HEG Limited (HEG) Earnings Call Transcript

Ladies and gentlemen, good day and welcome to HEG Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajesh Majumdar from 360 ONE Capital. Thank you, and over to you, sir.

Yes. Good afternoon, everyone, and welcome to the Q1 FY '27 Earnings Call of HEG Limited. We have with us today Mr. Ravi Jhunjhunwala, Chairman, Managing Director and CEO; and Mr. Riju Jhunjhunwala, Vice Chairman; along with their colleagues, Mr. Manish Gulati, Executive Director; Mr. Om Prakash Ajmera, Group CFO; Mr. Ankur Khaitan, MD and CEO, TACC Limited; and Mr. Ravi Tripathi, CFO, HEG Limited; Mr. Puneet Anand, Group CSO. Also on the call are Ms. Neha Rajvanshi, CFO, HEG Advanced Materials; and Mr. Salil Bawa, Group Head, Investor Relations. So first of all, sir, congratulations on a very good quarter on the first quarter. And without much ado, I would like to hand over the call for the opening remarks of the management.

So good afternoon, everyone, and welcome to our conference call for the first quarter of financial year '26. The year began in a shadow of an ongoing war in the Middle East, which materially impacted energy prices globally besides disturbing world trade and pushing shipping costs disproportionately very high in some cases and also increased transit times. In this backdrop, let me give you a broader picture of the global steel industry and its resulted impact on our company. According to World Steel Association's data, global steel production during the first half of calendar year '26 showed signs of gradual stabilization, declining by a marginal 0.7% year-on-year to around 931 million tonnes. This indicates that the contraction is bottoming out and global steel demand is beginning to find its floor. Surprisingly, steel production outside of China remained highly resilient, expanding by 2.1% year-on-year to 431 million tonnes after many years. This positive momentum in the world steel -- world steel, excluding China represents a supportive demand environment for our products. While HEG does not sell electrodes directly to China, Chinese domestic steel market dynamics continue to influence global pricing. A weak real estate sector in China has forced domestic mills to export surplus production of steel. While Chinese steel exports for the first half of 2026 eased slightly to 55 million tonnes, which is a 5.6% decline from the peak of 2025, they still remain at historically elevated levels. This sustained export pressure has prompted a broad wave of defensive trade measures, including antidumping and safeguard duties across key regions like the U.S., EU and India. Among key steel producing regions, India remained one of the strongest performing markets with crude steel output increasing by approximately 7.1% year-on-year to around 87 million tonnes in the first half of 2026. This growth was supported by robust domestic demand for infrastructure development, construction and manufacturing activities. In mature economies, we saw a solid broad-based recovery. Steel production in the United States recorded a year-on-year growth of 6.3% in the first half of 2026 to reach 43 million tonnes, while Germany's output also rose to -- rose close to 8% to 18.6 million tonnes. We also saw an exceptional growth in Vietnam, which surged by as high as 27% year-on-year to over 15 million tonnes, cementing its position as a major Southeast Asian steel powerhouse. Various changes in the trade policy in several countries and the ongoing geopolitical tensions remain key sources of near-term uncertainty. Changes in U.S. trade policies, including tariffs and several country and product-specific measures are disrupting the established global trade channels. At the same time, tensions in the Middle East are affecting the oil and gas market, contributing to severely higher freight and energy costs and creating a challenging business environment across industries. These pressures are also being felt across all raw materials like needle coke and other key inputs in the supply chain, which are gradually getting reflected in our input costs. We continue to manage these developments through operational efficiencies. Despite all this, the medium- to long-term outlook for graphite electrodes demand remains highly positive. Decarbonization policies, including EU's carbon border adjustment mechanism, CBAM, are accelerating the global shift from carbon-heavy blast furnace steel to lower emission electric arc furnaces. This structural trend is heavily supported by latest OECD steel outlook, which highlights that approximately 71 million tonnes of new electric arc furnace steelmaking capacity is planned globally for completion between now and end of 2028. As graphite electrodes are indispensable for steelmaking -- electric arc furnace steelmaking, these planned capacity additions support a favorable long-term demand outlook for the industry and validate the strategic rationale for our recent expansion from 80,000 to 100,000 tonnes and a further expansion that we are currently undertaking to reach 115,000 tonnes, which is on track and should be in operation by early 2028. Against this backdrop, we remain confident of HEG's long-term growth prospects, and we believe that we are very well positioned to benefit from the continued transition towards electric steel -- electric arc furnace steelmaking, resulting into increase in demand for electrodes. Our plant with an installed capacity of 100,000 tonnes per annum remains by far the world's largest single location plant in the world. Its scale and cost-efficient operations place HEG among the most competitive producers globally. During the past quarter, we operated the plant at an average capacity utilization of more than 90%, reflecting strong operating efficiency and expect to continue operating at more than 90% in the forthcoming quarters as well. Further expansion that we undertook to reach 115,000 tonnes is likely to be commissioned by early 2028. This will further increase the gap between our plant and the next 2 largest plants in the world, which are in the region of 70,000 tonnes per annum. With our scale, competitive cost position, location, high utilization levels and expanding capacities, we believe HEG is very well placed to capture the long-term growth opportunities emerging across the global electrode industry worldwide. Now an update on demerger, which my colleague, Puneet is going to do.

Hi. Good afternoon, everyone. So we are pleased to inform you that the company -- the composite scheme of the arrangement is progressing very well. The NCLT has received its order and the company is awaiting announcement of the order. The company will provide an update shortly on the time line of effecting the scheme and the record date. We will also hold an investor call to explain the HEG Advanced Materials business once the order is pronounced and a copy of it is being received.

With that, I'll now hand over to our CFO, Ravi Tripathi to take you through the quarterly financial performance, after which we will open the floor for Q&A. Thank you.

Thank you, sir. Good afternoon, everyone, and thank you for joining us. I will briefly take you through our financial and operational performance for the first quarter of FY '26, '27. We have begun the financial year on a strong note, delivering a meaningful improvement in profitability despite a marginal decline in volumes. The quarter demonstrates the strength of our operating model, supported by improved realization driven by product and geographical mix, disciplined cost management and continued focus on operational excellence. On a stand-alone basis, revenue from operations increased by 11% on a year-on-year basis to INR 681 crores compared with INR 613 crores in Q1 of the previous year. Total income also increased by 11% to INR 731 crores from INR 660 crores. On a consolidated basis, revenue from operations also grew by 11% to INR 681 crores, while total income increased by 8% to INR 724 crores from INR 673 crores in the corresponding quarter last year. Stand-alone EBITDA increased by 38% on a year-on-year basis to INR 211 crores from INR 154 crores with EBITDA margins also improved to 29% compared with 23% in the corresponding quarter of last year. At the consolidated level, EBITDA increased by 17% to INR 194 crores from INR 166 crores, while EBITDA margins improved to 27% from 25% for the last year. Stand-alone profit after tax increased by 53% on a year-on-year basis to INR 110 crores from INR 72 crores while consolidated profit after tax increased by 23% to INR 122 crores from INR 100 crores. Capacity utilization during the quarter stood at 90% plus, which is marginally lower than the corresponding period of last year. However, the impact of lower volumes was more than offset by better realization, improved operating efficiencies and effective cost management, resulting in a healthy expansion in both margins and [indiscernible]. Sequentially, the business witnessed a strong recovery compared with the previous quarter. Stand-alone revenue increased by 13% over Q4 FY '25-'26. More importantly, the stand-alone EBITDA improved from a loss of INR 126 crores in the previous quarter to a positive EBITDA of INR 211 crores in the current quarter. Stand-alone profit after tax also recovered from a loss of INR 163 crores to a profit of INR 110 crores. Similarly, on a consolidated basis, EBITDA improved from the loss of INR 108 crores in Q4 FY '25-'26 to INR 194 crores, while profit after tax improved from a loss of INR 119 crores to a profit of INR 122 crores. In previous quarter, the loss reported due to MTM loss in foreign equity investments. Our balance sheet continues to remain one of our key strengths. The company remains debt-free with no long-term loan borrowings and our treasury stood at approximately INR 858 crores as of 30th June 2026. This strong liquidity position provides us with the financial flexibility to pursue future growth opportunities while maintaining resilience across business cycles. Overall, we are encouraged by the strong start to the year. While the external environment continues to evolve, our focus remains on enhancing operational efficiency, maintaining cost discipline, strengthening our competitive position and creating sustainable long-term value for our stakeholders. For a more detailed discussion on the quarterly performance, I would request you to refer to the investor presentation, which has been uploaded on the company's website as well as the stock exchanges. With that, I would now like to hand over the call to Q&A. Thank you. Over to you.

[Operator Instructions] the first question is from Amit Lahoti from Aditya Birla.

My first question is on revenue mix. How much would be share of [indiscernible] improvement and to which [indiscernible] divert last one month.

Sorry, Amit. Can you repeat this for us, actually the voice was echoing. Please repeat it.

Yes. So my question was on revenue mix. how much was the share of Middle East and which region did we divert last one month [indiscernible]?

Sir, your voice is not clear.

But I understood the question. Manish?

Yes. Understood the question. So Amit is asking what was our share in Middle East over the year, it's around 20%. And it hardly matters because we are so well died temporary delay in shipping, et cetera, was spread over to the rest of 30 countries we operate.

Okay. So did we not lose any volumes in Q1?

No, no. We didn't lose any volume. As you can see, we still operated in excess of 91%.

Okay. And my second question is on implied price realization, which I calculate the revenue and the volumes. So it appears that the benefit of any recent price hike is yet to flow into earnings. So how much of price increase can we expect in the coming quarters?

See, in -- for companies like us in this electrode business, normally, we are always booked 3, 4 months ahead. So whosoever is announcing a price hike and we also -- I mean, we have to start raising prices will only happen October onwards because we any get committed up to September. So whatever price hikes which will come in will come in later, will actually start showing up later in the year. However, in our existing markets, whether it's India or elsewhere, whatever new business we are booking are at higher prices. So we continue to gradually raise prices. [indiscernible] input costs are increasing [indiscernible].

The next question is from the line of from Ahmed from Unifi Capital.

Congratulations on great set of numbers and execution in the tough environment. Same follow-up question to what Amit was asking. If we have had 20% roughly volumes from Middle East market over the years, then can you elaborate a little bit which markets we have diverted those volumes to where you see the better demand and has absorbed your balance volumes? And also, you can quantify, if possible, how much the Middle East volumes have degrown by?

Amit, it is not the right forum to talk in so much of details. I mean, obviously, it's a listed company. We have competitors all over the world. So we should not be divulging these kinds of numbers. But suffice it to say that our exports continue to be in the region of 70%, 75%, which has been the case for not now, but last 25, 30 years. And we are practically exporting our electrodes to each part of the world to the smallest countries sometimes in Africa, to Latin America, to the largest consuming country, which is the U.S. and Europe. So more than that, I mean, we should not be talking in public about how much we are selling to whom, how much has our market share come up or come down. And it happens from quarter-to-quarter. It's nothing so special about this particular quarter. The world is large enough to take a small piece of drop in one region to some other region.

Sure, sir, I understand it. The question why I was coming from was, if you look at whatever the regulatory action being planned in the U.S. market, so in terms of both CVD and AD, so in that case, what rate in your internal assumptions you would have considered so that the U.S. volumes for us continue to hold or grow. My question was coming from that angle.

Okay. Let me try and take this question. See first, let me talk about Middle East, we're not talking about 1 or 2 countries or state of hormones or whatever. We are talking about the bigger MENA region, Middle East, North America. So only 3, 4 countries are impacted. Rest of the business is still ongoing. And they're just postponements. I mean, of course, if they don't take it this month, they will take it next month. So there is no connect between this and the U.S. business per se. The CVDs and ADs, which you are mentioning, that thing will keep ongoing, and we will see what results come and we'll see. I mean, right now, of course, as we are -- as Chairman said, we are very -- we have very well diversified markets. So it remains to be seen. Maybe we'll come to know around September, what was the final result of the CVDs and antidumpings.

In terms of the pricing, obviously, you have had some all committed volumes and you are saying from October onwards, there will be price hike. And there will be -- I'm assuming there will be proportionate hike in the needle coke as well. So how would you assume in terms of your net EBITDA expansion, whether the price hike will be much higher than the cost increase we have seen? Any sort of sense you can give?

We have seen 2 of our colleagues announcing fairly steep increases, the American company and a Japanese company. And obviously, their costs have also gone up, so have our costs gone up. And I think one of them has announced a price increase of between $600 to $1,200, depending on the size and quality. The other one has given one number of $930. So they have just been talking about these in the last 6, 7 weeks. And as Manish said, we are more or less booked. Each one of it is more or less booked at least for the next 1 quarter or 2 quarters. So the trend is -- it's a very favorable trend that -- and it had to happen in any case. I mean the world has seen so much -- so many different kinds of problems relating to several price increases in raw material, oil, shipments, with that, that like anything else, I mean, prices are going up for everything. So we -- we will obviously follow and we are following. There are only 3, 4 of us in the world. So 2 of them have already announced their intent. They have given the numbers. They are all available in the public domain. So apart from these 2, 3 companies that we spoke about, then there is only we and our Indian colleagues. So obviously, so we will follow suit. But nothing substantial is going to happen in the next 1 quarter or next 2 quarters because more or less, everybody is booked more or less fully, if not fully, more or less fully for the next 2 quarters. So is the case with our raw material. I mean whatever prices of raw material will go up like needle coke and all, the impact of that product will only come by November, December, January. Everybody is covered or everybody has ordered the needle coke at the old price.

Sure. Just one accounting question. If I look at the -- our other income number that's close to INR 43 crores, and there will be about INR 7 crores, INR 8 crore interest income, which you disclosed in the segmental numbers. So CFO, sir, if you can explain what the balance component is? Is it ForEx gain or anything else?

It is the fair valuation gain on the investment side in the second part.

Sorry, can you come again, please?

There's a fair valuation gain on the investments.

The next question is from the line of Akhilesh Kumar from Emkay Global.

First of all, congrats on the good set of numbers. So I have a couple of questions. So my first question is on the capacity commissioning. So we were talking about 30 million tonnes of capacity commissioning in CY '26. So now since 1H is already passed, so how much of that has already been kind of commissioned? Or what's the status on that as of now?

You see a lot of this has been in operation and balance is going to be in operation in the next 2, 3 quarters. We are tracking each and every new facility. And whatever we have been talking about in terms of new capacity for the last 2 years, we are very happy to say that they are all happening. I mean these are all $1 billion, $2 billion kind of a greenfield expansion. So a couple of weeks or a couple of months delay or in some cases, early implementation is very, very practical. But between 25 million, 30 million tonnes has already come in, in the last 3, 4, 5 quarters. And from all our conversation with our existing customers and from whatever we hear from the market, we are seeing that whatever numbers that we have been talking about, about new electric arc furnaces coming up in the next 2, 3 years and then, let's say, in '29, '30 is more or less correct. We could be out by 10%, 15%, 20% plus/minus here and there, but they are all on the annual and they're all coming.

Right. So is that fair to say since in 2025, close to 18 million tonnes of capacity got commissioned. So first half should be somewhere around 8 million to 10 million tonnes already being commissioned now.

Yes. Between the 2 years, '25 and '26 -- sorry, '24 and '25, about 20 million, 21 million metric tonnes has certainly come up. I have the name if you would like to know offline. And then in these 3 years, '26, '27, '28, we are talking about almost 60 metric tonnes to come. And during the year, half year has gone by, I think 8 million, 10 million metric tonnes has already come up. So if you really want really very interested in knowing which customer where, I'll be happy to provide, but offline.

Sure. My second question is on price hike. So there were a lot of concerns which were coming up regarding the Rex price hike that it is not getting absorbed in the market. So what's the status on that since now Tokai Carbon has also come up with the price hike. So how does the situation improves for us from Q3 to Q4? And do we see that sustenance of price hikes in further years also FY '28 and FY '29, for example?

Shriman, we would not like to really comment upon the GrafTech and Tokai pricing, except sharing with you what we have seen in the public domain. So this is an intent to raise prices. How much gets eventually absorbed by the steelmakers, that remains to be seen, and that will be known in next 1 or 2 quarters. But yes, these are the announcements. And of course, we also have to raise prices because in our case, the energy cost, the ocean freight and even needle coke is now going to go up so far, it was not, but now going to go up. So I think as an industry, we all need a price increase. How much actually gets translated and what is anybody's basket as every company think how much is already booked, now being booked, something like that. So we can't really say about if price is getting absorbed or not absorbed, it is not good for us to comment and neither we are aware.

Got it. Got it. Fair point. My another question is on Greentech. So how much of that 20,000 tonnes of volumes is already contracted or let's say, is in the advanced stages of the contracts so that because FY '28 is now only 8 months away. So any clarity on that?

So [ Ankur ] -- yes. So we are talking with the customers for 3 to 5 years contracts. And almost about 70% of the contracts will be closed by the next 1, 1.5 months. And all these contracts will be long-term contracts with the top Tier 1 players across the world.

So when we say 70% of the contracts, that would be how much percentage of our capacity?

70% of the capacity basically.

Okay. 70% of the capacity Okay. And my second question is on the DE. How much of the debt we have as of FY '26? And how do we see it progressing for FY '27 and '28?

See, there is no debt in the company, debt-free company right now.

And it has been like this for a number of years.

Okay. So if we talk about in the case of Greentech, so let's talk about Greentech as an entity, how much of that debt would be coming to Greentech and how much would be with the...

That would be INR 1,500 crores.

INR 1,500 crores.

[ INR 1,200 crores ].

Gross debt or net debt?

It's a gross debt. So just to explain to you till date, we haven't drawn any much money for TACC as a debt. It has just started. So when this entire demerger exercise will complete and when you see 31st March '27 balance sheet, then there will be approximately around INR 1,500 crores of debt lying on the company on a gross basis.

Okay. And consecutive that we will take that [ ] in FY '28, '29 because 70/30 kind of project financing will be there so just INR 1500 crores would go up eventually, right? Is my understand correct?

So TACC -- no, the TACC debt, what we have secured till date is INR 1,240 crores from SBI and balance is from our own capital and internal accruals. FY '29, we will see how we have to go about the additional debt if it is required for the additional capacity per se.

Okay. So out of INR 3,100 crores of debt -- out of INR 1,300 crores of CapEx which is there for TACC, earlier our plan was that 70-30, we will do. So INR 2,100 crores of debt would be...

When you're talking about INR 3,100 crores, INR 3,100 crores of CapEx, that is for 30,000 tonne capacity, which the management have given a time line that will be coming in next few years. So if you talk about in that phase, then INR 3,100 crores, 70% will be through the financing. Yes, the debt will increase for that.

The next question is from the line of Chirag from SKP Securities.

So my question -- can you hear me?

Yes, yes, we can.

So sir...

Should I take the next participant now?

Yes.

The next question is from the line of Rohan Baranwal from Arihant Capital.

Congratulations for the good set of numbers. My question was, sir, you recently on the yesterday, you had announced that needle coke prices is expected to rise by another 10% to 15%. So given the coverage cycle of -- am I audible?

Go ahead, go ahead.

Yes. So like given the coverage cycle of roughly 45 days of shipping and 45 days of processing, in which quarter do we expect this higher cost material to actually flow into our P&L side? And what would be the spread per tonne we can expect on this, sir?

See, just to clarify, the 10% to 15% what Rijuji said yesterday was the of the total our cost of making electrodes. That was roughly 10% to 15% left to need itself, then it has gone up by a higher amount. And this will start taking effect in I think towards the end of the year because, of course, because it's a long process cycle, it takes 1.5 months to make electrodes stalls, et cetera, et cetera. So the rise will start taking effect towards the end of the year. And as we unbooked for that quarter, we will be raising prices for the end of the year to cover the rise in costs.

Got it, sir. And we -- like a run rate of around like 24,000 tonnes annualized to roughly around like 96,000 tonnes, sir, so against 100,000 capacity. So how much headroom we can expect to have like on the overall utilization level, what we can expect for the FY '27 level, sir?

See, production varies quarter-to-quarter. So I think there's no more headroom beyond 94 or 95. That's about the peaking. We are running in excess of 90% -- so quarter-on-quarter, it varies a little bit. And we think we'll close the year between 90 to 95, something like that. But I don't think there's any more headroom because then you have to create ideal conditions to reach 100 and conditions are never ideal.

Got it, sir. One last question is, sir, like in the recent media interview, we said around 7% to 8% price improvement we had in the first quarter. So in last quarter con call, you guided for like $300 to $500 per tonne price increase we expect for FY '27. So what have you concentrated on the new bookings in dollar per tonne basis? And what percentage of your second half volumes is now booked at this level, sir?

Okay. So we cannot speak in terms of specific numbers or dollars what I remember in the last con call, we said that this is the kind of which we definitely require to cover our cost. So right now, we have booked up to September or even, I would say, up to October. And we are trying various markets, what market, what customer, what price. So it's still a little while away. We'll know in next 1 or 2 months what kind of price increase average we are able to get from various markets. Can't say, but surely, we would definitely like to cover our cost and increase margins if possible.

Got it. And sir, if time is allowed, one last...

Sorry to interrupt you, Mr. Rohan, can you please rejoin the queue? The next question is from the line of Chirag from SKP Securities.

So actually, my question was -- guided for about INR 2,200 crores, INR 2,300 crores. So what can the phasing over the years to come?

Chirag, you're asking about...

[indiscernible] project, the CapEx INR 2,200 crores, INR 2,300 crores guided, right?

Yes. So I think it will be safe to assume around 4- to 5-year payback on that amount.

No, no. So I was asking what our phasing would look like? How much our spend would be for -- how much have we spent for Q1 and for the rest of the year, Fy '27 and '28?

Get that exactly because I think...

You are asking how much CapEx we have spent in FY '26, '27, right? FY '27, '28, my plant is coming online. I'm not able to understand your question.

Yes. I'm asking for the anode project, how much have we spent in Q1 and...

In Q1 FY '27...

And for how much we will spend for the rest of the year and for...