HEG Q4FY17 Concall Summary

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Financial Highlights 

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  • EBITDA stood at INR 31 crore which was same as the previous quarter despite increase in turnover, due to orders being carried out at older price
  • Loss reported was INR 3.86 crore for the quarter
  • Loss reported for FY16 is INR 50 crore constituted by Graphite market due to over-capacity and subdued demand
  • Total debt has decreased by INR 98 crore from INR 782 crore last year to INR 684 as on 31st March 2017 due to better management of working capital and inventory
  • Despite increase in the price of coke and other raw materials, the company is expecting higher gross margins in this year compared to 48% last year due to increase in the price of electrode at a global level
  • The company is expecting a utilization level of 75%-80% this year as compared to 65% last year
  • Increase in other operating income is due to changes in accounting standards to Ind-AS leading to inclusion of export incentives. Also, the current year’s sales volume increase led to increase in other operating income
  • Needle coke comprises of 40%-45% in total raw material required for electrode
  • Other raw material includes power, windup pitch, fuel oil, gases etc.
  • Margins are expected to improve significantly on a quarterly basis
  • Non-UHP electrodes are 20-25% cheaper than UHP
  • The company is expecting 60% volume sales in exports in FY18 which remains same every year
  • The company haven’t booked any kind of hedging cost this year
  • HEG has repaid INR 97 crore debt in FY17 and is expected to repay INR 150 crore debt in FY18
  • Power cost of the company has increased from INR 47.69 crore last year to INR 71.98 crore this year due to addition of a part of power cost to inventories. Other factors for power cost is 20% increase in volume and 5%-7% increase in the cost of coal
  • The hydropower business is generating stable income and costs are coming down Y-o-Y and as a matter of fact, 75%-80% costs are just interest on debt which will decrease every year due to repayment 
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Company overview

  • Overall performance was affected by the increase in cost of raw materials
  • Company has been able to achieve significant cost reduction in terms of conversion costs, fixed costs and interest
  • Net sales in power segment is higher than previous quarter due to the enhanced requirement in the graphite segment, which more or less offset the reduction cost due to seasonal closure of our hydroelectric generating facility in Tawanagar in early March 2017.
  • Losses are decreasing significantly due to progressive increase in sales
  • HEH has already forward booked 65% capacity for the year which might get affected by the price rise in needle coke which is vulnerable due to decrease in contract period from 12 months to 6 months
  • Order booking split between HP and UHP is about 60% and 40% respectively
  • The Company has already booked 60%-70% of order (based on higher capacity) based on previous price in the first half and so the second half of the year will include orders with price rise
  • Company’s exports prices are similar to those of Japanese and American company’s prices and these countries don’t impose any duty on import
  • The Company is involved in short term power purchase agreements only (PPA) and it enjoyed a Plant Load Factor (PLF) of 40% -45%
  • Hydro side Capacity in Bhilwara Energy is 300 MW
  • The Company is practically producing its own power in Rajasthan and M.P.
  • The Malana Company, which is a 100 megawatt plant started about 16 years ago is debt free already. The second plant is also about 7 years old now, which means a lot of debt is already been paid

Steel Industry overview

  • Ban by Chinese government on heavily polluting industries led to impositions on few large Steel and Graphite companies which will directly impact the earning of HEG
  • Ban on induction furnaces led to steel shortage in China resulting sudden increase in price of steel.
  • Ban on induction furnaces led to increased usage of electric furnaces and increase availability of steel scrap along with reduced prices, thus benefitting the steel arc furnaces and electrode industry in general
  • These developments led to increased demand of electrodes in China and decrease in exports of electrodes from China to western countries, thus increasing the opportunity for companies like HEG
  • Steel industry has grown by 8.5% over last year as compared to the global Steel growth of 5.2%, thus making the India 2nd largest steel producer after China overtaking Japan.
  • Exports from India increased by the 8.2% to 97 million tonnes which is over 100% increase in growth over the previous year while imports declined by 37% to 7.5 million tonnes
  • Government of India imposed Anti-dumping duties on cold-rolled steel products from Korea, Japan, China and Ukraine and another 6 countries for 47 different hot-rolled steel products
  • National Steel Policy 2017 states the Indian government’s plan to enhance the per-capita steel production by over 2.5 time from 61kg in 2015 to over 160 kg in 2031
  • Total Steel production in India is 97 million tonnes and Electric Arc Furnace (EAF) contributes around 30 million tonnes
  • Shutting down of induction furnace led to availability of large amount of scrap, which can alternatively be used in EAF. While blast furnace requires iron ore and coal. Unlike last few years, this year has seen huge reduction on the scrap prices leading to more use of EAF as compared to blast furnaces
  • Share of EAF will keep on increasing due to its relatively more eco-friendliness and increased availability of scrap at lower costs
  • Total steel of EAF is just 30% of total steel as compared to 60% in US and western Europe has 44%
  • India produces less scrap as compared to America and other countries because Indians use their car for more than 10 year on an average. Thus less availability of scrap don’t encourage TATA and SAIL to use EAF. 

Electrode Industry overview

  •  Cost of all major raw materials have gone up and are expected to go up further over the next 6 months along with the increase in the price of electrodes
  • Developments in China will lead to an uptrend in the electrodes growth and increase in electrodes price but company is carrying numerous old contracts at old prices due to which company may not be able to reap enough benefits of the electrode price increase
  • While the global electrode industry is moving towards consolidation, company is able to produce robust sales volume in the current year due to expansion over new territories and building new customer base in terms of exports will lead to further increase in growth in domestic and international sales volume.
  • Due to prolonged losses, lot of graphite manufacturers shut down their businesses resulting into disposal of 2,00,000 tonnes of graphite capacity from the industry
  • China exported around 1,00,000 to 150,000 tonnes of graphite electrode last year which includes both Ultra High power (UHP) and non-UHP. The customers who buy UHP also buy non-UHP as 20%-30% of UHP bought. Which means if China’s non-UHP export is affected then its UHP exports are also significantly affected
  • Countries like India, US, Mexico has imposed import duty on electrodes exports from China
  • Needle coke prices has decreased by over 300% over the last 5 years but this year the prices are expected to increase
  • Most of the needle coke suppliers has reduced their contract period from 12 months to 6 months due to price fluctuation of raw material but this is also an indication of further rise on electrodes prices
  • China has already seen electrode price jump by 50% to 60% due to shortage of supply
  • Indian coke is even volatile in price than needle coke and its contract period last for only a month and then again the price changes
  • UHP are used in electric furnace for melting while HP are used in ladle furnaces for refining and consumption of ladle furnace is less than that of electric furnace
  • Building pressure on European Companies due to increase in raw material price may not surely lead to shut down in the European belt, because consolidation of Japanese and German companies will help in maintaining the demand-supply equilibrium.But this will equilibrium will require current plants to work at a capacity of 80% to 85% to maintain the demand-supply
  • Based on the ongoing trend in the electrode industry, where consumers buy against an annual tender, tend to freeze the order by Jan to Feb which starts in September
  • Chinese development will lead to increase in domestic demand of electrodes
  • Both customer side and input side are volatile as of now, so this industry in whole is volatile 

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