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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Welcome to the HEG Limited Q1 FY '24 Earnings Conference Call, organized by SKP Securities Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Navin Agrawal, Head Institutional Equities at SKP Securities Limited. Thank you, and over to you, sir.
Good afternoon, ladies and gentlemen. It's my pleasure to welcome you on behalf of HEG Limited and SKP Securities to this financial results conference call with the leadership team at HEG Listed. We have with us Mr. Ravi Jhunjhunwala, Chairman, Funding Director and CEO; and Mr. Riju Jhunjhunwala, Vice Chairman; along with their colleague Mr. Manish Gulati, Executive Director; Mr. Om Prakash Ajmera; Group CFO; and Mr. Gulshan Kumar Sakhuja, CFO.
We'll have the opening remarks from Mr. Jhunjhunwala, followed by a Q&A session. Thank you, and over to you, Ravi.
Good afternoon, and welcome to our financial results conference call for the first quarter fiscal year '23-'24. As per World Steel Association data, steel production in the first 6 months of the calendar year '23, that is January-June was lower by about 4% at 408 million tonnes as against 425 million tonnes in the first half of 2022. And it is expected to remain subdued in the rest of the next 6 months as well. However, World Steel Association outlook presents that steel demand would rebound in the next few quarters and is likely to increase by about 4% in 2024. It has been known for quite some time that steel industry alone accounts for about 7% of the global carbon emissions in the world, and it also accounts for about 23% of the industrial carbon emissions. The Western world, especially the U.S. and the rest of Europe are making serious efforts to decarbonize the steel industry in the near future. Steel produced through blast furnace emits about 4x more carbon, those are same steel produced through the electric arc furnace. In this backdrop, Western world steel production through electric arc furnace minus China, which leads to be around 44% in 2015, has now already reached about 50% in 2022, going up by about 78 million tonnes from 357 million in '15 to 435 million tonnes in 2022. Several steel bodies in the world expect electric arc furnace production minus China, to further increase by about 100 million tonnes by 2030, taking the electric arc furnace production from its current level of 435 million tonnes to 525 million tonnes, which means an additional demand of Graphite Electrode to the extent of deliver [indiscernible] 160,000 tonnes to 190,000 tonnes. Similarly Opex -- I'm sorry, similarly, OECD, too expect new capacity of EAF minus China of about 53 million tonnes to be operational by 2026. And another about 45 million tonnes, which by conversion of blast furnaces into electric arc furnaces by 2030. So this again matches the WSA figure of about 100 million tonnes that new electric arc furnace is coming into operation in the next 6, 7 years.
This would be the substantial increase in demand of our products all over the world. And since we have been exporting about 2/3 of our production to some 30-plus countries for a very long time, we are well set to meet this demand from HEG. We are closely tracking about 60 million tonnes of new electric arc furnace capacity between Europe and U.S., of which about 7 million tonnes have already started and another 18 million tonnes are likely to be in operations over the next 2 years and the rest between 2026 and 2029-'30.
In this backdrop, our timely decision to expand our capacity by about 20,000 tonnes per annum is likely to yield good results. While we remain solidly upbeat about the continued growth of electric arc furnace steel production in the coming decade, resulting into a continuous rise in electrode demand. At present, we are seeing a period of subdued steel production in the world over due to several global factors, which all of us are aware, which is likely to continue through the end of 2023, resulting into subdued demand for our products for the next few quarters. Now turning to China. China, which only produce about 5% of its steel through electric arc furnace to about 5 years ago, is currently at the level of 12% and is aiming to reach 20% by 2025. We believe the electric arc furnace will grow at CAGR of about 3% to 3.5% in the next decade, which will directly translate into a substantial increase in Graphite Electrode demand.
All this sounds very exciting for us at HEG, as no new catastrophes in the electrode industries have been announced by any other graphites company in the western world. Now, a word about our expansion. Production of Graphite Electrodes as you know is a long process, which entails 5 different processes. 4 of these are already in operations for last few months, and the last one is under trail and is likely to go stream fairly soon. In our expansion, we have viewed some of the best and most modern equipments and technologies which we believe will take us through the next level of enhanced capabilities in terms of quality as well as cost competitiveness. We at HEG have been operating the world's largest plant under 1 roof with the capacity of 80,000 tonnes for a long time. And with our expansion to 100,000 tonnes very soon going to be operational. We are in a strong position to take advantage of the growth in demand of our products. Now, a couple of words about our new subsidiary, TACC. Our new project of graphite anode is progressing well, and we have started our pilot plant, which will facilitate trials. The land acquisition for this project is already achieved, and we expect to complete the first phase of the project to make about 10,000 tonne of anodes by mid-2025.
Friends, in conclusion, our first quarter '23-'24 has been fairly satisfactory given the very tough market conditions. The next 2, 3 quarters may see margins coming under some pressure, but we are fully confident of the demand coming back from 2024 onwards, and we'll take full advantage of our expanded capacities and competitive costs. We have all the technological capabilities, operational efficiencies and market reach to take our company forward and to succeed and thrive in all emerging situations to create long-term value for our shareholders.
With these words, I'll now pass the floor to our CFO, Gulshan, who will take us through the financial figures. Following that, Riju, our Vice Chairman; Manish, our Executive Director and Gulshan will all be very delighted to address any enquiries you may have regarding electrodes and graphite anodes. Thanks. And over to Gulshan, now.
I will now briefly take you through the company's operating and financial performance for the quarter ended June -- 30 June 2023. For the quarter ended 30 June 2023, HEG recorded revenue from operations of INR 671 crores as against INR 722 crores in a corresponding quarter of the previous financial year. During the quarter ended 30th June 2023, the company delivered EBITDA of INR 178 crores as against INR 205 crores in the corresponding quarter of the previous year. The company, on a stand-alone basis, recorded a net profit after tax of INR 98 crores in Q1 FY '24 as against 134 crores in the corresponding quarter of the previous year. And on a consolidated basis, the net profit after tax is INR 139 crores in Q1 FY '24 as against INR 159 crores in the corresponding quarter of the previous FY. The company is a long-term debt free and had a treasury size of nearly INR 980 crores as on 30th June 2023.
Now to take out more questions from the participants, the detailed presentation have been uploaded on the company's website and on the stock exchange. Now we would like to address any questions or queries you have in your mind. Thank you. Over to Navin.
[Operator Instructions]
The first question is from the line of Amol Rao from Kitara Capital.
Sir, just a clarification. Sir, I thought you were expecting to commission our capacity in June -- at the end of June. So slight delay understandable, but sir, what is the technicality due to which the delay is happening, sir?
As I explained, out of 5 operations, 4 have been in operation. So we are getting the additional tonnages from those 4 [indiscernible]. But obviously, if the 5th one is not yet commissioned, to that extent, we don't have -- I can't say that we can produce 100,000 tonnes as of today. There has been a very small breakdown of a very small piece, which is being replaced, and it's coming from Bangalore. And it's a matter of another maximum 3 to 4 weeks. And by end of next month, this should be in business.
I guess there's no harm of power, because anyway, the markets are a little sluggish. So, having to commission...
Yes. Exactly. Exactly.
Okay. Great. And sir, one more question, and this is more on the business practice. So sir, I realize that you are sitting on something like around INR 800 crores of inventory last quarter when we spoke, sir. And the business decision is completely fine. So what -- what is the call here on sir? Do we see that demand still impact of which we had stopped up our finished goods inventory? Or has there been a slight change in time lines for that? If it is, I mean, by how much it is?
Manish, would you take that question?
Yes. I'll take that, sir. See, about inventories, we are not very much of -- normally, in normal business, we may fit 1, 1.5 months especially, which is now 2.5 months. So we don't see any big issue in liquidating that, whether looking at the intending opportunity was to have this in our hands, so that when the market starts picking up, we will have some additional products to sell in the market. So that the inventory is not something like an unmanageable type of thing. As I said, from 1 to 1.5 months of normal inventory, is 2.5 months.
So basically, the outlook remains the same as last quarter that we want to be stopped with finished good material whenever the demand materializes. So that time to market is short. Is that correct? So that understanding remains intact, right?
Absolutely. Because you see in our process, electrodes, take 45 days to make and connecting phase, which we call (14:18) [indiscernible] it takes 5 months. And it always happens. Whenever we have, there's a downsize [indiscernible] market picks up, there are -- we have time to make that product. So we are keeping that additional inventory knowingly consciously waiting for the markets to turn around.
Fair enough, sir. And sir, I'm sorry, I know I'm supposed to ask you two questions, but one more question, sir, on the spread. Sir needle coke, as per your analysis, that needle coke and the 5 electrodes spread that we usually look at on a rolling 3-month, 6-month, 12-month basis, 6 months usually for us, is that still more or less impact, more or less? Or has there been some contraction, sir?
See, because of the -- if I were to sell an electrode today at the price, which we are getting orders, and that we go also bought today, we can say the spread is impacted. But then, we are -- when the price is coming down for both electrodes and needle coke, needle coke takes longer to absorb. I mean, it takes longer to, the price shortage effect, just becuase of inventories and our processing cycle.
So that way, I would say that if your spread is under pressure because not too much, but yes, it is -- under marginal pressure because electrode price has been booked quarter-by-quarter. And when this falls, I need funds to catch up the back.
The next question is from the line of Pranay Khandelwal from Alpha Invesco.
Fairly new to the company (16:08) [indiscernible] I wanted to understand the demand supply scenario right now of needle coke. As it's critical raw material for our operations to pricing, demand and supply of petroleum needle coke, especially.
You see the power, if you have been tracking our peer groups, nobody is running at full capacity, some is running at 45, 50 globally. Certainly, there is abundant availability of needle coke as of now. What we expect from our needle coke suppliers is to help us to get the pricing so that we are able to go through this time with decent spread. So as -- your question was for availability. Today it is in abundant.
Okay. And can you just give me the numbers, if possible, just the industry supply ex of China and from China of needle coke?
Yes, that is fairly standard, actually is that their capacities have not changed for many years. So it's come out, I would say -- it's 650,000 should be a total number of their capacity, except China.
Okay. 650 from rest of the world. Yes. And from China, how would that -- how much in that?
China has lots kind of cokes, diesel cokes, petroleum cokes, that are mainly export our cokes. So that I cannot comment, but the first year is a large number. Just to add here, I mean, we hardly import from China. It's not the same quality, which you get from Japan and U.S. In our case, basically, there are -- in this business, there are only 3, 4 producers that we report, the quality producers and those -- and these are all based out of Europe, U.S. and Japan.
All right. And do we have any information of any new supply that might be coming up in Japan or U.S.?
I mean, I think the last new entrant in this business in the Western world probably is about 70 years, 75 years ago. So in the last 60 years, 70 years, 75 years, I don't think there has been a new entrant anywhere in the world.
And apart from this new entrant, is there any capacity expansion from the existing players that is planned?
They keep adding a little bit here and there. So when it's one of the byproducts, so depending upon the demand, they keep increasing or decreasing and replaced by something else. So it's part of the refinery process.
And if we -- I believe we must source it on contract. So what was our average tenure?
It again depends on the market. I mean, these days, it's quarterly.
Okay. We do it quarterly.
Basically it has to match with our selling cycle. I mean, obviously, for our selling cycle in current market conditions is quarterly. We can't buy coke for 6 months or 9 months. We don't know the price of electrode after 3 months. So it's not practical to buy coke for more than 3 months.
Okay. And do we have any sense of the capacity utilization these players might have in the petroleum coke?
As I said, it's exactly connected to the graphite industry. So if we are at 60%, 70%, they will ideally meet 60%, 70%.
Okay. And does that affect our contracts in any way like you said, capacity utilization is low or high. Is there any impact? Is there any restructuring in our contracts [indiscernible]
No, not at all. Actually, you see, as the Chairman said, that since all of us in -- the big players, they are all working at around 60%. The needle coke suppliers also have to align with that. They cannot see producing and adding to their inventory. So they are also at a level of 60%. But since we are negotiating with them or concluding contracts quarter-by-quarter, so there is no change in that set related to CapEx utilization.
Listen, I mean just to clarify in simple words, there are only 5, 6 players in the graphite industry, but only 4 or 5 players in the needle coke industry. So everything works in tandem. So it's not a commodity, when there are hundreds of customers or there are hundreds of suppliers. So everybody works in tandem with each other.
The next question is from the line of Abdulkadir Raja from Ratnabali.
Sir, just two questions. Sir, first, was there any inventory loss in this quarter? And my second question is, sir, if you could just please repeat like what is the current status on the graphite electrode project? And like are there any technology partners with us?
So first question, I mean, Manish, you can answer. Second, Riju will take up.
Sir, I didn't hear the first question very well. Abdul, can you please repeat it for me?
Yes. Sir, I just wanted to know, is there any inventory loss in this quarter?
No, no, not at all. We've seen our results. Pretty good results. There's no inventory loss. Our pricing is higher than the cost of goods sold. So there was a question of taking an inventory loss in this Q1 or even Q2. Yes, you had the second question about anode. Riju, please.
I actually wanted to know, if the current status of our anode [indiscernible] and are there any technology partners with us?
So we are more or less invested in all the machines that we will be focused and obviously all the [indiscernible] for the plant will be done by then. So there's not 1 technology partner because, we're actually sourcing them at least from 4 or 5 different companies. And these are not companies in China. And the current status is that we've got the land with us. It was 100 acres of land in 1 area and all the clearance now applied for all the clearance is like environment clearance et cetera. And right now we are still quite hopeful of [ Blue 1 ] target of around first quarter 2025 for our first meeting of success.
We have the next question from the line of Ajit from Nirzar Securities LLP.
Sir, I just have two questions. The first one is, sir, what is our strategic development towards energy storage solutions in medium to long term? And second question is, sir, what is our approx replacement cost of our assets?
Replacement cost of?
Of the assets.
You mean the current capacity of about 100,000 tonnes?
Yes.
So I can give you a very, very rough estimate because if we have been tracking our industry, you will probably know that ours is the last new greenfield plant put anywhere in the world, mainly in China. And we have been expanding from 10,000 tonnes to 100,000 tonnes. So only based on that experience and our last experience is about 20,000 tonnes, where we have spent about INR 1,200 crores. . So if you just multiply it by maybe 5 or 6, so probably anywhere between INR 6,000 crores to INR 8,000 crores. That will be very, very rough. But again, it's not going to be as accurate because ours were a brownfield expansion. And the new greenfield plant is a total catalyst space. And I'm not even sure that anybody will put up 100,000 tonnes of plant to start with. It's a fairly complicated technology.
And I'm sure nobody is going to take a risk of putting up a 100,000 tonne plant. So maybe the smallest plant viable will be like 30,000, 40,000 tonnes and probably it will cost somewhere in the region of INR 5,000 crores, INR 6,000 crores.
And sir, the first question which was on -- towards energy storage solutions like what are our strategies and what -- is there any development in that in medium to long term?
HEG is not doing -- participating in the energy storage solution that we are doing some of our different companies in Bhilwara Energy, in which HEG has (26:22) [indiscernible] and those things are going fairly as per target. We are actively working on 4 different projects totaling around INR 120 crores, which is close by the end of this financial year. And as we're seeing more and more traction in that, we are on track to be around INR 200 crores of projects in this particular year.
Why this question was that -- in our annual report, you have mentioned about there is 1 slide about paring the e-mobility drive. So in that leveraging our expertise in graphite technology and all these things. So that, for that reason, I was asking the question.
Okay.
So any development in this?
So with that, at HEG, we are not doing anything on energy storage, because here you already have our energy coming from the state government. But outside of HEG, as we are working on different projects on energy storage.
He was asking for, in our annual report, what these pics are referring to powering the e-mobility drive. That is for our new subsidiary, TACC, in which we will be making Graphite anode powder, which is one of the components which goes into cell, battery and those cells goes into batteries will goes into [indiscernible] so you're referring to that page, and this is the answer.
That we'll be making graphite anode powder from the new subsidiary. It's not an HEG-making graphite electrode.
Okay. That powder itself -- I missed your voice between. It's the graphite anode powder will be used in?
Cells.
And that is a project which Riju just explained should be in operation by second half of 2025.
[Operator Instructions] The next question is from the line of Deep Mehta from Bank of India Mutual Fund.
Two questions from me. First question, what was our capacity utilization for quarter 1? And how should we look at for the year ahead?
Manish?
Whatever, it was close to 90s. High 80s and 90s, closer to 90 for quarter 1.
Or 80,000 capacity.
On an 80,000 capacity.
And for full financial year, what should -- what are we expecting?
See, the balance, the 2 quarters of Q3, Q4, as Chairman was saying, we are looking with subdued demand. So I don't know where we'll finally land up with. Maybe around, if you take this bubble capacity or regional capacity, it should be around 80% -- 80%, 85% of 80,000 tonnes.
Sure, sir. This is very helpful. And my second question is regarding our needle coke as a raw material. Recently realized investors have announced in their annual report that they have developed a technology for manufacturing needle coke. So is this needle coke same as what we use in our plant? And can it help us in securing our raw material supply?
See, the last year, I mean, [indiscernible] dry waste have also spoke to us in the past also and also Indian oil has been dry. So you can see what eventually is the -- Chinese, there would be technology from somewhere. You can see what kind of product they eventually comes with, as what is whether that's critical to be picked at a high power grade or not. So there needs to be reinvestment.
So as of now, we don't have very clear visibility on uses of that product.
The next question is from the line of Pratim Roy from B&K Securities.
My first question is that, by some electrode prices hovering around, if I'm not wrong, $1,500 to $1,700 per tonne. And [indiscernible] Sir you mentioned that the margin is under pressure in the coming quarter. You are mentioning that [indiscernible] or is there any profitability at the [indiscernible]
Shall I answer this? There's a lot of echo in my line. I hope I heard your question. Did you mean say that needle coke pricing was around $1,500 and electrode prices. What did you say?
Yes, the needle coke price is around $1,500 to $1,700, and [indiscernible] prices is around the -- and 4, 5 years of pricing is around the same level in last 2 to 3 months, if I'm not wrong. So in that scenario, we can at expect the improvement is there, but in my earlier comment that we mentioned that the spread is under pressure, margin is under pressure. If you can throw some light on that.
[indiscernible]
Somehow, I have again heard the needle coke price, but I have not heard your price. No, no, I heard it. I can answer. So, as far as the price of coke is concerned, you are more on less in the ballpark. But your second assumption is not correct. I mean, Manish clarified that the markets are weak, and we do expect the markets to remain weak for the next couple of quarters. And the prices are under pressure. So it is not correct to say that the prices are stable. Prices are under pressure. But we still expect to maintain our capacity utilization at about 80%, 85%.
Okay. That's helpful. And my second question is that, sir, for the graphite, it could come from second half [indiscernible] '25. So what can be your ROE or IRR we can expect from that project and how much that can contribute to the profitability of the company if you can give some broad idea on that, please.
So can't give an absolute idea on that, because we are still 2 years away from strengthening the project -- but the project cost would be approximately INR 800 crore, which will produce 10,000 tons of annual. The current price of that being in the region of 9,000 tonne to 10,000 tonne. So obviously, I mean, you should do your math based on that current price. And if you the similar pricing of raw material that we have now in the process. So, the IRR, et cetera, I mean, we are expecting around 25% to 30% EBITDA in this particular project is done [indiscernible]
The next question is from the line of Ajit from Nirzar Securities.
Sir, just a follow-up question from my side on the powder you were talking about. Sir, is this a byproduct of the existing product or altogether a new product, sir?
Yes, this will be altogether a new product and the raw materials will be [indiscernible], and that can be of different grades of coke. And our byproduct that we produce in HEG, I mean because there are different grades of raw material that we produce over there. We'll try to use some of those also for this particular projects. But I mean, as far as the basis of the project is concerned, it's all on new raw material.
And just a ballpark market size of this product?
I mean, market size is huge. I mean, is basically going into lithium and battery. In India alone, by 2025, we expect a demand of around 50,000 to 60,000 tonnes. And by 2030, around 300,000 tonnes, so the demand in India based on what the company have announced some things like Amara Raja, Reliance, Ola, in 2024, et cetera, who are setting up plants in India. Their requirement itself should be this, and the global requirement is huge. I mean, today also, we had requirement of about 300,000 tonnes globally.
So what will our share in this 50,000 to 60,000 tonnes, sorry. So, what will be our share in this 50,000 to 60,000 tonnes in FY 2024?
First is, we are right now going to produce, I think, 10,000 tonnes of material. So I mean, this can be either exported or used for the Indian market as well.
It's the first project of its kind in India. So marketing 10,000 tonnes in the market, which is 50,000 tonnes is not really a problem.
[Operator Instructions] That was the last question in queue. As there are no further questions, I would now like to hand the conference over to Mr. Jhunjhunwala for the closing remarks. Over to you, sir.
Thank you, friends, for taking so much of interest and asking some very pointed questions. I look forward to speaking to you next time about 3 months' time.
On behalf of SKP Securities Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines. Thank you.