Indian Metals & Ferro Alloys Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Record realizations drove a strong quarter: Sales rose 38% YoY to ₹732 crores on average ferro chrome realization of ₹1,21,000/ton, but management guided this will fall to ~₹1,15,000 in Q2 as benchmark prices decline.
• Costs have likely peaked, but relief is not imminent: Cost of production hit ₹80,000–83,000/ton, and management expects elevated coal prices to persist for another six months, keeping the cost floor high even as realizations soften.
• Demand weakness is real but the contract book insulates volumes: Global stainless-steel output fell 3.8% in Q1 CY22 and spot ferro chrome prices collapsed, yet the company expects Q2 volumes to hold at ~60,000 tons because over 90% of sales move under long-term contracts with fixed tonnage.
• The underground mine transition is a long-dated margin headwind: Moving Sukinda from open-cast to underground mining is a necessity, not an option, and will raise production costs materially over the next 6–7 years, with ~₹1,000 cr of capex planned.
• What to watch next quarter: Whether Q2 NSR holds near the guided ₹1,15,000/ton, the trajectory of e-auction coal prices, and any formalization of the long-term contracts currently under negotiation.

Revenue & Realization

• Q1 price tailwind: Average realization jumped to ₹1,21,000/ton from ₹89,000 YoY, driven by strong benchmark prices and a sales mix almost entirely on annual or long-term contracts with minimal spot exposure.
• Q2 guided down: Realization is expected to fall to around ₹1,15,000/ton because the European benchmark dropped 33% and Chinese benchmarks also declined, though a one-quarter pricing lag cushions the immediate impact.
• Q3 is a black box: Management repeatedly declined to forecast Q3, citing extreme market volatility from the Russia-Ukraine war, pandemic resurgences, and currency moves, calling prediction "very difficult."
• Volume stability via contracts: Despite collapsing spot demand, Q2 volumes are expected to remain at ~60,000 tons because most sales are on long-term arrangements with fixed or formula-based tonnage, and the company is running "hand to mouth from production for meeting the shipment."
• Currency tailwind: The Indian rupee depreciated alongside the Chinese RMB and South African Rand, partially offsetting the impact of lower dollar-denominated ferro chrome prices on realized revenue.

Prem Khandelwal: "We don't expect too much fall in the net realization price this quarter, maybe a little bit lower, but not much, because of this lag in negotiation, so one quarter overlap is always there."

Cost Structure & Margin Pressure

• Cost peak claimed: Management stated cost of production has likely peaked at ₹80,000 to ₹83,000 per ton, up from ₹61,000 YoY, driven by power variable cost nearly doubling to ₹594/unit and coke cost nearly doubling to ₹41,000/ton.
• Coal pain to persist: Thermal coal procured via spot e-auction at ₹500+/ton is expected to remain at elevated levels for another six months because e-auction prices are stable and not declining, contrary to initial expectations of normalization within six months of the December 2021 crisis onset.
• Coke cost steady into Q2: Blended coke cost was a little over $500/ton in Q1 and is expected to remain in the same range in Q2, with inventory sufficient until end-November.
• Power cost flat sequentially: Power cost per unit is likely to remain around ₹6.10 in Q2, similar to Q1, with no relief expected from the coal cost driver.
• Captive raw material advantage: 50–60% of raw material cost is under company control because chrome ore is captive and 60–70% of power uses washery reject, insulating the cost base partially from market vagaries; the remaining exposure sits in e-auction coal and imported coke.
• No inventory write-down risk: Despite falling coke prices, the company follows the average method of accounting, which averages down the cost of inventory and eliminates the need for write-downs.

Binoy Agarwalla: "In December this coal crisis started, but we thought at that point in time that it would get normalized within six months, but my apprehension is it will continue for another six months this 500 plus rate because coal rate is not coming down because we have seen in different spot e-auction the coal price is remaining stable."

Demand Environment & Pricing

• Stainless-steel demand weakened: Global stainless-steel production fell 3.8% YoY in Q1 CY22 to 1.45 crore tonnes, with China down 8% due to pandemic lockdowns, zero-COVID restrictions, and A-listed defaults; Q2 CY22 is also expected lower, and the initial 4% growth forecast for the year is now in doubt.
• Spot price mechanics broke down: With low demand and few buyers, spot ferro chrome prices collapsed as long-term suppliers chased limited volume, but management called this unsustainable given high logistics costs, container freight, and the global coal crisis.
• Price floor argument: Management expects prices to remain around $1/lb at least for this quarter and next, arguing that cost pressure across the industry prevents prices from falling much further, and non-competitive capacity is already shutting down.
• Contract renegotiation underway: Many long-term contracts are currently under negotiation and not yet formalized, with some on monthly or quarterly negotiation cycles and others formula-based on benchmarks, creating uncertainty around the exact Q2 and Q3 price realizations.

Deepak Mohanty: "But actually, this is not a sustainable price with the high logistic cost and you know the barrel price is still around $1 it is hovering, although it went to 125, that's the price. And the logistics things have not yet come up because of all this downtrend and all, there is little bit of ease in the container size but still container and all freight prices are higher and coal crisis in all the countries, so that is affecting the power prices going up, with all these things, prices cannot go down."

Operational & Competitive Position

• Top-five cost position: Management asserted the company is one of the top five least-cost ferro chrome producers in the world and is already at par with or lower than international cost levels, a structural advantage that matters when spot prices test industry breakevens.
• Export-heavy, contract-backed model: More than 90% of total production (~250,000 tons annually) is exported, almost entirely under annual or long-term contracts with the same customers, with very minimal spot tonnage, insulating volumes from spot demand shocks.
• Freight execution strength: The company arranges freight on CIF and DAP basis and claims better freight terms than peers due to 15–20 year relationships with forwarders; even during container shortages, shipments remained on time.
• Inventory blip explained: Ferro chrome inventory was higher QoQ solely because a 2,500-ton shipment scheduled for end-June was delayed and executed in Q2; otherwise inventory was at normal levels for the export volume.
• Finance cost optics: The reported finance cost includes a ~₹26.38 cr notional foreign-exchange fluctuation from restating dollar-denominated working capital and receivables at the quarter-end rate, which is not an actual cash outflow; pure interest cost was only ~₹5 cr.

Prem Khandelwal: "Yes, as far as ferro chrome is concerned, we are one of the top five least cost producer in the world."

Growth Projects & Capex

• Kalinganagar land progress: Land allotment is done and demarcation completed; the lease deed with IDCO is expected to be signed in 2–3 months, after which boundary-wall construction and ECL can begin, with ECL taking around one year.
• New furnace timeline: Commercial production from the new furnace is targeted by end-FY25 or early FY26, with most investments concentrated in FY24 and FY25.
• Sukinda underground mine: A study has been commissioned and the report is awaited; opening of the underground mine may start next year, though this refers to development start, not production.
• Underground capex and cost impact: ~₹1,000 cr is planned over the next 6–7 years, and the transition from open-cast to underground mining will raise production costs materially because open-cast is comparatively low-cost while underground is high-cost.
• Mining capacity expansion: With capex, Sukinda can add another 3 lakh tons initially, with a further plan for another 3 lakh tons, taking total capacity from 0.03 cr to 0.09 cr tons.
• No thermal power expansion: Management has no intent to add any thermal power capacity beyond the existing 200 MW; during scheduled maintenance, power is bought from the grid, and the company is exploring hydel and wind power for captive use beyond the existing 4.55 MW solar capacity.

Prem Khandelwal: "We have to it, there is no other way out otherwise we have to stop the production of ferrochrome."

Utkal Coal Block Compensation

• Refund trigger: The allotment agreement between the Ministry of Coal and the new allottee (Jindal) is expected to be signed in a month or two; once signed, the government must pay the compensation within 90 days.
• Court case status: The Delhi High Court case is scheduled for the first week of 2023, but if the agreement is signed, the court case becomes infructuous.

Guidance & Commitments

Key Metrics