Indian Metals & Ferro Alloys Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Ferrochrome price crash gutted Q3 margins: A sharp fall in FeCr realizations, compounded by POSCO’s force majeure, forced ~20,000–25,000 tons of distress spot sales into China at the cycle bottom.
• China reopening has already flipped the price signal: Realizations have shot up to INR 1.10 lakh per ton in Q4, and management expects a “much better” quarter with margins recovering toward 20%.
• Cost peak is in the rear-view mirror: Coal costs are already declining (INR 2,850 → INR 2,700 expected in Q4), and coke costs, while sticky, are not rising further.
• The OTS settlement removes a legacy overhang: INR 271 crores in total outgo closes the electricity dispute permanently with no further liability, clearing the path for the Kalinganagar expansion.
• What to watch next quarter: Whether Q4 FeCr realizations sustain the post-reopening uplift, the pace of POSCO offtake normalization, and any progress on the Utkal Coal recovery (management “quite hopeful” of ~INR 350 crores).

Ferrochrome Price & Demand Cycle

• Q3 was the trough: The Q3 benchmark price was USC 149, down only \$0.31 QoQ, but spot realizations into China were far worse because POSCO’s force majeure dumped uncontracted volume into the weakest market of the cycle.
• China reopening drove the turn: Prices began moving up from mid-December as COVID lockdowns lifted and stimulus measures were announced; domestic FeCr prices have now crossed INR 1 lakh per ton and stand at INR 1.10 lakh.
• South African supply risk supports Q1 FY24 pricing: An 18.65% power tariff hike from April, winter tariffs, and load-shedding reaching stage 6–7 lead management to expect further FeCr price increases in Q1 FY24, though everything depends on the demand-supply balance.
• Domestic demand is picking up: Stainless steel consumption is expected to rise, supported by high capex spending in the Union Budget, which should increase stainless steel demand significantly in the coming year.

Prem Khandelwal: “Third quarter was badly impacted because of sharp fall in the ferro chrome prices, but now in the fourth quarter, again, the prices have shot up after China reopening. And right now, it is around INR 1,10,000. So, fourth quarter again should be much better compared to third quarter.”

POSCO Force Majeure & Offtake Disruption

• Q3 offtake collapsed: POSCO was under force majeure for the quarter; production restarted only toward end-November at minimal scale, resulting in just 1,600 tons billable against contracted volumes.
• Distress spot sales were the consequence: The un-lifted ~20,000–25,000 tons had to be sold on spot basis into China at the worst possible moment, before the mid-December price recovery began.
• Shipments have resumed: Supplies to POSCO started for February delivery, and Q4 offtake is expected at 15,000–16,000 tons (February and March only), with full normalcy from Q1 FY24.
• Freight costs provided a partial offset: Shipping charges fell in Q3 because POSCO’s break-bulk shipments (2–3x more expensive than container freight) were absent; freight prices have now stabilized and no further increase is expected.

Cost Structure & Margin Recovery

• Coal costs are declining: Average coal cost dropped from INR 3,500 in Q2 FY23 to INR 2,850 in Q3, with a further decline to ~INR 2,700 expected in Q4, a saving of INR 100–200 per ton.
• Coke costs remain sticky: Coke consumption cost rose marginally from INR 22,000 to INR 23,000 QoQ as low-cost inventory was exhausted; Colombian coke prices have not dropped drastically, so Q4 coke cost may stay at similar levels or decline only slightly.
• Production was deliberately curtailed: Q3 production was 58,000 tons, lower due to maintenance shutdowns taken advantage of during the depressed market; Q4 production is expected at ~59,000 tons, also slightly below budget as some maintenance continues.
• Margin recovery is underway: Management expects margins to return to the 20% level in Q4, with costs having peaked and realizations improving; the long-term normalized EBITDA expectation remains INR 15,000–20,000 per ton.

Prem Khandelwal: “No, we can expect around 20%... 20% we can expect on an average.”

OTS Settlement: Electricity Dispute Closure

• The liability is now fully quantified and capped: The one-time settlement requires a total outgo of INR 271 crores: INR 100 crores in a no-lien/escrow account plus INR 100 crores interest accruing to the counterparty, plus INR 26 crores unpaid principal plus INR 45 crores interest on that principal. Once paid, the matter is closed with no further liability.
• No book hit from the differential: Management clarified that the company had acknowledged liability of only INR 0.06 per unit while the counterparty claimed INR 0.20; the 14 paisa differential was being deposited into a no-lien account, so there is no additional P&L charge from the settlement.

Prem Khandelwal: “We were liable for INR 0.06 only, only which we were paying to them, but they were claiming INR 0.20, which we have not acknowledged. So that 14 paisa differential we were depositing into no-lien account... So there is no saving as such in this. I mean, we have not acknowledged anything on the books.”

Expansion & Capital Allocation

• Kalinganagar expansion is on track: Two new furnaces will produce up to 100,000 tons of ferro-chrome annually, backed by captive chrome ore; by the time the furnaces are operational, further ore will be available from the company’s own mines.
• Timeline is FY26: Both the new furnace capacity and additional mine tonnage are planned to coincide in FY26; FY24 production volume is expected around the same level of 250,000 tons.
• Funding preference is internal cash: Management is hopeful that cash generated can fund the expansion if current price levels improve or maintain; no long-term debt is needed under that scenario.
• Debt ceiling is explicit: If debt must be raised, the company will not go beyond a 0.5:1 debt-to-equity ratio.

Prem Khandelwal: “We cannot delay the expansion plan, expansion normally go on as scheduled. And we are not foreseeing any such danger in the near-term. So we are quite hopeful that whatever cash is going to be generated can be used for the expansion project.”

Guidance & Commitments

Key Metrics