We have temporarily suspended the expansion plans due to COVID: Manish Gulati, ED, HEG

Manish Gulati, Executive Director, HEG Limited, talks about Q2FY21 numbers, provided his outlook for future quarters, capacity utilization, realization in the UHP and non-UHP segments, debts levels and free cash flow during an interview with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: What were the important highlights of the September quarter and do you consider this kind of performance as a one-off? Do you expect that good numbers will be posted in the coming future, if yes, what are going to be the growth drivers?

A: if you are seeing the result now and comparing it from the last year, then the price is the main factor in this. The electrode price has come down quarter-by-quarter, which reflects market reality. The main reason for the number at which you are looking at is the inventory that we are carrying is high-priced, although, we took a NAV valuation right down in March last year. But despite that, we have the inventory – because our process is such that a product is made in two-five months. S0, we have inventory in finished form, work-in-progress form and raw material form. And, I think, the impact will take at least two more quarters to settle down. If the electrode is sold at the same rate at which we get the raw material then the margins are good but the legacy, the raw material, we have is used and exists the system then the company will probably return to profitability. SO, the pain will last for another two quarters.

As far as COVID-19 is concerned, it has had an impact in the first quarter, as volumes were low but now, we are upbeat in regard to volumes. Our capacity utilization stood at around 70% in the last quarter and we expect that this figure will be maintained in the next two quarters as well. So, steel companies in India are also looking up and they are increasing their prices and has also increased their capacity utilization in India. But of course, the uncertainty of COVID is there.

Q: You were talking about the steel companies who have posted good numbers and their production has increased amid a good demand. But graphite electrode companies have disappointed the street. Till when do you expect steel companies to start stocking graphite electrodes?

A: They have inventories at present. And, they have had lean operations and don’t have much inventory. So, as their productions will go up then it will naturally translate into demand for electrodes. There as an overhang of inventory in the world when the electrode prices had skyrocketed as at the time, every company had overbuying and had overcommitted, I am talking about the export markets. And, if COVID would have not been in place then it would have settled at the start or middle of the year. But the effect has prolonged a bit. If you have a look at the results of our international competitors then they are also going through the same pain. But there is a big difference between a steel company and us and it is that we have a lot of inventory in the process, as I have said that minimum process time is two months for electrodes and its nipples take five months. So, the availability of such inventory is normal for us or any graphite company is a normal thing.

Q: Can you brief us about the realization in the UHP and non-UHP segments?

A: As far as realizations of UHP are concerned, I think, till date, its price has been falling sequentially quarter-on-quarter for the last six quarters. And, the prices of the raw materials were also going down but its advantage is not visible due to the inventory. However, I feel the price of UHP has bottomed-out. If we have a look on 15-20 years history of this business then the level to which the prices are coming and where the raw material prices are present gives a sense that it is bottoming out. So, it may take a quarter or two and once the high price inventory gets out – then as I have said that if the raw materials are purchased at current prices and electrodes are sold at current prices then there are decent margins – so we just have to get this inventory out of our system and then we will return to profitability. So, we are quite upbeat in relation to our business.

Q: You have almost halved your debts from Rs 594 crore to Rs 241 crore making the company virtually debt-free. Going ahead what will be the debt levels of the company and what are your plans in that direction? Can we now say that the worst is behind and the company’s performance will improve from here?

A: Give us one more quarter and then things will get better. At least one more quarter, i.e. October to December, then the investment that we have done at fair value at around Rs 1,400 crore and loans of Rs 239 crore. We have been reducing our working capital loans. As you rightly said, we are a debt-free company, which is absolutely correct. This investment is holding us in the good stand in these times.

Q: You have a free cash flow of around Rs 475 crore. How will you utilize it and what are your expansion plans?

A: As far as expansion is concerned, we have suspended it temporarily due to the COVID and we are waiting for the right time to restart it. The fundamentals of the industry have not changed, there is a growth in electric arc steel production and there it is going to be a decent growth. The premise that we had was our assumptions before expanding and there is no change in the assumptions. Yes, due to the COVID, because construction was going at a fast pace has slowed down and we are waiting for a time and will have a look on the ongoing uncertainties, like COVID, the vaccination and other things, that exists in the market, we hope to restart it.

Q: In 2017-18, we saw a boom and growth that we have seen in Graphite electrodes but had not been able to see it again till date. Can we say that such growth can be seen in the financial year 2021-22?

A: It was a very unique situation, once in a lifetime opportunity when a China was suddenly clamped down and it stopped exporting the steel and the world started production of more steel due to which the electrode demand shoot-up. Before this many graphite plants of the world were shut down in the slowdown of six years and excess capacity was not available due to which the market turned red and the prices went up eight times.

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I think it is difficult to see such a time again but if you will have a look on the 30-40 years history of this business then it is a good industry as it has EBITDA margins of 25-30%. If you want to know when such prices will come then I would like to say that it was a unique situation and it rarely occurs in any business in which one can talk about 75% EBITDA margin.