Ladies and gentlemen, good day and welcome to the HEG Limited Q1 FY23 earnings conference call hosted by SKP Securities Limited. As a reminder, all participant lines will be in the 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 then zero on your touchtone phone. 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. We have with us Mr. Manish Gulati, Executive Director, along with Mr. Gulshan Kumar Sakhuja, CFO. We'll have the opening remarks from Mr. Gulati, followed by a Q&A session. Thank you, and over to you, Manish. Good afternoon, friends, and welcome to our Q1 FY 2022-23 con call. Let me start with a disclaimer first. Before we proceed with this call, I would like to take this opportunity to remind everyone about the disclaimer related to this call. Today's discussion may be forward-looking in nature based on management's current belief and expectations. It must be viewed in conjunction with the risks that our business faces that could cause future results, performance or achievements to differ significantly from what may be expressed in such forward-looking statements. Friends, in comparison with the last few quarters results, its performance this quarter was the strongest in terms of all parameters, volume, revenue, EBITDA and operating margins. Coming to steel, as per the recent data released by World Steel Association, global crude steel production for January to June 2022 was 949.9 million metric tons, down by 5.3% compared to 2021. Steel production ex-China was down by 4.2%, while Indian steel production increased by 8.8% compared to 2021. Chinese steel exports seem to be proceeding at the same level as last year, 2021. In China, EAF steel still constitutes around 11%-12% of their steel production, up almost double of in 2016 and is expected to be 20% by 2025, which has to be seen in the backdrop the rest of the world produces around 47% of its steel through EAF. Due to Russia-Ukraine crisis causing steep rise in energy and electricity prices in EU and some other countries, supply chain disruptions and subdued steel demand, global steel output has recently begun to fall. With steel production declining year-on-year in all major steel producing regions and inflated input costs impacting margins, the outlook for the rest of the year remains unclear. We have been participating in steel conferences in U.S. for last several years, and we have seen increasing focus and serious efforts towards decarbonization in U.S. Steel industry contributes almost 8% of industrial pollution, and blast furnace, BF route emits four times more greenhouse gases compared to EAF. Almost 20 million metric tons of EAF capacities are already announced and under construction in U.S., some of which will start coming on stream from end 2022 onwards. Besides US, in Europe there have been announcements of conversion of steel capacities to the tune of 15-16 million metric tons from blast furnace route to EAF route. In the backdrop of decarbonization efforts in the steel industry at global level to reduce carbon emissions, we believe that the EAF steel production in the world will continue to grow as the world keeps adding more and more electric arc furnaces in the immediate and foreseeable future. Thus the demand for high quality electrodes is likely to keep increasing. Most of these would be large sized furnaces using ultra-high power grade electrodes, which we are fully equipped to cater to. The electrode prices improved for both U, UHP and non-UHP grades in Q1 FY 2022-23. However, the electrode prices have now stabilized and so have the needle prices. The sales volumes might face some pressure in July to September and October to December quarter due to order pushbacks from some customers due to decline in steel production. We are upbeat that as soon as the steel production starts to grow, the demand for electrodes will come back, particularly when we see that electric arc furnace production will grow much faster. Our expansion to increase capacity from 80,000 tons to 100,000 tons is going on with full steam, and we are confident of completing it by end 2022 and be ready with commercial production from early 2023. This will increase our capacity to 100,000 tons in Mandideep, making us one of the most cost competitive graphite electrode plants in the world. I would now hand over the floor to Mr. Gulshan Sakhuja, our CFO, to take you through all the financial numbers. Together we'll be very happy to answer any queries that you have. Over to you, sir. Thank you, Manishji. Good afternoon, friends. I will now briefly take you through the company's operating and financial performance for the quarter ended 30 June 2022. For the quarter ended June 2022, HEG recorded revenue from operations of INR 722 crores as against INR 673 crore in the previous quarter and INR 414 crores in the corresponding quarter of the previous financial year. Revenue for the quarter saw an increase of 7% compared to the previous quarter, while it witnessed an increase of 75% on a QoQ basis. Since turnover is a factor of both volume and prices, we are happy to inform you that the company has been able to achieve healthy growth in both aspects. During the quarter ended June 30, 2022, the company has delivered an EBITDA, including other income, of INR 105 crores as against INR 174 crores in the previous quarter, and INR 94 crores in the corresponding quarter of the previous financial year. The EBITDA for the quarter ended June 30 has increased vis-à-vis previous quarter and corresponding quarter of the previous year due to an increase in both the sales quantity and price realization of graphite electrodes. The increase in employee benefit expenses over the previous quarter and corresponding quarter of the previous year is on account of annual increment in salaries, incentive to employees, and provisioning for the profit-related commission payable to CMD and ED of the company under contractual terms of their appointment. The increase in expenses pertaining to power and fuel is on account of higher production and an increase in the price of LNG, furnace oil, et cetera. The reason for the increase in finance cost is on account of two factors. First, the RBI has revised the interest intervention from 3% to 2%. Second, there is an increase in the working capital requirement on account of increased sales and production, which has led to the higher utilization of our working capital limits. Further, the fall in other expenses as compared to previous quarter is because the company has incurred expenditure on account of CSR amounting to INR 19 crore during the quarter ended thirty-first March 2022. The corresponding amount for the current quarter is 0.61 crores. The company recorded a net profit after tax of INR 134 crore in the first quarter of FY 2023, as against INR 113 crore in the previous quarter and INR 55.8 crore in the corresponding quarter of the previous financial year. I would also like to inform you that India Ratings and Research has affirmed our long-term rating at IND AA- with a stable outlook and a short-term at A1+. Expansion plan from 80K to 100K is going on in full swing, and we expect the expansion project will be completed by December 2022 and ready with a commercial production by early 2023. The company is a long-term debt free and has a treasury size of approximately INR 1,150 crore at cost as on 30th June 2022, yielding an average return of approximately 6% per annum. Now, we would now like to address any questions, queries you have in your mind. Thank you. you. Thank you very much. Over to Navin. Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. 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. The first question comes from the line of Dhaval Toshi from Endpoint Asset Management. Please go ahead. Hello, sir. Just wanted your views on the near-term demand and supply scenario for the industry. If you look at the cost structures in the global markets, which is US and Europe, the costs have gone up significantly higher. Can we see some supply disruption arising out of it? The way we've started seeing other commodities like aluminum and zinc. Can we see some plant closures just because the costs are not sustainable? Dhaval, to answer your question is that, yes, in Europe, the impact of higher electricity cost is felt the most. To tell these electric arc furnace steel companies are running at off-peak hours because of which the production is slow and you can feel it because they've been receiving several requests to push back our orders. There is no such problem in U.S. as such. This is something which is unique only to the European bloc. For them, the electricity costs have gone up three times or four times. Some of the steel companies do have contracts with the utilities in which 50, 60, 70% of their power is covered. See, we don't. Since this is not going to be something forever and it's of course there has to be timelines to that because not only steel industry, all industry in Europe is suffering on account of electricity costs. To ask me if there's any closure, I've not heard of it, that any electrode plant to close or something because on this account, however, their costs have definitely gone up. Our peer group, I mean, who operate plants in Europe, costs must have certainly gone up even if they are hedged for some portion of their electricity with the utility providers. Okay. Does that kind of help us in terms of the overall electrode pricing, sir? Because either through supply tightness or through cost, essentially the prices has to start moving up, right? Yeah, that's true. See, the European plants, definitely, the electrode plants must be facing higher electricity prices. Definitely that provides some base for the electrode prices because they cannot go below a certain point. Otherwise it becomes unviable for European plants. Anyway, I can't be commenting on their costs really. In your discussions with the customers, are you seeing some kind of uptick in the overall pricing for our electrodes or that really is not the case? See, for the time being, the European, these, all these steels are pushing back their orders with us and with our competitors. Right now it's not that situation about this pricing. The demand has to be there. Right now there's pushback of electrodes. I mean, this pricing power will return later but once the demand returns. Right now the prices have stabilized at a point. They're not falling as such but they have stopped increasing. That has been the impact of these pushback of orders and some inventories there in Europe. Prices are not increasing. They're not dropping either because of, as you said about the rise in energy costs, electricity costs, logistic costs. Everything is going up still. It's still at an elevated level. Okay. Alternatively, sir, how do you see the needle coke pricing? Given crude has started correcting, do we eventually see that in our overall needle coke prices as well? See, the needle coke prices, thankfully for the last two quarters, our purchase prices have been at almost the same level. One or two suppliers tried to raise prices, but more or less you can say for these two quarters, our purchase price for April to June and July to September, a majority of our supplies is remaining the same. So they're not increasing. That's a good part. Yes, we have some relationship with crude but still is more driven by demand and supply rather than the crude oil prices. Can we expect some relief going ahead? I'm not sure actually. You see, I will definitely accept, I mean, I'll want some relief from their account but they know their economics. They know what is the crude oil price, they know how much demand for their needle coke is there. But right now the supply of needle coke has eased. There is no shortage as such, and I would really expect if they could provide some breather as we do. We are negotiating with them quarter by quarter. I'm sure they are also seeing the markets, they are seeing the markets stabilizing or, you know, settling for a while. Maybe, yeah, that's up to them. So far there's no indication. I mean, so far the prices have been continued with the same prices for the last two quarters. Is it safe to say that there can be some near-term challenges as far as the operating environment is concerned before things actually start cooling down in terms of the overall energy cost in Europe and post which we can expect a good recovery? That is exactly how I think. Let's see, we are talking in the middle of August. Of course, I know very well what is going to happen in this quarter. The volumes are subdued. The price is stable for both electrodes as well as needle coke. The volumes just because of these order pushbacks from some predominantly from Europe and some other customers, there'll be lesser volumes expected in July to September. Maybe the same probably some market to continue. Same phenomena to continue for October to December. Barring which at least, I mean, in CY23, I definitely expect things to turn around. I mean, the steel production has to turn around. We'll see how it behaves in the next one or two quarters. I think in this quarter in the middle of which we are already and the next which is very foreseeable, it seems the volumes will be subdued. See right now, April to June we were working at 92% capacity utilization. We could sell each and every ton we could make. We worked at record low inventory levels. Our closing inventory of thirtieth June was record low. I mean, it's not even workable inventory. So far so good. Starting July we started receiving the. I think the impact of Russia-Ukraine thing started to settle in and customers calling us every now and then to push back their orders by two months, three months to settle. As you know, we book three months to six months maximum at a time. That impact is being felt from volume just carrying over from this quarter to next and from next to next. It may have our volumes are expected to be low in this quarter. Not drastic but yeah, low. We can't still put a number on it because I'm still hoping to make it up. We still have one and a half months to run. Maybe we can make it up, maybe we cannot but there might be some risk. In a stable price. The price is the same as the June quarter but lesser volumes expected. Thanks a lot, sir. Thank you. Next question comes from the line of Sonali Salgaonkar from Jefferies. Please go ahead. Thank you for the opportunity. My first question is what has been the capacity utilization in this quarter versus same quarter last year? It was 92% for Q1 2022-2023 versus 85% year-on-year if you quarter. If you just compare it with the last quarter, January to March, 87%. Our volumes of Q1 have been the most in the last 10, 11, 12 quarters. We have sold the highest volumes in Q1. Highest capacity utilization of 92%. That's probably the best we can do. We cannot go beyond it. It's very difficult to exceed the nameplate capacity. 92% was our best ever capacity utilization April to June quarter. Understand. As of mid of August, currently, how much are they running at? We continue to run at full blast, full level because as I said, Sonal, we have record low level of inventory closing of 30 at June. We really don't mind. I mean, we want to run full till we can for a couple of months, even if sales are slightly lower. Because when the things turn around, these volumes will be required in the market. We continue to go full blast for the next 3-4 months. We are planning at 90% capacity utilization. Yes. Even in the current quarter, right? Yes. Absolutely. We are making product. The capacity will be utilized to 90% for sure. 90% you can imagine. Sales may not be as much. 90% will be the plant's capacity utilization. Understand. In terms of our export, now we export 70% of our top line. Could you broadly elaborate what is the country-wise export mix and how much especially Europe is contributing in that? We have total about 35 countries and it's very well diversified. Our main, if you say the main areas other than in, excluding India, of course, we're talking about, let's say U.S. and then followed by, Middle East, followed by Europe, followed by Southeast Asia. If you ask how much has our sales been in Europe, then I would say in 2021, 2022 it was to the order of 10 or 11%. 11%. Understand. Fair enough. Sir, you talked about inventory position being at record low, at least for yourself as of June ending, the quarter ending June. How is it for the industry per se? I think their inventory levels are higher than us. I think we have probably the lowest inventory level. But I also do not mean to say that they were significantly Sorry, sir. No, that's fine. I cannot have a peek into their plans, but I'm reasonably confident that our inventory levels were the lowest or one of the lowest. All the industry has been working full. I think we have been able to sell more in April to June, resulting in low inventory levels closing third quarter. Understand. You would say industry inventory levels are probably optimal or normal and we are below normal? I think so. Again, this is my judgment. I cannot peek into our peer groups and make an estimate on what they must be carrying. Just by the market, what they have in the market and how they sell, we can have some idea. Understood. Now my next question is regarding price hikes. You did mention that there were price hikes in this quarter. Could you give us a quantum or the delta of price hikes in this quarter, in the quarter that went by, Q1? Yeah, understood, ma'am. You can consider 0.5%-2% price. The difference between Q1 of 2023 and Q4 of 2022. Understand. This quarter largely up till now it's been stable. It's going to be stable. I can see that because 1.5 has already gone and it's probably is going to be stable. Again, I'm talking overall global average. Of course. Yeah. Sir, cumulative over the past 4-5 quarters, how much do you think could be the price hikes? Because every quarter you have the quantum of price hikes and in the preceding quarters you were as high as 7%-8% as well. Cumulative, do you think it is about 15%-20% price hikes in the past 4 quarters? No, past four quarters it's going to be much more. Okay. If you compare the price level which we have in April to June with what we had in April to June of 2021, it's going to be more than 50%, more than that. It depends on the trade and markets, but anywhere, I mean, 50-odd%. Yes, that is correct. It is more than 50%. It's more than 50. Yeah. True. Understand. Sir, also on the CapEx bit, you talked about commissioning that. I think your overall CapEx is INR 12 billion. How much of that is already spent, and how much are you planning to spend in the remainder of the year? See, INR 1,200, against the INR 1,200 number, almost INR 900 has already been spent, and INR 300 would be spent by March, all of it by March 2023. Understood. Sir, in your opening remarks you talked about 15-16 million of, you know, EAF capacities in Europe converting from BOF. By when are you- Sonal, from BOF to EAF, not otherwise. Yes. By when do we expect that to happen? See the projections which they have. They are like, because it's a big thing, blast furnaces to electric arc furnaces. All these steel companies, you might have heard public announcements of, let's say the biggest steel companies called ArcelorMittal. They have blast furnaces in Spain, Belgium, Germany, France. What they're doing is these steel companies are. They have made some targets to cut their carbon emissions, and they want to be converting gradually. The timelines would be what they have mentioned is starting 2025 to 2030. There's a time frame of this 15-16 million metric tons which I said, and the 20 million metric tons which I said about US, they would be up to 2025 or 2026. From now, starting this year, they'll start coming on stream by end of 2022 and going up to 2025 or 2026. Next three years, four years, we'll definitely see the arrival of this 20 million metric tons capacity on the ground. We can see it happening. We know the companies who are making it. We know the plants who are coming up. Europe is starting 2024 or 2025, and they want to do it by 2030. Understood. Sir, last question from my side. Sir, any update on the China electrode supply? I mean, not really anything different, we can say what we have always said, that we do not compete with them in the ultra high power grade market. They have lots of capacity. There's no doubt about it. Their own electric arc furnace portion is only 11%-12%, which should go up to 20% soon, I mean, next two, three years. These excess capacity of electrodes they have, we're certain some of it will get absorbed in the domestic market. They still continue to export lot of electrodes to lot of countries in the world. But we do not have any head-on competition with them in the ultra high power grade segment. In the non-ultra high power grade, the small side, that's okay. We do face some competition, but we have several customers in several countries who still prefer to use our electrodes. Right. Sorry, just one more question, if I may squeeze in. In terms of Europe exposure, you mentioned that 11% of your sales emanate from Europe. Yeah. How much of the production emanates from Europe as a term? Our production? I mean, I didn't get this. You asked how much we sell in Europe. I I said 11%. Yes. No, no. In the sense, do you have any manufacturing facilities or planning to do that in Europe? No, Sonal. We do not have any manufacturing capacity other than what's current in India. Sure. Thank you very much, sir. Have a good day. Thank you. Thank you. Thank you. The next question comes from the line of Pranav Jain from HDFC Securities. Please go ahead. Good afternoon, everyone. Thanks for the opportunity. Sir, do we foresee any problem in selling our incremental volumes of 20,000 tons considering the situation in Europe? How is the demand outlook going forward? For the next two quarters, which I said, the July to September in which we are, and October to December, it looks subdued. This is not something which is going to last forever. You see this even a common man today has started feeling the impact of climate change. The seriousness towards that is only growing every day. The developed countries are becoming very, very serious about it, and serious about it to the extent that they actually started putting those electric arc furnaces plants. This is one of the surest way to reduce carbon emissions, putting up electric arc furnaces instead of blast furnaces. We have seen that happen in U.S. We are seeing that happen in Europe. Likewise, this trend will continue. This is something which is irreversible. With steel industry being one of the biggest polluter of the world, I mean, the trend is going to be toward electric arc furnaces. The expansion, I would say it is a modest expansion of just 20,000 tons, and it's only a matter of time, maybe takes a year or so to get fully absorbed in the market. It all depends how soon things turn around. The medium and long-term fundamentals of electric arc furnaces are unquestionable and robust, and they stay in place. The world is not going to go turn around and say, "Oh, let's go blast furnaces." No, that's not going to happen. Yes, what you said is the demand outlook for these two quarters look difficult because they are all being precipitated by the Russia-Ukraine thing. The sooner it gets over and world economies get back on track, steel production will grow as economies grow, out of which electric arc furnace will grow faster. Okay, second question would be how much would be the incremental depreciation in the quarter four of this financial year and Q1 of the next financial year, like, after the additional capacity expansion? Well, our CFO, Mr. Sakhuja, will answer this question for you. We are coming to the capitalization of INR 1,200 crore in the next financial year. Considering that, 4%-5% average depreciation on that is going to come around 10-12 crore per quarter of additional depreciation in the next financial year. Okay. This would be the INR 10-12 crore additional depreciation, right? Apart from the current. Okay. Just one more question to squeeze in. Sir, the share of associate in this quarter was around INR 25 crores versus INR 1 crore in Q4 of the last financial year. Sir, what is the reason behind such a big jump? Yeah, this is on account of that we are having a stake in Bhilwara Energy, and they are into this hydro power. Out of 25.44, around INR 24 crore has come from only Bhilwara Energy. They have shown a very good profit in the first quarter. Bhilwara Energy Limited. Okay. Where we are having a stake of 9%. Okay. What is the outlook regarding these associates going forward? Like, considering we haven't got so much of shares from these associates previously. If I talk about Bhilwara Energy, that the future looks bright, and going forward that the profitability ratios and all this profitability remain would be on our upper side. Okay, sir. Thank you so much, sir. Thank you. Thank you. Next question comes from the line of Rajesh Agrawal from Moneyore. Please go ahead. Hello? Hello? Hello? Rajesh, please go ahead. Yeah. How is the outlook in U.S. in terms of demand and supply? Very good. In terms of, volumes and what? Sorry. U.S. is, I would say more resilient, if I may. Yes, the U.S. steel production is doing good. The capacity utilization of steel company there are in excess of 50%, and it is 60% portion is through electric arc furnaces. Besides that, they will be putting new ones there, which will start coming on stream from the end of this year. The outlook in U.S. steel production as well as demand for electrodes is good. Sir, what about our percentage of supply to U.S.? Okay. If you want me to put a percentage on that, maybe, it is going to be around 13, 12, 13% maybe. For monthly? 13% maybe. Roughly. I'm just giving you a rough number. We are very well diversified that way. As I said, I mentioned about U.S., Europe, Middle East, Southeast Asia. We're serving almost 35 countries, and we are not dependent on any one country, whichever it is. Any of that, we're very well spread out globally. Thank you. Thank you, sir. Thank you. A reminder to all the participants that you may press star then one to ask a question. Once again, a reminder to all the participants that you may press star and one to ask a question. Since there are no further questions, I'd now like to hand over the conference back to Mr. Gulati for his closing remarks. Thank you, very much. Thank you, friends, for listening to us. I will just close this by saying that we are very optimistic or I would say upbeat about prospects of electric arc furnace industries, steelmaking. We are a company which is making very good quality, ultra-high power grade electrodes, as good as anybody in the world makes. We are very cost competitive. Being a large partner in the group, we are cost competitive also. This year we're completing 50 years of company's existence. We are very optimistic and about our company's prospects. Thank you very much, and I look forward to meeting, talking to you again next quarter. Thank you very much. Thank you. On behalf of SKP Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.