Welspun Corp Limited (532144) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Welspun Corp 2Q FY '22 Earnings Conference Call hosted by Emkay Global Financial Services. [Operator Instructions]. Please note this conference is being recorded. I now hand the conference over to Mr. Abhineet Anand of Emkay Global Financial Services. Thank you, and over to you, sir.

Thanks, Vikram. Good morning, everyone. Let me introduce the management that we have today from Welspun Corp. We have Mr. Vipul Mehta (sic) [ Vipul Mathur ], Managing Director and CEO; Mr. Percy Birdy, CFO; and Mr. Akhil Jindal, Group CFO and Head Strategy at Welspun Group. We will have an opening remark from the management. So over to you, sir.

Thank you. Good morning. First and foremost, just to make a small correction. My name is Vipul Mathur and not Mr. Vipul Mehta. I hope you could have taken a little -- should have been a little more diligent about this. But nevertheless, good morning, friends. Welcome to all of you for this Q2 FY '22 conference call. It's a great pleasure to have you today morning with us. First and foremost, just to start, let me give my opening remarks, and I would like you to take -- I would like to take you through the -- some of the operational and the financial performance of the company during this quarter ended September 30. The total income from our operation was INR 1,306 crore, which was 12.8% higher on Y-on-Y basis. We had an EBITDA of INR 195 crores and a PAT of INR 85 crores. Our sales volume for this quarter was 180,000 metric tons. At this point of time, we have a current order -- unexecuted order book of almost 580,000 tonnes and an active bid book of close to 1.4 million tonnes. We have a very strong net cash position of INR 1,000-plus crore. From an operational performance, I just wanted to let you know that from our India operation, out of that 180,000 tonnes what we executed, the sales what we have achieved, our India operations was 110,000 tonnes; from our U.S. operation, it was 32,000 tonnes; and from our Saudi operations, it was close to 38,000 tonnes. I'm sure you would like to have a little brief understanding of -- our understanding of the market. Just let me give you a little overview as to where we see the market seems to be moving. As you know, we are seeing a significant surge in the energy prices. The oil prices have climbed up to a multilayer high. As OPEC+ said, it would stick to the existing plan for gradual increase in oil supply. Some market participants have expected a higher increase in supply, but that didn't happen. Even the natural gas prices have soared over the last few months, especially in Europe. Even in the U.S., if you see, the gas price is around 6 -- in excess of $6 per MMBtu. And in Europe, it's more than $30, $35 per MMBtu. This is a very historic high. So we are seeing a huge surge in the energy pricing globally. The reason for that was that the global energy demand for last year when the economies went into a lockdown to fight the pandemic. As the situation improved this year, especially in the Asian economies, the demand shot up and the energy producers pressured to meet the growing demand, pushing up the prices. In the near term, a repeat of cold winter in the northern hemisphere would further propel the energy prices further up. The current level of high prices is a big positive for us as it is expected to drive global spending for oil and gas pipeline-related infrastructure projects in the medium term. However, the commodity pricing, including the steel pricing, continues to be a cause of concern. The steel price -- increase in the prices has created disruptions in the supply chain as project costs have gone up -- have escalated significantly. A further flare up in the steel price is still a key risk. If we specifically talk about India, the outlook of the oil and gas sector in India continues to be a bright spot. India's oil consumption is estimated to rise from 4.8 million barrels per day in 2019 to 7.2 million barrels per day in 2030 and then to 9.2 million barrels per day in 2050. Under this stated policy scenario, the global oil demand will peak in 2030 at 103 million barrels per day and will remain unchanged till 2050. This projection yet again shows that the certainty of that oil is going to be there, is going to play a major role in the Indian economy, at least over for the next 3 decades. The Indian natural gas demand is also projected to double to -- is also expected to double from 64 BCM to 133 BCM. While our demand will double, but as against the global demand has been rising at a rate of 12%. Indian refining capacity is also set to expand by 30% to 6.9 million barrels per day by 2030, while the global capacity is expected to increase only by 3%. With the country aiming to increase the share of the gas in the energy market to 15% by 2030 from the current level of 6%, 15,000-odd kilometers pipeline are under various stages of construction at this point in time. Taken together with the 17,000 kilometers of existing pipeline, this will create a huge national gas grid in the country. The major impetus was the gas demand will also be through the City Gas Distribution system. The oil and gas regulator, PNGRB, in September 2021 invited bids for giving out city gas retailing license in 65 geographical areas in the 11th city gas -- in the 11th round of bidding. Presently, there are 228 geographical areas authorized by PNGRB in 27 states and union territories covering approximately 53% of the country's geographical area and 70% of its population. In the last CGD bidding round, that is in the 10th round of bidding, 50 geographical areas were authorized for development of CGD network. So in the 10th round, there were 50 areas. And in the 11th round, there had been 65 areas which have now been awarded. On the water side of it, the demand for spiral pipes in the water segment has been impacted as the state governments were battling the pandemic. Moreover, a steep increase in the raw material price has also adversely impacted, which led to delays in the project implementation. However, we are now seeing a distinct pickup in the orders as the number of COVID-19 cases are declining throughout the country. There's also a recognition among all industry players that the steel price will continue to be higher for the foreseeable future and the project costs will have to be revised upward. So there is a paradigm shift which has happened and the industry acts slowly and gradually and the whole supply chain mechanism have started understanding that. We are confident that we will see a steady improvement in demand driven by irrigation and drinking water supply projects across various states. We are also in discussion for several orders in the export market, which has seen an improvement in prospects. During this quarter, we received a very significant and a prestigious export order for a deep offshore pipeline project in Gulf of Mexico, U.S.A., which was approximately for 60,000 tonnes. This exhibits an overall improvement in the business sentiment, our strong connect, their confidence in our technical excellence and our execution capabilities. As regards U.S., in U.S., the natural gas spot price at Henry Hub averaged around $5.16 per MMBtu, which was up against $4 and up from an average of $3.25. So historically, it has been floating around $3.25, it went to $4 and now the average was $5.16. And when we look at the last week, it was in excess of $6 per MMBtu. So that is a very clear reflection that how the energy prices in the U.S. seems to be going up. The rising price in the recent months reflects U.S. natural gas inventory levels that are below the 5-year average and continued demand for natural gas for power generation use at a relatively high price. However, there is still a caution among midstream companies about regulatory issues and environmental opposition. Nonetheless, at the current level of high oil and gas prices, we are confident of a revival in the medium term and are already seeing inquiries coming up in us for -- to work on. If you will recollect, in the last quarter call, we mentioned that there has been quite a bit slowdown in the U.S. market, but I'm very happy to report that we have started seeing a little uptick into the market. We have started seeing inquiries coming back on the ground. And right now, at this point in time, we are -- there are these inquiries which are coming up for small diameter HFIW pipeline. But that is the general trend they follow. First, you will see inquiries coming back for small diameter pipelines and then followed by the large diameter pipeline. We will talk a little more during our Q&A section about this. As regards Saudi Arabia, we have a confirmed order book of almost 222,000 tonnes, the steel for which is fully secured. At this level of oil price, we are optimistic and seeing -- oil price, we are optimistic and seeing that Saudi Aramco will also come back strongly in the market in terms of finalizing a few projects. We being an LTA holder are expecting to receive a significant portion of these line pipe orders. I also just want to give you an update with respect to our proposed IPO. The capital market -- the CMA, which is the regulatory authority responsible for capital markets in Saudi Arabia, has approved our IPO offering. We are intending to divest 30% of our total share capital. The divestment of the shares will be done by the JV partners in proportion to their shareholding. WCL currently holds 50.01% in the JV through its overseas subsidiary. Post the proposed listing, WCL shareholding will not fall below 35% in the JV, and it will continue to be the largest shareholder. The CMA's approval of the application shall be valid for 6 months from the CMA Board resolution date. Considering the buoyant market conditions, the EPIC Board, which is the Saudi Arabian Board has given the consent to go ahead on the proposed IPO, and we are hopeful that it should have its listing sometimes in the end of Q3, early Q4. I would also like to update you on the few activities on the business front. Number one, the corporate tax credits. The company has fully utilized existing tax credits in FY '21 and has switched to a new corporate tax rate of 25.17% in FY '22 from existing 34.94%, both including surcharges in India. Dividend. During Q2 FY '22, the company paid a dividend of INR 130 crores. The dividend amount declared per share for FY '21 was for 100% of face value of INR 5 per share. Third, proposed acquisition of steel business of WSL by WCL through a scheme of arrangement. The Board of Directors of the company at its meeting held on June 28 decided to propose the scheme of arrangement between Welspun Steel Ltd. and the company for transfer of WCL -- WSL Steel division to the company, with appointed date as April 1, 2021, subject to the regulatory and other approvals. The transaction is in line with our business growth and diversification strategy to improve earnings predictability and enhanced value creation for all stakeholders. As apart its steel division, WSL also holds 50% share in Welspun Specialty Steel Solutions Limited. The honorable NCLT Ahmedabad Bench vide its order dated October 4, 2021, which was received by company on October 7, has given directions for convening a meeting of the equity shareholders, the secured creditors and unsecured creditors of the company for obtaining their consent of the scheme of arrangement between WSL and WCL. A few rationales. I understand there were -- quite a few would like to know the rationales behind it. This transaction has several benefits for WCL as we believe that it will bring in earning predictability, stronger revenue and improve competitiveness with business diversification. Our strong presence across market segments provide access to new market and product offering. Greater economies of scale will provide a longer and a stronger base of potential future growth. Synergies, especially in raw material sourcing, common infrastructure, technical manpower, et cetera, would be extremely useful and can be leveraged and significant value creation for all the stakeholders. As we have informed earlier, a thorough due diligence was being done and the valuation was being done by 2 independent registered valuers, RBSA and Drushti R. Desai. A fairness opinion was taken by DAM Capital Advisors Limited. Our finance due diligence was done by Ernst & Young and legal due diligence was done by ELP. As regards to the consideration, for every 100 equity shares of face value of INR 10 held in WSL, shareholders of WSL will receive 81 6% cumulative redeemable preference shares of face value of INR 10 of WCL, redeemable only after 18 months from issuance date and for a total consideration of INR 362 crores. So once this deal is consummated, the preference shares will only get triggered only after 18 months. I would also like to make some important points on this particular transaction. As we have seen, there is a fundamental shift in the steel market, and we believe that there is a sustained strong commodity cycle. We are seeing that commodities are at their peak and this cycle is going to stay there. The TMT bars are extensively used in the construction industry, both in projects and by direct consumer. This will enable WCL to diversify its portfolio in the B2C segment as well. WSSL is a listed -- is listed on the BSE with a market capitalization of almost INR 750 crores. The stainless steel pipe business is technology-intensive with high entry barriers and approvals required from process licensers and EPCs. Consequently, the SS pipe companies command a value premium. We have seen that in the industry, in the peer group, what type of premium they are demanding -- enjoying. There has been a steady increase in the SS pipe sales. WSSL has continued its journey towards gaining approval. Just to reflect the sales volume for SS pipe divisions, in FY '21, they sold almost 2,000 tonnes of pipe versus 600 tonnes of pipe in the last year, in FY '20. So that has been the growth. From 600 tonnes in FY '20, they were able to gain a market share of almost 2,000 tonnes in FY '21. Even in FY '22, as we are progressing, they are showing a very steady performance. Post merger and stabilization, both these entities will bring predictability and higher revenue potential to WCL, which is the primary intent of this acquisition. Fourth, amendment to object clause. The company continues to evaluate suitable opportunities for both organic and inorganic expansion, diversifications, which have synergies with its business. It is important that the company continues to expand and diversify its business product offering for growth, predictability and enhanced earnings. As a prudent practice, detailed due diligence will be done, will be exercised with a clear oversight from the Board. Since the company has a judicious capital allocation policy, every proposal has to first met internal threshold for ROI and profitability before being considered for acceptance. Update on the DI project. As I apprised earlier, given the industry prospects and the synergies with our existing business, we are setting up a greenfield facility at Anjar to enter the DI pipe business. The project is absolutely on track and expected to be commissioned by March 2022. There's a big focus on creating water supply infrastructure through various government schemes. Considering the expected growth and budgetary allocation by Government of India under Jal Jeevan Mission, both for urban and rural now, there is expected to be a huge demand for DI pipes in this industry. ESG. We continue to embed ESG in each and every aspect of our organization and are committed to be carbon neutral in our pipe business by 2040. We are undertaking a project in Anjar for the installation of solar panels and are also undertaking several energy efficiency projects which include replacement of conventional lights with LED lights, compressed -- centralized compressed air network, variable frequency drives for our compressors, water and waste reduction measures and rainwater harvesting. These are a few of the activities which have already been -- which have already started, and we have set up out a very clear road map and goal to achieve these targets. To further strengthen our commitment to achieve net 0 carbon emission, we have signed an MOU with BP India Pvt Ltd. on October 18, 2021. The scope of this MOU is to jointly explore carbon emission, mitigation and reduction opportunities in Welspun Corp's energy, logistics, mobility and waste management activities. ESG is a strategic priority with goals linked with executive remuneration. We have further strengthened our governance structure this quarter and have taken many initiatives like ESG into our internal audit framework, formalizing key governance roles, expanding the scope of stakeholder relations committee to include all stakeholders, currently it covers only shareholders, a revised fraud prevention policy and plan approved by the Board, having a disciplinary action matrix in place. This is just to highlight that ESG is the center of all our activities at this point in time, and it will get a lot of traction in times to come as well. With this, I would like to conclude my opening remarks. We'll be happy to take any questions from all the members who have joined this call. Thank you.

[Operator Instructions] We have a first question from the line of Vikash Singh from PhillipCapital.

Yes. So first of all, congratulation on steady performance despite the headwinds. Sir, my question pertains to our bid book. If I'm not incorrect, then our bid book used to be roughly around close to 3 million tonnes. So it has come down significantly without our order book increasing in a large manner. So has those projects have been awarded, and we missed out on those opportunities or the projects have been shelved, sir? If you could just give us some idea about it?

Vikash, our bid book, you rightly said, used to be close to 2.5 million to 3 million tonnes, right? At this point in time, it has come down to 1.4 million tonnes. We have seen in some markets, especially in the South American market, we were -- there was a significant order potentials which were anticipated. However, because of the elections and being pandemic in a very strong manner still persisting out there, there has been a slippage in terms of awarding those particular projects. And to that extent, largely the bid book has -- the shrinkage what you're seeing in this bid book is largely because of that.

Understood, sir. So sir, just second question related to this only. If I exclude Saudi, then India plus U.S. would have somewhere -- overall orders would have somewhere around, that is, it's roughly around 350 Kt odd. So that gives the bid book post winning rate, our visibility is just for -- quite low at this point of time. So just wanted to understand that what is our thought process in terms of our earnings visibility now going forward?

So if you -- let's dissect this issue into 2. Let's -- you rightly mentioned that at India at this point of time, our active -- our order book is close to 350,000 tonnes, right? With this 350,000 tonnes, let's say -- we have 3 assets in India, which is a spiral asset, which is a longitudinal asset and then ERW asset,right? Now our longitudinal asset is completely booked for next 12 months, right, even it could be more because with the new order which has come from the Gulf of Mexico out of U.S., with that, our plants are completely booked for next 12 months time. On the ERW side, there is a significant order book at this point of time. And I'm sure that for the next -- for this quarter and the next quarter, we have a clear visibility on the order book in hand. It is only on the spiral side of the business, which is purely domesticated as in water sector that we have just started seeing an uptick in the business for the second. As I said earlier that business on the spiral side of it was largely impacted by the states not buying those -- not finalizing the projects because of the fund constraint what they were having because as they were fighting the pandemic. But now we are seeing in Madhya Pradesh, we are seeing in Karnataka, we are even seeing in Gujarat, the spending coming back on the track. And it has been a development only over the last 2 weeks -- 2 or 3 weeks, and I believe that this will further build upon that. So we will see a higher capacity utilization even for our spiral business in times to come, which will consequently improve our bid book as well, and consequently improve our order book.

Sorry, please continue, sir. Hello?

Yes. Yes.

Sir, just one question on our cash of roughly about INR 1,000 crores. This is before any payments on the 2 acquisitions, which we are supposed to do, right? Because a part of it was the cash payment also, if I remember correctly.

No, there's no cash payment. There is no upfront cash payment.

So the entire transition of adding the steel business does not require any cash payment even upfront or with the completion of this project?

There is no upfront cash payment for the transactions, what has been done for the steel. As I said, all the payments have to be done after 18 months once the merger is completed. And the only cash payments, which will happen, or only investment which will happen is basically with respect to the TMT project where -- which we are putting up. Other than that, there is no other cash payments which are happening.

Understood. Understood. And just one last question, if I can pitch in. So Saudi, we are looking for a 30 million tonne upwards of money in terms of high dilution. Just wanted to understand this timing. So basically, last year, we were doing pretty good in Saudi. And this year, last couple of quarters our performance has been weak. So in terms of valuation, since this approval is valid for only 6 months, so are we looking for a -- tying this with the new orders of Saudi Arabia coming in? Or at right now, you think that the valuation which you are looking forward would be easily attainable and you would go as soon as possible?

No, Vikash, in the last 2 -- 1 or 2 quarters, yes, the performance has been really muted because the projects which was to get finalized, they took some time to get finalized. Now if you see, we have an order book of almost 225,000 tonnes, which is more or less an order book which will take us through for the whole next 12 months time, number one. More importantly is the pipeline of the orders. There are a couple of projects, at least there are 3 or 4 projects, which are there up on the table. In one of the projects, in any case, we have been L1 and those awards will happen in times to come. Over and above, there are 3 or 4 projects, big projects which are in the pipeline. I think so the future visibility of projects in Saudi Arabia stands very, very strong. That's one. And also in terms of the market, the market is also extremely buoyant at this point in time. So what we are seeing, when our order book is sound, our visibility for the order book is looking very robust, the market fundamentals -- the capital market fundamentals are equally sound at this point of time, I think so -- we feel it is an appropriate time to go in and hit the market for -- with respect to our IPO listing. From a time line perspective, as I said, we are looking at end of Q3 or early Q4. That's the time line we have set to ourselves.

Understood. And sir, is there any one-off in U.S. operations because EBITDA per tonne at $370 seems to be pretty high?

So U.S. -- this is Percy here. So in U.S. operations, of course, we had an overflow from the previous quarter. So we have been able to execute certain volumes which were in the inventory at the end of the previous quarter. Also, we have certain arrangements with the customers where we are having certain storage charges also being recovered. So there is no one-off item as such. And the EBITDA that is coming up is from the operations only. But as you are aware, we don't have any further right now in the order book. So going forward, of course, it's -- we'll have to wait and watch as to how the further volumes will come up.

So what would be the quarterly fixed cost there at this point of time? I know that you have cut down your cost significantly there. But if you could just give us because next 6 months, we won't have any order in U.S. So that would be a hit on the consolidated numbers.

I think it should be close around $2 million, $2.5 million.

Per quarter?

Yes.

[Operator Instructions] Next question from the line of Nirav Shah from GeeCee Holdings.

Two questions. Firstly, on our DI pipes business. If you can just share how much have you spent till date in that project out of INR 1,550 crores? And how do you see the cash outgo for the remaining year? And how much will spillover to FY '23?

So at this point in time, I think from a capital expenditure point of view, we would be close to -- we would have spent close to 70% of our CapEx, would have already been spent at this point in time. We are -- as you know, we are in the last phase of execution of this particular project in the last 3, 4 months' time at this point in time. So that would -- but there would be a carryforward of that expenditure even in the next year from a cash flow perspective. Percy, wouldn't that be a right statement to make.

Yes. So we have been investing into the capital expenditure for this greenfield project. And we are pretty much on track. So -- but so far, the investment -- the actual cash outflow would be closer to about INR 600 crores to INR 700 crores.

Okay. So technically, we invested something around INR 200 crores to INR 300 crores in last quarter itself. And still, our cash balance has increased sequentially by close to INR 170 crores. And even after the payment of dividend. So we saw a substantial reduction in working capital partly because our U.S. operation has scaled down. So is that the right way to put it?

That's right. So in the current quarter, there are 2, 3 things major that have happened. So the free cash flow generation has been very strong in the current quarter as we have put it out in our business update document also. The outflow side, there was a dividend payout of INR 130 crores that has happened in the second quarter. And secondly, of course, the investment that we doing in the DI project.

And so what will be the total numbers for FY '22 in terms of CapEx, both the maintenance part plus the DI project on a consol basis, India plus U.S.?

Maintenance CapEx is very minimal. So we usually spend in a year INR 30 crores, INR 40 crores of maintenance CapEx, consolidated basis. The DI Greenfield project is the main project that we are executing. And I think as you know, including the soft cost, it's coming up to close to about INR 1,800 crores to INR 2,000 crores. So -- and we are almost close to INR 600-plus crores is what we have already spent. So the balance amount will be getting spent over the next few months.

Sorry, I mean, sorry to harp on this, but if you can just share some indicative number, how much will go next year for our modeling purpose that would be really helpful.

So as I said, the total project cost DI is about INR 1,800 crores. And so already spent about INR 650 crores. So the balance will be getting spent over the next few months, up to March '22.

Would be on [ net ] to profit.

And of course, we'll be having project term loans coming from the banks. So that will be used to finance the remaining CapEx.

Got it. And second question is, sir, we are in the midst of a DI CapEx plus we acquired the steel business and doing some CapEx over there. At the same time, there's a amendment that you've made in the Articles of Association. So can you just elaborate on the strategy because we any which ways are focusing on 2 big projects for us. At the same time, we plan to enter into new businesses. So if you can just elaborate on the strategy, that should be really helpful.

Nirav, our focus continues to be to incubate these new businesses, the one which we are -- one, which is the DI business, the other one, which is the WSL business as and when it comes to us and the WSSL business as and when it comes -- the scheme of amalgamation arrangement gets consummated. So that would be our primary focus. Having said that, we still have -- this is -- the country currently is into such a -- in such a state where you have so many opportunities, which are coming up on the table at this point in time. And it's an unprecedented situation we are seeing. So at any point of time, we keep on evaluating a lot of opportunities, number one. And not that we are jumping on those opportunities, but we are very watchful and mindful of any such opportunities which may come and add value -- which can create value to our shareholders. So in order just to facilitate that process, in order to be ready that tomorrow if there's any opportunity which is up on the table, we are geared up to utilize it, of course, subject to all due diligence and regulatory approval. We keep on amending our update clauses to keep our scope as wider as possible because these are regulatory matters and they take their own time. And as and when we see -- keep on evaluating opportunity, we just keep ourselves being prepared for that.

Got it. So just to confirm, I mean, these will largely be through inorganic routes?

Yes. Yes. They would mostly be. If at all anything will -- at this point of time, we will be looking at, it will only be through inorganic route.

We have next question from the line of [ Saket Kapoor ] from [ Kapoor Company ].

Yes. Sir, firstly, just a small understanding sir. This Welspun Specialty Solutions will remain a separate entity going forward?

It will. It is listed entity. It will remain separate, yes.

Okay. And what kind of rationalization or cost CapEx are we doing in that segment? Because you have spoken about this being a niche segment of seamless pipes and tubes and the margins being relatively much higher than the commoditized products. So what is our road map for this company going forward, sir? What is the scale and size currently it is? And what are we aiming, let's say, 2 to 3 years down the line?

So if you look at this company, this company has already invested a lot of CapEx in earlier. It's a very -- all the major CapEx which was supposed to be done was already done. So there's nothing -- any significant CapEx now, which is going to come up on the table, when the scheme of arrangement gets consummated, first and foremost. Secondly, what our intention that business has -- that company has 3 lines of business. One is the steel making -- steel-melting shop, other is the rolling shop. And third is the pipe making shop, all seamless. So we started -- they are currently focusing a lot on their pipe division. And if you see in the pipe division in the last 12 months, there has been a significant jump, which has happened into their acceptance into the international and in the domestic market. From 600 tonnes of supplies in '20, they have now almost logging something like close to 2,000 tonnes in the last financial year, which means the acceptance rate and the product quality is very well accepted into the both domestic and the international market. So there is not going to be any significant CapEx, number one. And looking at the traction, what is going to have -- what we are seeing in the Pipe division at this point of time, we -- whatever minimal CapEx which we have to do for some balancing of equipment or something like that would only be required to be done. But I don't expect anything significant which is going to happen on that front. On top of it, we are also seeing the demand for stainless steel billets, which is the raw material for this particular thing. So now today, they have a beautiful facility in place. There is no CapEx which is required to operate that facility. I think so moving forward, that is something which we are -- already -- they have already started on a trial basis. And I think so the results have been very, very -- the first results which have come up are extremely encouraging. So all in all, what we are looking is to operate the SS billet making facility, the rolling mill and the pipe mill. And I don't -- and we do not foresee any significant CapEx which is coming up. It could only be a matter of a little bit of a cash flow support, which will be extended.

Working capital.

Working capital, yes.

On the revenue front of this entity, WSSL, as you mentioned in your release, their revenue of INR 93 crores and a negative EBITDA number of INR 19 crores for FY '21. So with current year's volume ramp up and the fixed cost absorption and the order booking in hand, what is the, I mean, critical mass size for this company that we are eyeing, sir?

Typically on the pipe side of it, I think so what they can definitely do is close to 10,000 tonnes of pipe on a year-on-year basis. That is the potential of that particular company. They can do that, number one. On the steel rolling side of it, their -- if we don't -- they can potentially do close to 50,000 to 60,000 tonnes of SS rolling on a year-on-year basis. I think that is what my belief is that in the -- that is what's in their consideration to ramp up in the very first 2 or 3 years of period when they will incubate this business. That's the current thought process which is going on. While the scales can be different as the market improves, as everything settles down here, it can be further scaled up. But I think so from a Phase 1 perspective, this is what the -- what we are looking at. And once these things happen over the period of next 1 to 3 years' time, you will see a tremendous amount of earning coming out of this particular company, as you would have seen any peer company doing the same.

And sir, if we go for a likewise comparison, what it should be for Welspun Specialty? Do we have any -- listed space, any likewise comparison?

You have that. I think so there are peers in the industry. They are publicly listed. I think so it is easy for you to compare. It is unfair on my part to make a comparison on a call -- on this call.

Right, sir. Last 2 points, sir. How are the cash accruals that will be utilized from the Saudi when I see -- offering. What would be the end use of the sale? And what would be the cash -- how much will be the cash realization?

Yes. So we are already -- so right now, the bankers are -- the merchant bankers are working on the valuation, and we will come to know exactly what type of valuation we are going to get in our IPO. But I think so they should be significant. That's what our expectation being. But having said that, I think so the last question on the table is about the cash utilization. As I said, that first and foremost, we -- all the cash, what we would always -- it has been our policy to use this cash very judiciously, number one. Any investment which we are going to do, we are going to do with a very, very proper due diligence. And as I said, there are certain inorganic activities, which we always keep on looking. So that -- the basic purpose of that cash would either to scale up the business and bring in inorganic activities into the fold, which can further bring predictability and earning potential to the Welspun Corp. And also a portion of that could also be addressed to the shareholders.

Last 2 points. Firstly sir, you have spoken that the Saudi operations are going to perform much better going forward. That depends -- because of the business environment in that segment, correct me there. And for India, we are underutilizing our HSAW capacity because of the delay in the order release from the state government. These are correct understanding, sir?

You're right. You're right. Just to draw a comparison, if you see the performance of Saudi last year, they did close to 150,000 tonnes of production. Right now, they already have order book of more than 225,000 tonnes, and they also have orders -- they are lowest bidder in one of the major projects. And also the pipeline of the project looks robust. So there is a turnaround. There is a change which has happened. Saudi went down to a little slowdown process in the last 12 months and -- which was very evident. But I think so they seem to be coming back on track. And in India also, as I mentioned that India also, while our spiral capacity is not completely utilized or utilized to the extent it should have been, but we are now seeing in the last 2 to 3 weeks, I am seeing a significant amount of traction, which is happening. We have seen upticking of order, almost a good amount of 40,000 to 50,000 tonnes of order book has got finalized in the last 2 or 3 weeks itself. My marketing -- our business development and sales team are very actively pursuing some more leads. And I'm sure that this business will also ramp up.

And sir, there was one M&A activity that happened, not exactly M&A, but there was some agreement between one of your competitors and a company that is in CDR -- under CDR -- under I think so, this, IBC, Sathavahana Ispat. So as we, as management, look at the facility because that -- what we understood was a long pending one with the entire set ready for DI pipe manufacturing with, I got to say, a plug-in facility. So have we looked at to that aspect of Sathavahana Ispat also and that didn't work for us, since we are moving into the DI pipe, yes, sir?

Saket, we -- as I said, at any point of time, we are very watchful, mindful of many activities which keeps on -- opportunities which keeps on coming upon the table. So we keep on evaluating quite a few opportunities. This was also one of the opportunities which had come up on our table. We have evaluated it in great -- at great length and detail. It is like a normal process, which we follow. And I believe that, that asset is now already awarded and finalized or something, some conclusion actions have already been taken. But yes, having said that, did we look at it? The answer is yes, and it is a part of our [ normal ] due diligence process, which we do.

[Operator Instructions] We have next question from the line of Bhavin Chheda from Enam Holdings.

Excellent set of numbers considering the challenging environment. Sir, a few questions. If you can break the order book into plant wise, I think you gave Saudi. But what is the India and U.S. order book and break it up into ERW, LSAW, HSAW?

So Bhavin, as I said that right now, we have an order book of close to 580,000 tonnes and in which our -- at India level, it is close to 350,000 tonnes. At Little Rock level, it is low -- it is extremely low at 5,000 -- 5,000 to 6,000 tonnes. And at Saudi level, it is around 225,000 tonnes. So this is broadly the breakup of the order book between the geographies. And if you -- if we see that what is between the product, out of -- so let us say, in the U.S., the entire 5,000 or 6,000 tonnes is all about ERW pipes, right? In Saudi, whatever 222,000 tonnes we have is all about spiral pipes. But the 350,000 tonnes what we have in India is about, we have almost close to 180,000 tonnes of -- hello?

Yes.

Yes. In India, we have close to 180,000 tonnes of longitudinal pipes and almost close to 150,000 tonnes of spiral pipes and almost 18,000 tonnes of ERW pipes. So that is the breakup in India. That is the breakup of 350,000 tonnes of order book in India.

Sure. And sir, you mentioned about winning 60,000 tonnes in the quarter from Gulf of Mexico. So that you bidded from the India book, right? It would have been better from U.S.?

No, no. This is a deep offshore pipeline project, Bhavin. It is -- this has to -- I mean it is a repetition of Gulf of Mexico pipeline, which is the deepest offshore pipeline in the world. It is almost similar to this pipeline. So this has to be a mandatory longitudinal pipe, and that is how it is getting serviced out of.

Okay. So that's the reason here. Okay.

Yes. This is LSAW pipe. And just to let you know that this business also came to Welspun on a nomination basis. That reflects that what confidence at Welspun, we still enjoy in the Gulf of Mexico offshore market in the United States of America.

Sure. So the U.S. legacy order book, which you used to book in the last 2, 3 quarters is almost over. Right now, this is the normal 5,000, 6,000 ERW order, which we'll produce and sell, right?

That's very correct. This is a confirmed order what we have at this point in time. This will get executed during the fourth quarter of the financial year.

And you mentioned that the U.S. fixed cost is $2 million to $2.5 million per quarter. And what's the storage income, which we generate per quarter or per month basis of the pipes we have stored at our facility?

It's close to -- if I'm not -- if I -- my memory helps me correctly, it's close to $1 million a year.

Storage income is $1 million a year. Okay.

$0.5 million a quarter.

$0.5 million -- I stand corrected, it is $0.5 million a quarter, yes. So $2 million a year.

$2 million a year. Okay. Yes. So now since the legacy high-margin orders, so second half would be largely breakeven in the U.S. unless we get very big orders, there would be no cash burn in U.S. operations, right?

Yes, there would not be a significant cash burn. Let me -- just to make it clear, I don't think so it is going to drag our numbers down, the earnings at a consol level down. Rather, it will contribute to some extent because in the first and the second quarter, we have significant earnings around that. I think so in the third and fourth quarter, the cash burn rate we have seen to it that it is very, very minimal. And then on top of it, the rental income and everything is coming out. So we are very focused in terms of cost conservation out there at the U.S. At the end of the year, I don't think so that it is going to drag us down. But more importantly, more importantly, what is that the business seems to be -- the business sentiment seems to be improving. I think so that was something which was missing, that confidence was missing over the first and the second quarter. I think so now that the feeling has started coming in that there is a little uptick on the business, which is looking on the table. So I think so that is what is exciting, and that is what our intent is, to pursue more further and swell our order book. So how can we improve our order book.

And India 350,000 would be executed over the next 2, 3 quarters, right?

It would be.

Okay. And regarding the DI Pipe projections, that's the big one and the momentum also is very strong. If I understand correctly, first, you will start the mini blast furnace, stabilize it and then you will start the DI pipeline. So you have indicated March '22. So we should take that March '22 commissioning as first hot metal firing and 3, 4 months down the line, you will start rolling DI pipe?

It could be in parallel because the DI project, though it's independent project, it is also at the same speed. I think [indiscernible]. The commissioning of both the projects, which is the hot metal as well as DI, should be around the same time.

We have next question from the line of Rishikesh Oza from RoboCapital.

Sir, my first question is regarding our EBITDA per tonne. So can you please guide on what EBITDA per tonne we can achieve in coming -- like going ahead?

EBITDA per tonne, Mr. Oza, as you know, it's a factor of multiple conditions. Number one, the steel pricing, the geography and all that stuff. So generally, we have always -- while we have never committed ourselves, but if you look at it, even in Q2, our EBITDA per tonne has been close to $150. Even if you look at it from an H1 perspective, our blended EBITDA has been close to $150. So I think we have been able to maintain consistency around $150. I would expect that it should go up, but it's a factor of various, various conditions around it. And -- but such levels to maintain? Possible. Can it be improved? Is to be seen.

Okay. Okay. And my second question is, sir, sales in thousand metric tons, it's around 142, which is like a bit lower than what you used to do. So when can we again do around 180, 200 kind of levels?

I'm sorry, I didn't get your question, please.

Sir, 142 sales -- 142 KMT sales at Saudi I'm saying, which is quite low comparing what we were doing a few quarters ago.

That's totally correct.

What -- like when can we again reach that 180, 200 kind of levels?

See, one of the key factors here is that the U.S. performance, U.S. has not been performing there, right? So the business in U.S. has been absolutely low. So that is getting reflected -- clearly is getting reflected in our sales volume. I'm sure that the more sooner that the business in U.S. ramp-ups, right? And -- so there are 2 factors to that. The business in the U.S. has to ramp up, which we are extremely hopeful that it is now, it's a matter of time. We are seeing visibility coming around that. So that could happen. Number two, the domestic buying, the spiral -- the water sector has to come back. And that is also what we have seen had started coming back. So these 2 factors on both of which we are seeing quite a positive outcome at this point in time, I think so that should improve our sales volume.

But sir, can you just like indicate whether we can do -- this can happen as soon as next quarter or whether it will take next 2 quarters or something like that?

It's quite a bit of an assumption and prediction. I don't think so that we should get into that. I think our focus should remain that whatever opportunities are there, they should be encashed upon. And that is what our focus would be.

We have next question from the line of [ Saket Kapoor ] from [ Kapoor Company ].

Yes, yes, yes. Sir, if you take the P&L item, we found that for this quarter, the employee cost has gone down by around INR 15 crores, INR 16 crores. And if you compare last year September, it is down by INR 17 crores. So is it because of this utilization levels part only playing out? Or if you could explain that?

So as I said, that our operations in the U.S. were significantly scaled down to conserve the cost, and that is where quite a bit of rationalization and optimization has happened, both in terms of manpower, and that is getting clearly reflected into the cost side of it.

Okay. Sir, when we look at your -- the entire capacity of LSAW, HSAW domestically and international, if we take the current order booking, can you give some color on how the utilization levels for LSAW, HSAW and ERW for Indian operations are looking as per the confirmed orders which we have? What should be the utilization levels for H2 since for the U.S., you have already said that it is going to breakeven at the best.

See U.S. capacity utilization is almost negligible because rolling 5,000 to 6,000 tonnes in a quarter is not something adds up to any utilization level whatsoever. In a matter of time, as I said, the business in U.S. is bound to bounce back, and we are seeing all the traction coming up on that. In terms of India, if you look at it, I think so our capacity utilization level for our longitudinal pipe will be close to 75%, 80%. With respect to our -- with our ERW plant, is also going to be around that. But it is only that the challenge is currently hovering around the spiral plant, and we are hoping and expecting that the water business bounce back, which we -- for which, as I have said, again, that we are seeing some resurgence happening around. So that capacity utilization should also go up now.

What is the expected capacity you said for the next half for HSAW facilities. I think you said the Madhya Pradesh government and the government of Uttar Pradesh has come up with a lot of projects for this Jal se Nal and -- schemes. So our order book contain any of these orders which have been released from the state government of Madhya Pradesh and Uttar Pradesh?

So Nal se Jal scheme is not for the large diameter spiral pipe. That is primarily driven by the DI pipes, right? So we -- so when the DI pipe comes into play sometimes in March, that is where we will be capitalizing upon it. But having said that, in terms of projects, both Gujarat government, the Madhya Pradesh government and the governments in the South, I think so they have huge projects which they have already awarded. I think so the projects got stalled because they have to divert the funds for fighting up the pandemic. Now with that situation coming back in control, they have -- we have seen that they have started throwing back the monies into this water irrigation projects and water distribution projects. So we are clearly seeing that. And I'm sure that will gain momentum over the next few weeks, months. And that's where we would see our capacity utilization for spiral mills across these 3 locations, which is Gujarat, Madhya Pradesh as well as in South should go up.

Sir, it is more about the river linking project part, which I was referring. How are things on ground with respect to the river linking part? I think so there, our -- this huge diameter pipes would be in demand. So your understanding on how the concept for the river linking is going ahead? And what kind of incremental demand that aspect is going to play out going forward?

So river interlinking project is a huge project. I think that it was very ambitious in time, and then it was calibrated around because the states did not see any utility in interlinking rivers project. What has now happened is that the central government has pitched in. And they are seeing the utility and the benefits accruing out of that. So like Nal se Jal mission, where the central government primary -- is the primary funder, even for the interlinking projects now the central government has announced that they would be the primary funder to that particular project. A large portion of that funding will come from -- I think from my -- if my guess is right, almost 70% of funding will be done by the central government. So now these projects will gain traction. And the good part is that all -- the projects what has currently been conceived or envisaged for interlinking are all in Madhya Pradesh. And that is where we have a geographical presence. And the moment these projects will come up on the table, we would be one of the largest beneficiaries, and we would be servicing in those interlinking projects.

And lastly, sir, on the U.S. part. What are the green shoots on the ground side, if you could explain going forward, that may translate into order booking and then the utilization levels going up going forward. You did spoke about some small orders as the first time. So if you could dwell more on the same and how is this infrastructure spending bill going to -- in any way going to trigger for the pipes -- laying out of pipes also, as earlier it was being contemplated that the entire pipeline has been aging and there will be a new laying out of pipes that will relate to huge demand. So are those stories still there -- valid? Have they -- or they were only conception? So if you could give some color on how the U.S. market is going to shape up and what are the factors that could contribute?

See, first and foremost, I think so there is a very clear recognition coming up on the table that the growth of the renewables is at the pace at what it is happening, it is not good enough to meet the current -- the ever-growing needs of the industry. I think so that has very clearly come out, which means -- and we have seen that. So there is a fundamental -- if you look at the - what are a few fundamental things that happened in U.S. A, the gas prices have gone up to a historic high of $6 per MMBtu. Typically, they used to be hovering around $2.8 to $3, right? It has doubled. We have seen that sort of the power collapse, which has happened in a couple of states because of nonavailability of the fuel or the nonavailability of the energy. I think so these 2 or 3 factors put together is clearly asking the administration back on the table, the administration is thinking back on the table that whatever drastic [ cuts ] they have done in terms of infrastructure spending on developing the oil and gas pipeline, it cannot be that drastic, right? I think so that realization has set in now very, very clearly, number one. And now they have started calibrating their policies around that. They have completely come in terms and recognize that aspect. The moment they have done that, they have started easing out investment in terms of developing this oil pipelines and the gas pipeline. So I think so this fundamental shift which has happened is now forcing or compelling the E&P companies to come back on the drawing board and start looking at the projects. So just before this collapse happened, there were a couple of projects which were like -- which were in very active discussions and about to be awarded. They were all stalled and stopped. I think so we are seeing that those projects -- the discussion around those projects have already started. So that is a very welcoming sign. The E&P companies have started coming up and discussing about the evacuation of the gas from the Permian basin to the coast and all that stuff, which was not happening in the last 2 quarters. Now we have started seeing that discussion started happening, one. Two, we have seen an increase in the drilling and the increase in the rig count. We have started seeing the number of wells being drilled are much more. We have started seeing that because of that, the interconnectivity of the wells and transportation of those oil and gas for which the small diameter pipelines are being used, the demand is going up. So I think on the ground that traction has started. Slowly, it has started. It has to build upon. And I think so by -- in Q3 and Q4, this momentum will build upon and the next year will -- I think so the U.S. will be back with full bang. That's what our expectation is all about. Coming back to your question on the infrastructure spending. See, infrastructure spending in U.S., that is the bill in the U.S. eventually got approved, though a little scaled down, but it is finally there. But that is more in terms of highways, more in terms of airports, more in terms of their telecommunication networks and all that stuff at this point in time. On the water side of it, there's not much which is being done, but I'm sure the tranche 2 probably should take care of that. So right now, in the tranche 1, they are talking mostly of the key infrastructure projects.

Right, sir. And lastly, sir, line item #4, there is a loss of INR 5,33,00,000 from the joint venture. To which segment is it attributable to and the reasons for these losses?

So that is the -- our Saudi joint venture. So for the quarter, they are having a loss, as we said, because of the lower sales volumes.

Okay. And this is going to reverse because of the strong order booking and the execution that will happen for the second half?

That's right. We are very strong and hopeful on that because they have more than 200,000 tonnes of order book. So that's optimistic.

Thank you very much. So ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you. Gentlemen, once again, thank you very much for joining us today morning, taking time out of your busy schedule to attend our Q2 FY '22 call. I hope we have answered most of your questions. But still if you have any further query, you can directly reach out to us, and we would be more than pleased to answer them. And once again, thank you very much. And my sincerest and my greetings for happy -- wishing you all a very happy Diwali, and stay safe. Take care. Thank you. Bye.

Thank you very much, sir. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.