HEG Q1FY18 Concall Summary

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Financials highlights

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  • For the quarter ended June 2018 HEG recorded a net operating income of INR 213 crores as against INR 267 crores in the previous quarter
  • EBITDA, including other income, which stood at INR 30 crores in the previous quarter reduced to INR 24 crores in the current quarter
  • Tawa Hydro Power facility was non operational because of its seasonal nature, it stops towards the beginning of March every year
  • The company reported a net loss of INR 8.43 crores as againstINR 3.86 crores in the previous quarter. This turnover reduction is a factor of both volume and reduced prices
  • The impact on volume was primarily towards the end of June 17, wherein some of the customers requested the company to defer supplies post GST implementation on 1st July, 2017. So, the company carried stock to that extent and those are getting delivered or those have already been delivered in July.
  • There has been a significant increase in the cost of materials and as a percentage to sale, there has been increase which is primarily due to increase in raw material, both domestic and imported
  • The sale prices of graphite electrode remain almost same as that of last year
  • Net sales and also the segment results in Power segment are lower than previous quarter because of the hydro power generating facility, which did not operate during the quarter, being rain dependent and hence seasonal in nature
  • Total debt, as on 30th June stands at INR 677 crores as against INR 686 crores as on 31st March, 2017 whichcomprises of INR278 crores of long term debt
  • The current level of fixed cost of INR 220 crore comprises of employee cost, maintenance costs and the administrative and depreciation.

Steel Industry

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  • Earlier this year the Chinese government banned about 12 to 15 highly polluting industries due to serious environmental concerns.
  • In the steel industry, in addition to blast furnaces and electric arc furnaces, use of induction furnaces is very prevalent in countries like India and China.
  • Induction furnaces are highly inefficient and a polluting way of producing steel. China has decided to close down all of its induction furnaces totally by end of June this year
  • Till a couple of months ago,steel production deficit was said to be around 40 million to 50 million tonnes. But as per some recent data available from Chinese authorities, this number could be as high as 120 million tonnes. In addition to this, they also seem to have shut down another 40 million to 50 million tonnescapacity of mini blast furnaces
  • A sudden drop of export of steel from China to the rest of the world has been witnessed . China used to export about 115 million to 120 million tonnes per annum of finished steel for last couple of years which is now likely to drop to somewhere in the region of 60 million to 70 million tonnes in the current year causing sudden drop of steel exports from China, thus helping an equivalent additional production of steel outside of China, which would obviously include about 25% to 30% through electric arc furnaces, where electrodes are required
  • In addition to export of finished steel, China was also exporting substantial quantities of semi-finished steel in the form of billets, which has also come down sharply in the past few months and this figure is estimated to bearound 20 million tonnes and this kind of steel is primarily produced by EAF, electric arc furnaces, which means that this additional 15 million to 20 million tonnes of billets, which are no more exported.
  • The world steel production in the first half of the current year has gone up by 4.5% as compared to only 0.8% last year
  • The required 160-170 million tonnes of steel demand replacement is not going to be quick and cheap.
  • China's export has declined by practically half to about 50 million-60 million tonnes
  • China's billets export has dropped from about 30 million tonnes to less than 10 million tonnes now
  • The price at which China was able to sell billets to theTurkish plant, was much lower than what they could do using their own electric arc furnace. So, suddenly all these electric arc furnaces, which were closed in Turkey, they have suddenly came back into the business and now they all want electrodes, because obviously when you start electric arc furnace, you need electrodes
  • For electric arc furnace, the major cost is scrap. Second major cost is power. For a blast furnace it is iron ore and coal and electrodes constitute less than 2% of the total cost of EAF
  • A large part of this 80 million-85 million tonnes drop in the export of steel and billet and at least 90% of the 20 million billet export goes through the electric arc furnace. At least 35% - 40% of the 60 million tonnes of finished steel is also getting produced somewhere else in the world through the electric arc furnace. So, the major issue is not the closure of electrode capacity. The major issue is that maybe 40 million-45 million tonnes of additional electric arc furnaces have been put into use, which were closed until now.
  • Total steel-based, steel dedicated some 400 Kilo Tonnesout of which 200 KT is integrated, 200 KT will be just all spread out capacity
  • India currently produce 26% of the steel produced globally and with the recent developments in China, India can attain the Steel production of more than 31% in next few years

Electrode Industry

  • In China, in addition to integrated graphite plants like those in India and in the western world, there are many small plants that only perform 1 or 2 of the 6 processes required for electrode making. These are very disintegrated kind of small plants and many of these one process plants have been closed down again due to environmental reasons, thus breaking the total chain of electrode production and reducing electrode production in China itself resulting into around demand deficit of 150,000 tonnes
  • Recent developments has resulted in a shortage of not only steel, but also of electrodes within China, which was a large exporter of low grade electrodes to rest of the world has suddenly become an importer of all types of electrodes, UHP and non-UHP, thus vacating a substantial part of this market of electrodes to other producers
  • The additional growth of 3.7% steel in the first half of the current year has also led to an additional demand of electrodes this year
  • In this industry, a large part of order book is committed at the beginning of the year, and this year was no exception and most of the electrode industry around the world had committed a significant part of their current year's production at previous year's very low prices, by the time, this China led development started getting noticed from February-March onwards resulting which, major impact of this sudden demand spurt along with a spurt in electrode prices could not be seen in the current year
  • There are still some uncommitted quantities available with most of the electrode producers, where an impact of increased prices in the current year can be seen
  • The full impact of higher electrode prices would only be seen after 2-3 quarters
  • On the cost front, needle coke prices and the costs of most of the other domestically procured raw materials have also started going up substantially. Besides, the electrode industry is also facing a constraint in getting enough needle coke in the current year due to some major shutdowns in various calcination plants around the world.
  • Chinese are mainly into not very good quality ultra high power(UHP) electrodes. They are more into the regular grade and the lower grade. So, a lot of that market has suddenly been opened up, which was for many years part of China's dominance
  • China has huge capacity to produce low grade needle coke which can’t be used to make UHP and even Indian coke is similar to Chinese coke, so there is still a scope for high grade needle coke production
  • In the last 3-4 years, the electrode industry closed about 6 plants totalling about 200,000 tonnes, which was amismatch between the demand-supply and an additional 80,000 tonnes to 100,000 tonnes of electrode demand has suddenly come up due to increased usage of EAF
  • The movement of people from one place to another place, which is facilitated by the government, happens very fast in China which means workers who used to work in the recently shutdown steel and electrode industry must have already gone to work for someone else
  • Electric vehicle supply chain has nothing to do with electrode produced as these electrodes has no major use in that in that industry 
  • Needle coke capacity including both petroleum based and pitch based is around 8,00,000 tonnes globally
  • Alternate use of the needle coke is in lithium ion batteries
  • With the increase in demand for electrodes and needle coke having its other uses as well, capacity for needlecoke may be required higher
  • Electrode industry and needle coke industry is less attractive for new entrants because of the sophistication of technology and it has seen no new player in this industry for the last 30 years
  • Pitch coke is not something, which is necessarily usedonly for non-UHP electrodes. Pitch coke can also be used for certain grade, certain quality, certain sizes of UHP and it has nothing to do with UHP and non-UHP
  • To manage the price volatility in needle coke and electrodes, company is yet to finalize about price and duration for forward booking of the orders
  • Talking about addition/expansion of new capacities in this industry, brownfield projects will require atleast 2 years and greenfield projects will require minimum of 3 years to setup

Company’s key highlights

  • The capacity utilization was around 71% during the quarter. It is going to be in the region of 80%-85% for the year
  • In the month of December –February, the tradition has been that at least 50%-70% commits for the next 12 months. And it is correct to guess that these commitments are more for the earlier quarters than the later quarters
  • two-third UHP production and one-third Non-UHP done by the company on an average
  • Company uses Indian coke for producing Non-UHPelectrodes
  • The Company's repayment commitment for FY17-18 is INR 135 crores, out of which as we stand today we have repaid about 70 crores till now with the current gross debt at INR 677 crore with a total long-term debt to be about INR 250 crore
  • The cash flow would be used towards income tax, towards dividend and repayment
  • The quickest electrode takes about 5-6 weeks, while the most difficult electrodes take as much as 5-6 months to be delivered by the company
  • The company is self-sufficient in power up to even 100,000 metric tonnes of capacity
  • The  company is giving thoughts over the contractual terms where it wants to be be more cautious regarding first entering into a needle coke contract and then electrode contracts with the clients because the company used to get yearly contracts and then buy needle coke based on the requirements but since needle coke suppliers have reduced their contract terms from 12 months to 6 months, there is a need for the company to renew the contract terms for electrodes as well
  • The company has alternate capacities, so in case on shutdown, the order requirements are met through alternate capacity plants
  • SDK-SGL merger is going on and would get completedby the end of the year
  • As a currency hedging measure, the company trades in Dollar with the all the other trading countries
  • No IPO for Bhilwara Power (where company holds 28%)is going to come in power sector because there is no growth expected around 300 MW capacity of this company 

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