, the solar plant has been running well. And we are now expanding the solar plant by another 22.5 megawatts, 20-megawatts for this will be for the current plant and 2.5 megawatt will be for the entity line, which is being set up in the forging plant. For the forging plant, there will be solar power coming in by the time it starts reaching better utilization. The forging plant is expected to come up by March of '28. And then, of course, it will take some time to fill up the capacity. A slight change or the thought process is happening on the financing structure of the new plant. We were earlier looking at debt equity for the company was 0.5:1, which would have been at max 0.75:1. More and more as we were talking to some financial experts at some well mature of the company, advisers. We are now coming around with a conclusion. We are diluting a bit more than required. And therefore, we may look at 1:1 debt equity. And therefore, the debt component will become a bit higher and the equity raising part will be a bit lower. For the equity part, we'll be doing a rights issue, which will happen in the later part of next calendar year, second half of next calendar year. As far as the project cost is concerned, we are also looking at the project costs, some aspects of the projects have gone up in term of cost. Land is definitely more expensive than we had envisaged. As well as for the equipment the rupee has depreciated after the Iran was substantially. Sea freight has gone up as well as metals have gone up. So all commodities have gone up. So the project cost is going to be higher than what we had envisaged. Also, certain equipment that we had planned in the second phase, we have brief in the first phase. And we are also looking at some product reconfiguration to look at -- to special service these non-automotive parts. So all that that project is being eying modified to the conceptualization. Everything will be finalized by March, April next year. But suffice it to say at this point in time, the project cost will be higher than the INR 2,000 crores that we had at this stage. But we will also have the ability to have a higher production at 500,000 tonnes eventually. So we are building a scope to increase the production beyond 500,000 tonnes to at least 700,000 tonnes in the second phase. And further after that also with some more additional [indiscernible] The additional equipment that we'll have to add will not be of a highly significant quality. The other thing we are examining, of course, the decision will be taken by the Board is also to look at [ Exaren ] suspending the dividend for 3, 4 years. It does not make sense to give dividend rights issue for these same investors to put in money and rights issue. We are examining this. Decision, of course, will be taken by the Board in the April Board meeting. So overall, I think the business remains good. The demand for the next quarter is also good, and we have finally received the approval from the European OE, mass manufacturing for that has started. Also on a major import substitution of domestic major, which is a large quarter it was a highly -- very high-end quality. We have successfully got approval and mass manufacturing for that too has started. Sales for that will start happen from January. So we are on track in terms of all our workings. Our new entity line will get commissioned by December and the new sealing line will get commissioned by early November. With this, we'll have some more capacity, more flexibility to service customers better. So capacity increase will be for feeling overall capacity still sustained by the environment approval of 300,000 tonnes. We have applied for increasing the capacity of 360,000 tonnes. We seem to have got a recommendation. Maybe this may happen. But until we haven't received any letters so far. But until we have not received a letter, we don't have any further information at this point in time. That's all for opening comments. And over to Mr. Singla, CFO; and then, of course, we'll be open for question and answers. Thank you.

Good morning, everyone. On the financial part, we have already circulated the media. And as per this our total sales for the quarter has increased on a year-on-year basis by 27%. And revenue from operations is up by 39% and EBITDA, they are up by about 50% for the quarter over the previous -- over the postponing quarter of last year. The main increase is -- the main reason for the increase in the profitability apart from the robust demand, Sachit sir has already said. It also coupled with the operational efficiencies which we have started arriving on the CapEx, which we have undertaken last year in the amount of is putting up cost loss and the renewing furnace. So really, we have started now getting some benefit in terms of cost savings from these CapEx in the second quarter and going forward to further increase. And of course, this power plant is also us has the benefit. So this quarter, in other income also GST benefit is a little higher than the corresponding quarter, because the GST benefit was sanctioned by the government for 7 years. And a 7-year period has over by August, '26. And now we are left with only electricity duty benefit, so which will continue for 10 years and the validity is up to August '29. So, that's all on the operational side. Now I request that...

No, one more thing, I think, is that our EBITDA per tonne is on the highest part of our range. So I do not expect -- I would request you not to treat that for now as a standard tearing, we still believe the EBITDA range will be between [indiscernible] to INR 12,000 per EBITD per ton.

Currently, we are in [indiscernible] range.

Yes. So that's all from our side as initial opening remarks. So we are open to questions.

[Operator Instructions] The first question is from the line of [indiscernible] Capital Limited.

A couple of questions. Firstly sir, you -- so you mentioned EBITDA per ton has sharply improved. How much of this has been driven by inventory gains?

Yes. So, we don't separate out those, but there are -- there is an limitation said, these are not sustainable numbers. If we get it 1 quarter, maybe we get it get something next quarter. Those are not in our control. Our guidance remains INR 9,000 to INR 12,000 EBITDA per ton.

Just to add that from last year from 1st July '25, we have shifted to SAP as for [indiscernible] And in that, we are doing the valuation brief on the each batch. And whatever the material has been issued, accordingly, the valuation is done. So there is no -- the early concept which we are revaluating based on the last 3 months of [indiscernible] so now it is on basis posting batch is having its own port at type of product. And accordingly that for the tailoring facilities. So there is no revaluation of the inventory at the end of the month or at the end of the quarter.

Okay. Okay. And just the volume growth for this quarter?

Sorry?

Yes. So the volume growth for this quarter has been very [indiscernible] you mentioned that the demand you see is very strong. So do you see this momentum sort of continuing ahead and maybe will surpass the volume guidance? Do you see that as a possibility?

No. See, second quarter is always the best quarter because this is a buildup for inventory for the season, the festive season. unlikely that we lease up our inventories of periods and billets. So this kind of is unlike are clearly we will be at the higher end of our little bit higher than our initial forecast. So we expect sales of about 260,000 tonnes now for the it was about 6,000 tones now for the [indiscernible]

Okay. Okay. And so also the realization, there's been a sharp improvement. Do you see that -- you mentioned a bit of the demand and supply for balance. So what sort of average utilization should we expect for this year and going forward?

Average utilization, I think it will continue at this same pace, because we are getting the price increase from -- in the first quarter also the price increase was the same settings. So third quarter also striking some prices increase. So this average utilization will continue [indiscernible] maybe little higher.

The other companies that set out letters for price increases, which are ranging between INR 3,500 crore to INR 4,000 a tons. So the latest have gone up. What will be the final status will be seen -- so no settlement has happened for Q3.

Okay. Okay. And you mentioned some of the forging and we're expecting to be...

[indiscernible] Can you come back to the queue, please?

[Operator Instructions] The next question is from the line of [indiscernible] Havelivala, an Individual Investor. Please go ahead.

So my first question is, so the capacity is at 3 lakh tonnes for beds and 2,000 or rolled bars and 1,000 for BrightPath. So what are the current utilization levels and the bottle -- principal bottlenecks and the near-term opportunity to improve throughout -- without any major incremental CapEx, sir?

Rolling mill capacity is also 3 lakh tonnes of input, which is leads to towards 70,000 tonnes of [indiscernible] After the new reheating furnace was commissioned, which was commissioned in March, after that, the capacity has gone up to be full based. So this is the full capacity. We cannot do more than this, because of environmental approval. So if we get the environmental approval to go up to 360,000 tonnes, then we will be able to produce more.

Okay. Okay. And sir, basically borrowing has been increased to INR 162.93 crores as of 30th September, which was INR 92 crores at the end of Q4. Why that trade receivable was close to INR 410 crores from INR 277 crores. So what explains this moment, sir? And what are the actions we are planning to take -- to improve the cost conversion cycle and the working capital efficiency, sir.

Actually in this -- there is a reclassification this time because of the changes in the IndAS. There were some creditors, which were against discounting on the vertical [indiscernible] So now because changes the IndAS, those have been reclassified in the borrowings. So otherwise, in total, if you will see taken together Boeing and the creditors, there is no increase rather -- there is an increase -- there is a decrease.

Okay. And then as raw material inventory carried forward from the previous quarter...

Can you come back to the queue, please.

The next question is from the line of Ritwik Sheth from One Up Financial Consultants Private Limited. Please go ahead.

Yes. Congratulations on a great set. Sir, two questions. Firstly, on the brownfield expansion, you mentioned that the EC has already recommended, but you are awaiting final approval, right?

There has been a recommendation of the committee. Now, when the final approval will come, whether some conditions will come, stores are on awaited. So until we have something in our hands, we don't know.

Right. And sir, once the final approval comes, say, Jan 2027 hypothetically, how long can we take to increase our capacity from 300 to 360?

Not also where there's also a question [indiscernible] we have will take [indiscernible] -- it will take -- so about a year or December next year, whichever is later.

Right. Got it. Got it. And indicative CapEx for this...

Why I'm saying December if the, let's say, the approval comes in October in itself [indiscernible] 15-day shut down. And turndown cannot be taken in the season. So we have to look for more lean period for a shutdown. And typically, the leanest period is December end when the OEs go on a shutdown may there is shutdown for a week [indiscernible] the leanest period. So mostly, we will plan a shutdown at that point in time. Again, if the approval comes and when the approval comes.

Right. Got it. And sir, my second question is the EU OEM kind of approval -- what kind of contract is going to be? Is it going to be on a spot basis or it's a long-term contract -- and what kind of volumes...

[indiscernible] also industry does not -- I mean we road operate any spot contracts, prices are fixed in every quarter, those prices change. Based on the negotiation that various steel companies have various OEs. So the prices change as per that. Now this European OE is new to the Indian market, so they will figure out with us, whether they want to go with the Indian system or they'll go to the European alloy system because you had a difficult set of pricing. We are flexible. We are open to both people with a lag, both match eventually.

Okay. Actually I'm asking from the volume perspective, sorry, like is there any fixed volume that they've committed.

We don't disclose volumes of each customer like this. And anywhere in full -- so eventually, if the volumes increase, we will be reduced and less paying customers.

Okay. Okay. sir. And I have a couple of more questions. I'll get back in the queue.

[Operator Instructions] The next question is from the line of Divyansh Gupta from Latent PMS.

First question regarding [indiscernible] So the incentives that we receive from the government, right? In the other income, is it recognized based on accrual or only when we receive the money? And what is the -- and if it's on accrual then what is the typical time line between accrual and receptor money? And any delays in government that we have experienced.

There are two types of incentives. One is GST and another one is the electric duty. So electricity duty, regularly, we are getting monthly power business Secondly, GST refunds, GST refund that is basically central government. So GST refund in area by the state government. So normally the lag of -- so we are recognizing on a pool basis, but it takes to back the money in cash from the state government normally it takes 3 years.

Got it. And therefore, the second related part to the question is, if we see the financials, we see a large jump in the account receivables what is driving such an increase in account receivable if I just look at from a number of days perspective? I know sales are increased or amount should increase, but on days basis also have increased.

[indiscernible] proportion increase in sales? Because if you will see the sales numbers are also during this quarter is more than 70 tonnes of sales. which in quarter was only 59,000 tonnes. So the difference -- the incremental sales of 11,000 tonnes, which happened in the last 2 months, August and September, is leading to this higher receivables. And [indiscernible]

Got it. So there's no increase in days on a BAU basis, just in [indiscernible]

Number of days, it has increased by 4 to 5 days only because of some sales to customers who are having [indiscernible] credit.

Got you. Got it. And the second question is what would be the export sales deemed or direct in this quarter?

It is almost in the same ratio as [indiscernible] last year. So 70% is direct and another 6% to 7% is indirect [indiscernible]

Understood. And sir, just the last question, I know that there's a limite of two, but...

Can you come back in the queue.

The next question is from the line of Anandh Dharshan from 360 ONE Capital Markets Private Limited.

Congrats on the great set of results. So my first question is regarding the new way at you have mentioned there has been an upward revision for the CapEx in bonus. So CapEx for both the new steel and forint what payback will be assuming for the new numbers?

As I said, maybe we are still revising both things not be declared as -- so we are not recall be done by March, April. So we'll have a better idea, but we're still reconfiguring some service the nonautomotive segment which are becoming very attractive now.

So do we see [indiscernible] 20% of upsales of cost or something like that?

So -- we are not -- as I said, we're not sharing information at this point in time.

Okay. Okay. Right. So next question is regarding the forging facility.

[indiscernible] the costs will be lower than what we had budgeted.

Right, sir. Okay. So regarding forging [indiscernible] we had around INR 45 crores of CapEx plan. So roughly observe like around 65,000 tonnes of steel, sir, from our facility?

No, no, no, no. in absorb about tons annually at full capacity. And it will take some time again business, it will take some time to build up the full capacity.

All right. This is a Phase 1 rate, sir, 15,000 tones it will be absorbing.

That is the first time that we're putting on. That's right.

Okay. Okay. Sir, then the EBITDA, the EBITDA range, which you mentioned has 9 to 12 per kg. Is it for the next 2 quarters? Or what's your guidance for the next year also?