Indian Metals & Ferro Alloys Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Record profit, but cost headwinds are building: FY22 net profit surged, yet Q4 saw a ~Rs 8,000/ton cost increase driven by coke and coal, with management guiding for more pressure in Q1 and Q2 FY23.
• Realization spike offers a near-term shield: Q1 FY23 realization is expected around Rs 1,20,000 per ton, a sharp jump driven by a 36-cent benchmark increase following the Russia-Ukraine war and global supply shocks.
• A fully-funded, multi-year growth cycle is starting: A Rs 1,500–1,600 crore CAPEX plan over 7 years, targeting 3.5 lakh tons of ferrochrome capacity and 8 lakh tons of chrome ore, will be funded entirely from internal accruals with no new debt.
• The balance sheet has been derisked: All long-term debt has been repaid, leaving only working capital debt; finance costs are expected to collapse from ~Rs 52 crores in FY22 to Rs 10–15 crores in FY23.
• What to watch next quarter: Whether Q1 realizations hold at Rs 1,20,000 against the rising cost curve, and any progress on the Utkal C coal block compensation agreement.

Cost Structure & Margin Pressure

• Coal and coke are the story: A ~Rs 8,000/ton cost increase from Q3 to Q4 was driven by coke and coal price spikes, and this pressure is expected to persist or intensify in Q1 and Q2 FY23 as high-priced inventory is consumed.
• Coal logistics are a self-inflicted wound: The company is forced to buy coal by road at spot auctions where premiums have hit 300%, because MCL is not providing rail rakes to non-IPP players; management is pursuing rail access to lower transport costs.
• Coke inventory is a partial hedge: A six-month forward cover was booked at \$480–\$490/ton, well below the \$700+ spot price, keeping average costs lower than the market through October.
• Employee costs had a one-off spike: A ~Rs 20 crore increase in Q4 came from a managerial remuneration provision tied to higher profits; this is expected to normalize from Q1 onwards.
• Depreciation policy change added pressure: A ~Rs 10 crore increase resulted from aligning mining asset life with the lease period rather than the Companies Act, a structural change that will persist.

Prem Khandelwal: "No Shubham I think we'll see some more cost pressure in Q1 on account of coke and coal because the prices have gone up, particularly the coal price has gone up very high so which is going to be consumed in Q1 and Q2."

Realization & Pricing Outlook

• A 36-cent benchmark jump saved Q1: The Russia-Ukraine war, a spike in nickel prices, and a cyclone in Australia that disrupted coking coal supply created a cost-push and availability bottleneck that drove the benchmark increase.
• Q1 realization is guided at Rs 1,20,000/ton: Management expects this level to hold for at least the next quarter, with Q2 expected on similar lines, but refuses to forecast beyond that.
• Pricing power sits elsewhere: IMFA exports ~90% of its product to Far East Asia, and management acknowledges that ferrochrome prices are determined by European and South African players, not Indian producers.
• China is the wildcard: Management expects Chinese industrial activity to pick up once pandemic restrictions soften, but repeatedly declined to base projections on this, calling China "very difficult to predict."

Deepak Mohanty: "Q4 vs Q1 as you know because of the Russia-Ukraine was and other nickel prices went up and there was cyclone in Australia which affected the coking coal and all, so coke and all other prices went up. In order to take care of the cost push as well as the availability bottlenecks the benchmarks increased by 36 cents in Q1 of this year."

Production & Volume Dynamics

• Production dropped on grade, not just disruption: Q4 FY22 production was 61,000 tons vs 67,000 tons in Q4 FY21, partly because FY21 included pandemic-backlog material, but also because ferrochrome grade increased from 59% to 61% chromium content, which reduces tonnage for the same ore input.
• The grade shift is value-accretive: Higher-grade ferrochrome yields better price realization per ton, compensating for the volume loss.
• Chrome ore production is ramping up: FY22 production rose ~7% YoY to 559,000 tons, with Q4 alone hitting 206,000 tons (above budget); FY23 is planned at ~6 lakh tons, nearly eliminating the need for external ore purchases.
• External ore purchases were for blending: ~1 lakh ton of chrome ore was bought in FY22 to source low-grade ore required for the furnace mix, not due to a structural shortfall.
• Ferrochrome production is guided at optimum capacity: FY23 planning assumes ~250,000 tons, with quarterly run-rates in the 60,000–62,000 ton range.

Growth CAPEX & Expansion

• A 7-year, Rs 1,500–1,600 crore plan is fully funded: The entire program, covering both furnace and mining expansion, will be financed from internal accruals with no immediate plan to raise debt.
• Ferrochrome capacity is heading to 3.5 lakh tons: Rs 550 crores will add 1 lakh tons of incremental furnace capacity, operational by end of FY25 and in full production by FY26; space exists for one more furnace beyond that.
• Chrome ore target is 8 lakh tons by FY25/26: This will be achieved through a Rs 1,000 crore mining CAPEX, with underground operations at MMC ramping from 3 lakh to 6 lakh tons and SMC underground adding another 6 lakh tons.
• Kalinganagar is on a fixed timeline: Land has been allotted and paid for, basic engineering is in progress, construction starts by March 2023, and commissioning is targeted for March 2025; management stated there is "no question of slowing down."
• Ore sufficiency is not a constraint: Existing mines can support the 1 lakh ton expansion even without the Sukinda underground contribution, and management has no plans to sell ore, preferring to consume it all internally.

Prem Khandelwal: "In fact, this entire CAPEX of 1,500 crores whatever is there 1,500-1,600 crores to be spent over a period of 7 years. We are planning from internal accruals as of now."

Balance Sheet & Capital Allocation

• Long-term debt is gone: All long-term borrowings have been repaid; only working capital debt of ~Rs 400 crores remains, driving finance costs down to an expected Rs 10–15 crores in FY23 from ~Rs 52 crores in FY22.
• Tax rate has been reset lower: The company opted for the new tax regime at a 25.17% effective rate, though cash tax paid in FY22 was higher at Rs 214 crores due to prior-period elements.
• Capital work-in-progress is building: The figure rose from Rs 248 crores to Rs 266 crores, reflecting normal annual CAPEX of Rs 60–70 crores and early-stage project spending.
• Other expenses rose with turnover: The increase from ~Rs 414 crores to ~Rs 500 crores was mainly driven by higher selling expenses proportional to sales, not a structural cost leak.

Utkal C & Regulatory Overhang

• The coal block is awarded but stuck: Utkal C has been allotted to a new party, and IMFA has re-filed a PIL seeking early determination of compensation; the agreement to formalize the allotment is yet to be signed.
• Compensation should be swift once the agreement is signed: Per auction timelines, the determination and payment process should complete within 80 days of signing, but management acknowledged court timelines are unpredictable.
• Export duty on stainless steel is a new variable: A 15% duty was imposed, but management noted it applies to steel, not stainless steel or ferrochrome, and the specific impact on domestic prices remains unresolved.

Prem Khandelwal: "Those things you know in India how court functions so, even if yes even if we request them they are not going to listen. They will give date as per their convenience only."

Guidance & Commitments

Key Metrics