Notes from Concall: Q4FY17
Successfully commissioned 3 projects.
- Enhancing DI pipe capacity (added new line). Almost doubled the capacity from 120,000 to 200,000 tonne. Happened around August-September.
Did 182,840 tonne sales this year. 55,640 tonnes in last quarter.
- Commissioned 2 factories of coke oven on BOT basis. Added 10000 tonne per month capacity. 40% of our requirement. Happened around October to December.
Producing around 12,000 tonne.
- Scrapped one old blast furnace (was 22 years old). We had two mini blast furnaces. Put up a new blast furnace in 90 days flat. Came in stream in March this year. This was the biggest project last year.
Huge volatility in coal and coke prices. This has been pressurising the cost. Might be same in this quarter too. But with structural changes last year, the future should be sustainable.
Capacity utilisation and further expansion:
- Logically we should expand though no forward looking statements.
DI business has been growing at 12-14% over last few years driven by urbanisation. Don’t see this coming down.
Entering rural market for irrigation through DI pipes.
Growth CAGR should continue if not more.
Pig iron growing at 5%. Foundries use our pig iron which is a niche. Demand should be reasonable if not too exciting.
Margin volatility in Pig iron segment:
In last 2 quarters, 2 things have happened:
- Volatility in coal and coke market which is key material for conversion. Significant volatility atlas 2 times. This was unprecedented. Domestic market has not been robust enough to take through these volatility.
- We had put down our blast furnace in one of the last two quarters. This should reduce coal consumption going forward. We will be able to pass on coal price volatility.
DI Pipes market - competition:
Some of the competition that exist is not doing 100% capacity. Don’t see any other player coming in or expanding.
Will take 2 years before capacity can come on stream.
Net debt is 383 Crores plus 100 crore preference shares.
Order book: It is robust. Can’t give the number.
Higher coke prices:
There is overhang of higher coke prices in current quarter as well.
We will be running 100% capacity in DI pipes.
One time line item in quarter due to blast furnace:
Interest capitalisation of around 10 Cr in last quarter.
Drivers in DI business:
- Demand evenly distributed across country. Last year Rajasthan, then Telangana.
- Irrigation not picking up. Odisha and Madhya Pradesh are key states now. UP should also pick up.
DI Pipes contracts:
Contracts are fixed price contracts of 12 months. Price risks is on manufactures.
Pig Iron, last quarter was weak due to coal prices. This quarter is better and we should be able to pass on price fluctuations.
New player for DI pipes, can one buy pig iron and make:
- Technically yes, possible to buy pig iron and make. Commercially no.
- If purchase and melt to make DI, the cost will be too high.
Margins would be under pressure in coming quarter as coke prices higher and fixed price contracts. Demand is picking up. Done plenty of work to reduce costs. Our key lever for sustainability will our cost cutting measures.
New blast furnace is 25% more capacity than old one and more efficient. Key raw material used, Coke (55-60% of hot metal cost). We should reduce consumption of this coke by 10%.
We keep max 1 month stock of coking-coal. We keep around 10-15 days stock.
In April, again there was a peak of coal prices. Now prices coming back again.
Difference in coal price in Q1 and Q4: Rs. 3000-4000 a tonne.
Total hot metal capacity: 5,00,000 tonne (383,000 produced this year)
DI pipes: 200,000 tonne.
We try 100% capacity.
- Reduce debt.
- Would like to improve value added.
CAPEX to increase to 300k or 350k:
Cost of 300 crore for additional 200k capacity. Brownfield.
Not explored expansion plans.
Lot of efficiencies have been added. These are the IPR. We have been able to bring down the DI pipe manufacturing cost to better than world class levels. Thus other expenses reduced.
Power cost has also gone down to due our own plant (10 mw) coming into operation (7 Cr in quarter. More than 4x will be in full year next year).
Sales tax incentive of 3.2 crores in other operating income in last quarter.
Our effort is to reduce coke prices impact in Q1 than in Q4 last year. Hopeful to do this.
Sri Kalahasti Pipes comparison (25% margins):
- Our hot metal capacity is much larger than DI capacity. Pig iron is less profitable. Thus blended margin.
- 3 major brownfield additions last year. One blast furnace down for 90 days. This subdued our potential of volumes.
- Inspite of all this we did best ever. And next year should be much better than this.
- Sri Kalahasti does only DI pipes.
- DI margins should go even better (from 22%).
In results we publish, hot metal comes at transfer price of market prices. For SK their raw material is coke and iron ore. We take in hot metal in segment result which is based on transfer price i.e. market price. Thus there is a slight shift in segment in profitability.
Pig iron has been a drag. As we move more towards DI, the profitability should improve.
DI is more sustainable that Pig iron. Lesser cyclicality. It is higher in value chain.
Transportation advantage to SK: Transportation cost does make a difference. But we have our market around our plant as well. Where we sell, there SK might incur higher costs of transportation. SK benefitted from Telangana. As Odisha and Madhya Pradesh scale up, our profitability will be higher.
Over 100% utilisation: Utilisation is a function of order size we get. We got higher segment order where productivity is higher. Thus we produced more than the capacity. This should continue in future.
Can do 240k?: Wont multiply last quarter by 4. But it is an indication of capacity.
Cost of debt less than 9%. Last year CAPEX of 125 Cr.
Rejection rate: Operational parameter can’t say much. But one of the best in the world.