Ladies and gentlemen, good day and welcome to HEG Limited Q2 FY 2022 earnings conference call. As a reminder, all participants' lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touchtone phone. Please note 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 Limited. We have with us Mr. Manish Gulati, Executive Director, Mr. Omprakash Agrawal, Group CFO, and Mr. Gulshan Sakhuja, CFO. We'll have the opening remarks from Mr. Gulati, followed by a Q&A session. Over to you, Mr. Gulati. Thank you. Yeah. Friends, good afternoon, and welcome to our Q2 financial results call for the year 2021-22. As you can see, this quarter's profits were higher than the previous quarters and among the best in the industry. Thanks to strong global steel demand, world's crude steel output increased by 7.9% in the first nine months of this calendar year, including China, while steel production in the rest of the world, excluding China, increased by 15.5%. If we compare China's steel production of quarter two with quarter one, there has been a steep decline in steel production from 292 million metric tons level to 244 metric tons, which is 49 million metric tons lower. This is due to their drive to lower carbon emission levels. Moreover, from November, they will be having winter cuts where they're supposed to be cutting 30% of their production. This will result in reduced Chinese steel exports, enabling the rest of the world to make more steel. As you know, 47%-48% of which is from the electric arc furnace route where graphite electrodes are used. In fact, if you look at the monthly production of China, the September was probably the lowest monthly production in 33 years, and October registered even 9% lower than September. Coming to our country, Indian crude steel production increased by 23.3% for the nine months January to September this year compared to the previous year. Despite the second wave of COVID-19, Indian steel industry performed exceptionally well in the last two to three quarters with very high capacity utilization and record margins. According to WSA's latest short-range outlook, steel demand would expand by 4.5% in 2021, reaching 1,185.5 million metric tons, up from 0.1% growth in 2020. Further, steel demand is expected to increase by 2.2% to 1,896 million metric tons in 2022. In comparison with the last quarter's results, HEG's performance this quarter was much stronger, supported by improved global demand for graphite electrodes and firming up of prices. In Q2 FY 2021-2022, electrode prices improved for both UHP and non-UHP grades, and we expect them to keep strengthening in the following quarters. Our high-cost inventory of electrodes as well as the needle coke-made electrodes from high-cost coke have all been liquidated. As we talk, the needle coke costs are also rising in tandem with electrode prices, and the scarcity of needle coke due to increased demand could keep supply tight for the foreseeable future. Our ongoing capacity expansion from 80,000 tons to 100,000 tons is in full swing, and we hope to be in the market with these new products by end 2022 or early 2023. This will bring our capacity under one roof to 100,000 metric tons, which is almost 40% more than the next largest plant. With our four decades of experience in business, we expect to be a supplier of choice to our global and Indian customers. With this, I would now hand over the floor to our CFO, Mr. Gulshan Sakhuja, to take you through all the financial numbers. Then we'll be very happy to answer any queries that you have. Over to Gulshan. Thank you, sir. Good afternoon, friends. I will now briefly take you through the company's operating and financial performance for the quarter and half year ended 30 September 2021. For the quarter ended September 2021, HEG recorded a revenue from operations of INR 518 crore against INR 414 crore in the previous quarter and INR 323 crore in the corresponding quarter of the last financial year. Revenue for the quarter saw an increase of 25% on Q-on-Q basis, while it witnessed an increase of 60% in comparison to the corresponding quarter of the last financial year. The upswing in the prices have led to the encouragement in the performance of the quarter. During the quarter ended 30th September 2021, the company has delivered EBITDA including other income of INR 167 crore in the quarter as against INR 94 crore. The company recorded a net profit after tax of INR 113 crore in the quarter, as against INR 56 crore in the previous quarter and against a loss of INR 34 crore in the corresponding quarter of last financial year. Further, during the quarter ended 30th September 2021, the rates and the other guidelines have been notified under the Remission of Duties and Taxes on Exported Products scheme, via notification dated 17th August 2021. Accordingly, the company has accrued the benefits amounting to INR 4.85 crore under the RoDTEP scheme on the eligible export sales for the period from January 1 to September 2021. Out of which INR 3.24 crore pertains to the eligible export sales for the period from January 1 to June 30, 2021. Expansion plan that is increasing the capacity from 80K to 100K is going in full swing. There was a few months delay due to COVID, and we expect the expansion project to be completed in the quarter October to December 2022, and we will be ready with the commercial production from early 2023. The company is long-term debt-free and having a treasury size of nearly INR 1,500 crore as on September 30, yielding an average return of approximately 5.5% per annum. Now we would like to address any question or queries you have in your mind. Thank you. Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your touchtone phone now. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star followed by one on your touchtone phone now. We have a first question from the lineup, Pritesh Chheda from Lucky Investment Managers. Please go ahead. Sir, if you could tell what is the capacity utilization in this quarter from that 80,000 ton? 90%. Okay. 90% it has been for Q1 as well as similar for Q2. Okay. Sir, I was just doing the math, because I was actually doing it 100% only. We are at about, let's say, $1,000 EBITDA type number. We have this fond memory of this industry, even recording, you know, for few quarters in excess of $5,000. You know, not now, but in that golden period of 2018. Yeah. Right. I just wanted to understand the dynamics of the industry then for recording those kinds of EBITDA and dynamics of the industry now. Do you see upside to this $1,000-$1,200 EBITDA which you are recording? How has the business working changed? Because that was a phase where we gained on prices with stable needle coke, then came a phase where we booked all the needle coke. That was a phase of, you know, operational losses. Now how in this cycle is the business being done? You know, if you could help us understand this part. Yeah, sure. Let me distinguish between those times and these times. In those times, you would recall in early 2017, the preceding six years were actually quite bad for the industry, where margins were under pressure, and there was excess supply in the market and less demand. Due to which about six major plants had closed down in the Western world. By the time we came to early 2017, the demand and supply of graphite industry were all quite balanced. Then came a sudden shocker from the Chinese side, where they put an immediate clampdown on their polluting steel industry, the blast furnaces, et cetera. Their steel exports to rest of the world declined from a level of 120, and within two years they were at a level of 60 million metric tons. That's a huge number. Just to emphasize what that number is, Indian total steel production is 112. Suddenly a 60 million metric tons going out of the market actually made the rest of the world make more steel. Rest of the world makes 48% of the steel through the electric arc furnace route. There was a sudden spurt in the demand of graphite electrodes. That came so sudden that the graphite industry was not ready to cope up with that. I mean, by the time everybody turned out extra production incrementally, the market was on fire. See, for a steel company, electrodes are just 3% of the cost. Nobody wants to take a risk of, you know, losing out on their steel production just for electrodes. In the later months, everybody tried to stock up more than what they needed, and you know, a company, let's say in Middle East, a company who was happy with working with two months of physical stock of graphite electrodes at their plant just because that region doesn't have any electrode plant, suddenly wanted to keep six months. Everybody stocked more and more and more. There was a psychosis in the market, and the prices shot up like anything. From a level of, let's say, $2,500 to a level of $15,000 happened in a matter of just two to three quarters. Everybody overbought. There was a period of correction which followed later. By the time before the inventories got over, the COVID thing struck. The inventories took a little more time to liquidate. There was so much of excess material in the supply chain that it took a while, almost year and a half or two years, for that to correct. That is what you saw in our results also, that we had like two bad years or rather six bad quarters trying to, you know, live with those high-cost inventories, revaluing them. Now the times are quite different than before. Now the times are such that we are getting a real demand from the world. After all these corrections, there's no excess inventories of electrodes, either with customers nor with manufacturers. Now it's a more stable regime that we are actually catering to the real demand coming in the world, whatever 2%-3% electric arc furnace is going. Also in the past two to three years, the clampdown on carbon emissions is increasing more and more, and China still continues to be very serious about it. I mean, as I said in my opening remarks, the September monthly production of China is the lowest in 33 years. So this is like making history because they're truly clamping down on their production. What will be the benefit of this for the other rest of the world is that the steel gets consumed domestically, so they won't have steel to export. In fact, they're discouraging export by taking out the VAT and even thinking of putting export duty on some of the grades of steel they export. That bodes well for the rest of the world, because the rest of the world can make more steel through electric arc furnace. Also in China, they still continue to give emphasis on more and more electric arc furnace in production, which is right now at a level of, let's say, 12%. We expect in two, three years, three, four years, maybe it has to go to a level of 20%. Anyway, the scrap generation in China is also increasing. These times are different than those times because those came a bit too sudden with industry, you know. This is more stable. This is a much better scenario than that. All the graphite companies like ours, they are all working, all have almost reached a level of 90% capacity utilizations. This is more stable than before and prices are firming up quarter by quarter. That's how I look at it. Okay. Has the industry of electrode supply now kept up with the pace of supply additional capacity or there is no additional capacity? In the Western world right now, as I just said, I think all of the steel and graphite industry is already at a level of 90%. Now we are doing an expansion of, let's say, another 20,000 tons. There is no other capacity announcement which has come by, other than in China. China does keep, you know, they have a lot of graphite companies making mainly non-UHP electrodes. They are there. The supply tightness has now started to happen again among the graphite people in the Western world. Okay. The format of doing business, earlier we had to book needle coke for a slightly longer supply. Hence we saw also that one year, and even in this call, you first mentioned that you exhausted the whole priced needle coke. Last call also you mentioned, right? Yeah. Now how does this business work? We have a more back-to-back way of pricing needle coke and pricing electrode that is a three monthly basis, and there is a spread always in mind. Is that the way of doing or we still have to go the old way? No, we are now electrode people as well as the needle coke people are working quarter by quarter. Now, if I have a customer asking for, let's say, a yearly price, I'm unable to give a yearly price. I just count what I have in stock, what is in transit, what I have booked. I always know our cost. Mm-hmm. We are booking business quarter by quarter. Needle coke is also available quarter by quarter. We always know our costs. We know the spread. Okay. Can you comment on the spread now? What was it running? No, I know. You can. It's not difficult for you to make some rough back of the envelope calculations. Okay. I will not, I mean, give you the number please, because I will be. No problem. Transcripts because it will be available and then, you know. No problem, sir. Do you think that the spread will be more consistent now, unlike last time, which went through haywire? Yes. Yes. Because it's all back to back. This is what I completely believe, that the spread in at least the next two quarters, which I can foresee, where we have an order book also, and we know what is the price of needle coke. The spread should be consistent. Again, I'm talking only two, three quarters ahead, not more than that. You see an upside to this $1,000 EBITDA, which is reported, $1,000+ EBITDA, which is reported in this quarter basically. No. I will not say in dollar terms. I would rather say the margins which you are seeing are going to be. You will see similar margins in the next two, three quarters. Reason being that all the costs are simultaneously going up. It's not only about needle coke, it's about Pitch, it's about metallurgical coke, it's about freights, fuel, everything. All the costs are going up. Having said that, if we say that we are able to have, maybe we expect similar margins, that means at least we are able to take care of all the incremental costs from all of the materials. Okay. This 80,000-ton capacity, you can use at 80,000, higher than 80,000 or lower than 80,000? See, as I said, this 80,000 capacity. Once we reach 90. See, this 80,000 is under certain conditions that we use. I mean, we make certain products, certain size of products. It's like an ideal thing. It's like a nameplate capacity. It's like saying a car would have an average of such and such under such and such conditions. Of course, 80,000 is the real capacity we have. When we work with all different grades, different sizes, catering to all kinds of demands. Usually around 90%, 92%, and you'll probably see with every graphite company. Okay. You're saying about 90%-92% of the rated capacity is what you will use? Yes, you can stretch it to, provided you're taking care of all the variables of the product mix. Uh-huh. See, I have a product mix. It's not ideal to me. If I would have the right product mix, exactly the sizes I want to make. This happens because the global market also is like that. You know, if there's electric arc furnace, we are also making some sizes for the ladle furnace for our years-old customers who still want to buy the small size electrode from us. Once you have a product mix which is ideal, of course 80 is the, 80 is possible. Okay. I'll just clarify. I got confused here. You can operate at 90%-92% comfortably, but even 100% utilization, which is generating 80,000 tons output, is possible. That's how you're putting, right? It is possible, but it has certain, you know, fine print to it that I need to be making certain sizes more than the others. Okay. If you want to cater to the market, your customers, your loyal customers who have been with you for 25, 30 years, I cannot choose to make the sizes I want to because of plant capacity. Which means you are running at optimal capacity as of now. We can say that. 90%, maybe we've stretched it to 92%, but that's where, you know, then. Oh, okay. Because, you know, ideal situation comes in. Perfect. Thank you very much, and all the best, sir. Thank you so much. Thank you. To ask a question, ladies and gentlemen, please press star one. We have next question from the line of Sonali Salgaonkar from Jefferies. Please go ahead. Sir, thank you for the opportunity. My first question is regarding China. You know, last quarter, Q2, we saw power cuts in China. How do you see the entire situation evolving and also impact our demand versus pricing in the other global countries? See, what is happening in China, Sonali, you guys would know better than us. It's all in a state of turmoil. Now, how it impacts HEG, we'll just talk about graphite and HEG. Now, we are not supplying to China. All we are worried about, all we keep tracking is what is China's effect to the rest of the world. Like how much steel are they exporting? How much electrodes are they exporting or importing? That's all. That's what we care about. You know, we're not per se, we don't have any customers in China as such. Right, sir. I was asking from the indirect impact point of view. For example, if the EAF production in China starts scaling down due to power cuts, how do you see the supply situation evolving in Graphite Electrodes? See, right now it is actually otherwise, but we are seeing lot of inquiries coming in from rest of the world for non-UHP. They're asking for non-UHP. That somehow if you talk about electrical power cuts, then their graphite industry is impacted more than the electric arc furnace industry because graphite is very power intensive. In fact it is actually working out to be the otherwise. The power cuts are hurting the graphite industry also other than the electric arc furnace. Got it, sir. Second question is regarding the demand. How are you witnessing the demand scenario in the rest of the world? You know, especially, in Europe or Middle East or U.S., and what is the current situation of the inventory? Are we at near normal inventory right now? Sonali, I'll answer the second question first. We are working at actually record low levels of inventory. We do not I mean, let me not give a number, but yeah, it's less than normal. I mean, the order book, the demand is good. We are seeing demand from U.S., from Europe, from Southeast Asia. Virtually everywhere globally, steel industry is doing well. You can see their margins for steel industry in India as well as globally. Got it. Our inventory levels are pretty tight. Got it. My third question is on the pricing. I understand you do not disclose the absolute pricing, but would you be able to articulate the quantum of price increase that we had in Q2, and how much do you foresee in the coming quarters? Just an approximate estimate would also do, sir. Yeah. That is what I can do. Let's say Q2 versus Q1, let's say. I'm just giving ballpark figures. We are talking in terms of 20% price increase, Q2 over Q1. Going forward, we are able to see 8%-10% price increases quarter by quarter. Okay. Correct, sir. 8%-10% in Q3 over Q2. Is that correct? Yeah. Yes. In Q4 over Q3. Got it, sir. Got it. Sir, my next question is regarding the capacity utilization. You did mention 90% utilization this quarter. Yeah. Sir, how much was it last year same quarter, and what is it currently? Even currently we are at 90%+ as we speak in November? Yes. We are consistently at 90% right from the last quarter of last year. Since then we have been at 90% level. Got it. For the next Q3 and Q4 also we expect to be at 90%. Got it. How much was the utilization same quarter last year? Same quarter last year was 70%. 70%, yeah, 74%. Yeah. Around 70%. 70% for the last year. Got it, sir. That's it from my side. Thank you. Okay. All right. Thank you. To ask a question, participants may press star and one on your touchtone phone now. We have next question from the line of Veeral Gandhi from Ninety One. Please go ahead. Hi. I've got three questions. The first is about coal. I had read that in October many power plants in India had less than eight days of supply. What would the impact on your production if there is load shedding, and do you have anything in place to mitigate the risks around that? Okay. Let me answer this for you. See, there was a lot of news everywhere that India is working with, like, four days of stock, three days of stock. Later I realized, we didn't see the impact anywhere. I mean, there were no load sheddings, et cetera. I think Coal India has done a wonderful job by ramping up production. That is why I think the government prevailed upon Coal India to push their own domestic supplies. So far as we talk, we didn't see any kind of load shedding, not to the industry, not to residential. That's about it. The way it has been proceeding since the last one month, the schedule of this coal shortage has gone down, and industry is working normally. Do you get all your power from the grid, or do you have your own captive power plants? We have captive power plants, which are also coal-based, but we're not running them now for the past year. We are using all our power. We have a 70 MW connection, and we have been taking all the power from the grid, from the state electricity board, like we say it in India. Okay. Thank you. All right. The second question was I saw that the spot price for electrodes in China fell from May this year to the end of September and then rose sharply from that point on. Do you have any thoughts on what caused that movement? Sorry, I didn't get the last few words you said. I heard about China, that price is shooting up after September 2020. Yeah. What is it you wanted to ask? What caused the fall from May to September? There was a fall in the spot price from May to around September. September it shot up very sharply back to the previous highs. I mean, it was quite an interesting dynamic. If you have any clues as to what caused that would be helpful. I mean, really the way Chinese have been working is demand and supply is very short-term. There you see more spikes from their side. I mean, I really don't know why they had to go down to those crazy price levels in the twenties. Also you can relate it to the steel industry capacity utilization and steel demand also. From October 2020, you are seeing a consistently, you know, rising production of steel companies and improving EBITDAs. That is the time that entails the period you're mentioning of April to September 2020. Even steel industry was not doing as good. Steel industry started to pick up only after October 2020. Mm-hmm. Okay. Great. Thank you. The last question I had was, I had read about the use of graphite electrodes in electric vehicle batteries. There is a Chinese company, Pu tailai, that produces this product. To what extent can production of electrodes for electric arc furnaces be converted to electric vehicle battery, or are they entirely separate markets? These are separate markets, separate products. Now, graphite electrode, the primary use of that is in steel melting. Because generally it's graphite, so what lithium battery they're using is an anode. In a cell there is an anode. An anode is nothing but a graphite powder. Yes, it is graphite, but it is processed differently. An anode can be made from two, three, four precursors, like natural graphite, like pitch coke. These are two. Sometimes people do mix the two things. That probably is the same thing, but it is actually not the same thing. But yes, generally it's graphite. But that anode, that process is very different. That product is very different from the graphite electrode which are used by steel companies. Got it. Thank you very much. Thank you, sir. Thank you. To ask a question, participants may press star and one on your touchtone phone now. We have next question from the line of Manish Sonthalia from Motilal Oswal Asset Management. Please go ahead. Yeah. Hi, sir. Thanks for the opportunity. Two questions. What is the situation of our Iranian exports? Second is, if domestic production in China of steel is coming down, what are they doing with the graphite electrode capacity currently? Are they dumping it worldwide, or how is the situation out there? See, China, the main production, as you know, 88% is from the blast furnace side, and only 12% is from the electric arc furnace side. When they're coming down, actually, it's both. Blast furnace, the side is impacted more than the electric arc furnace. Now what they are doing with their electrodes, I would say right now the way power cuts are going on, even their graphite electrode production is impacted. Yeah. About your first question, the Iran thing. No, we are not exporting anything to Iran due to ongoing sanctions from the U.S. side. It used to be a very good market for us, but for the last two or rather three years, more than three years, there's been absolutely no nil supplies to Iran. Maybe if sanctions are lifted, we might resume. Okay. Just a follow-up on the graphite capacity in China. With the power cuts, et cetera, are you seeing really Chinese export of electrodes increasing over the last quarter or two? No, not at all. Rather, I think I have a feeling from the market that their exports are actually coming down since the last quarter, the export of graphite electrodes. Maybe when the data emerges from China, we will have a look at it. Right now the feel I have from the market because I'm in touch with customers on a daily basis. It seems to me that more inquiries are coming to our side for the sizes which were earlier supplied, for the non-UHP grade, which was earlier supplied by Chinese. Customers are now preferring more of UHP as opposed to HP? No, I didn't say that. It's not about UHP or non-UHP. See, in our product mix, we also make about 30% non-UHP. Okay. The customers, our customers are aware that HEG also makes some non-UHP products. Even they're not getting supply from China, they turn to HEG to ask if we have some availability. That's how I get a sense that, let's say X, Y or Z customer who was not checking with us for the non-UHP, suddenly they start checking with us or sending inquiries, gives us an indication that probably they're unable to source it from China. Okay. Just an additional question. What is the price difference between, let's say, an HP and a UHP for similar dia? I mean, just not- Actually- -exact numbers, but just for. Actually, it varies year after year, quarter by quarter, because both have different costs in the sense, yes, we have to use only needle coke. For the non-UHP we use Indian regular coke. It depends upon their pricing and mostly non-UHP. UHP, its pricing is driven by the EAF demand in the world and what our graphite industry is doing. Non-UHP is mainly, pricing is mainly driven by how much supplies are coming out of China and their pricing. Accordingly, we have to price our products. Mm. If you ask me strictly what is the difference between the two? Mm. You know, it varies. I would say. The difference in prices for similar diameter. It can give some idea about the demand supply situation, basically on the China side. If the gap has increased significantly or is it compressed or is it stable? I mean, it varies from which point in time. If I have to answer this, let's say if I have to answer this today, what is the difference between UHP and non-UHP? I would say anywhere between $1,500-$2,000, something like that. But because they're two different products actually, that they are irreplaceable. I mean, you cannot use a non-UHP in place of a UHP. No, I was just referring to the last cycle when we saw very steep J-curve in graphite electrode prices. At that point in time, the demand was so strong, the UHP and the non-UHP prices converged literally converged. Literally converged. Correct. Absolutely. Right now that gap is standing at $2,000. Yes. No, I mean, it's again, which point in time? Three months later you ask this question, I'll give a different. At this given point in time. Currently as we speak. Okay. If you are being so specific, then let me hazard a more accurate guess to you. Yeah. I would say $1,000 to $1,500. Not $1,500 to $2,000. $1,000 to $1,500. Got it. Thanks. Thanks a lot. Thank you. Thank you, sir. A reminder to participants, if you wish to ask a question at this time, please press star and one on your touchtone phone now. Your next question from the line of Ravikant Taruna, an investor. Please go ahead. Hi, I'm Ravikant speaking. I'm a retail investor, so I barely got lesser knowledge in this area, but I've did my research a little bit. Out of the points that you spoke, sir, what I would like to know is, you said there are cuts in China that the production with power cuts or whatever the production of graphite electrodes and also this steel making has reduced. We all know that China is a big is one of the largest producer of the graphite electrodes, right? Will that reduction in supply cause any imbalance or increase in demand in the rest of the world which could compensate the other regions like Europe, U.S. and the other Asian countries, which could fulfill the demand for the graphite electrodes? We are seeing, I was mentioning we are seeing inquiries coming in for non-UHP electrodes also. UHP, of course, they are coming. Non-UHP also from places like Europe. Europe has recently announced anti-dumping duty against Chinese. That's one reason. Even in other parts of the world, we are seeing more inquiries coming for non-UHP also. Those customers were probably taking from Chinese earlier. Okay. I think that answers my questions. I'm good. Thank you. Thank you. Thank you, ladies and gentlemen. That was the last question. I'd now like to hand the conference over to Mr. Gulati for closing comments. Over to you, sir. Yeah. Thank you so much, friends, for attending this conference call, and we hope that we and the times to come will be better than this and the demand for steel and electrodes will continue to grow. We look forward to meeting you in our next conference call. Thank you so much. Thank you. Thank you very much, sir. Ladies and gentlemen, on behalf of SKP Securities Limited, that concludes this conference. Thank you for joining with us, and you may now disconnect your lines.