Indian Metals & Ferro Alloys Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Cost compression drove the profit surge: PAT jumped from ₹18 cr to ₹90 cr YoY as cost of production fell ~11% to ₹72,861/ton, more than offsetting a decline in realization.
• Utkal C compensation remains a timing overhang: The vesting order is issued and the other party is mining, but the final compensation order from the nominated authority is still pending after a promised 7-10 day window in mid-October passed without resolution.
• Greenfield project is now on a visible clock: Machinery orders are being placed and the furnace transformer is expected on site by December 2024, with first commercial production targeted for May/June 2025.
• Management declined to guide on H2 or resolve an EBITDA reconciliation gap: Analysts were told to estimate H2 themselves, and a ~₹50 cr discrepancy between implied and reported EBITDA per ton was not resolved on the call.
• What to watch next quarter: Whether the Utkal C final compensation order arrives, the trajectory of met coke costs as the cheaper $316/ton coke flows into Q4 consumption, and any movement on the green power PPA signing.

Profitability & Cost Structure

• Cost of production fell sharply: Dropped from ₹82,115/ton to ₹72,861/ton YoY, the primary driver of the PAT surge from ₹18 cr to ₹90 cr and EBITDA from ₹79 cr to ₹162 cr.
• Realization declined but less than cost: Prime realization fell from ₹1,15,000 to ₹1,10,000/ton; average realization was lower at ₹1,01,000 due to sub-standard material sales that cannot be stored and have a limited market.
• Three distinct cost measures exist: Cost of production (₹72,861/ton), cost of goods sold (~₹76,000/ton), and EBITDA cost (~₹78,000/ton), with the gaps driven by inventory changes and unallocable head office expenses.
• Met coke benefit has a two-quarter lag: Lower-priced metallurgical coke booked earlier will be consumed in Q3 and Q4, mostly Q4; Q1 FY25 coke is already booked at ~$345/ton.
• Power cost is ticking up: Variable power cost was ₹4/unit in Q2 and will rise to ~₹4.15 in Q3 due to plant maintenance shutdown costs booked in the quarter.
• Q3 cost guidance is flat: Management expects cost per ton next quarter to be more or less the same as Q2, with coke reduction offset by power increase.
• EBITDA reconciliation gap unresolved: Per an analyst's math, prime realization of ₹1,10,000 minus EBITDA cost of ₹78,000 implies ~₹32,000/ton EBITDA, or ~₹200 cr on the volume base, versus the reported ~₹150 cr; management said "there are lot of other components also" and "you need to rework it again" without resolving the discrepancy.

Prem Khandelwal: "Aditya, cost for the next quarter may be more or less the same. Although there will be some reduction on coke cost, but there will be some increase on power cost. So, I think for the next quarter also, cost is more or less likely to remain the same at these levels."

Utkal C: Compensation & Amalgamation

• Vesting order issued, mining has begun: The other party is now the owner of the mine and is removing overburden; coal is expected by December.
• Compensation order is delayed: A meeting was held on 13th October where the nominated authority said final orders would be issued within 7-10 days; as of the call, the order had still not been issued and the company is waiting.
• Payment and mining are separate tracks: Management emphasized there is no link between the operation of the mine and payment of compensation; the other party pays the nominated authority, which in turn pays IMFA.
• Amalgamation structure: Wholly-owned subsidiary Utkal C will be amalgamated into the parent; the loan extended by IMFA to UCL will be repaid first with interest, and the remaining amount distributed among shareholders in proportion of ownership.
• No comment on legal risks or interest: Management declined to comment on whether JSPL could go to court after receiving the final order, or whether IMFA would be entitled to 12% per annum interest on the ~₹416 cr for delayed payment, calling it "very difficult to comment."

Prem Khandelwal: "As I said, we are waiting for the final order of nominated authority. It all depends on that."

Growth Projects: Greenfield & Green Power

• Greenfield ferroalloys project timeline: First commercial production expected in May/June 2025 for the 1 lakh ton project.
• Machinery orders underway: The furnace transformer has been ordered and is expected to reach site by December 2024; other major orders are under process and expected to be finalized by November and December 2024.
• Boundary wall delayed: Construction for the Kalinga project boundary wall was supposed to start in October but was delayed due to Pooja and contractor friction; now expected to start mid-November.
• Green power project signed: A term sheet has been signed for a 50 MW round-the-clock hybrid renewable power project (solar plus wind) with an 80% availability factor; the power purchase agreement and shareholding are to be signed this month.
• Green power timeline and use: Generation will start between March-April 2025 to June 2025; power will serve Kalinga Nagar and Therubali, with some captive power from the Choudwar thermal plant also being pushed.

Market Environment & Realization

• Benchmark pricing moved marginally: The benchmark price rose from $1.51 to $1.53, but actual transactions operate at a discount; long-term prices have gone up only marginally.
• China demand is depressed: The real estate crisis (Evergrande, Country Garden) has weakened steel demand; China announced a 1 trillion RMB infrastructure package which could improve steel demand, but management said "nobody can predict" Q1 2024.
• Geopolitical risk flagged: The Israel conflict could affect oil prices, with the World Bank predicting $150/barrel, which management noted "can affect many things."
• South African Rand dynamics: Rand appreciation versus Chinese currency depreciation could push UG2 prices up.
• Spot prices are not viable: Current spot prices (₹1.10 lakh domestic, $0.92-0.93 China) are described as "not viable rates for any policy," though management noted things can change anytime.
• Realization guidance withheld: Management said blended realization is known only after quarter-end because 60-70% is sold on long-term contracts and 30-40% on spot; directional guidance was "more or less in line with Q2."

Deepak Mohanty: "Now, this Israel conflict is going on. That can affect many things. Even the World Bank prediction is barrel rate can go up to $150. So, if, who knows how it will pan out, how it will be."

Capital Allocation & Shareholder Returns

• Interim dividend declared: ₹7.50 per share.
• Buyback ruled out: When an analyst suggested a buyback would be more tax-efficient than a dividend for distributing cash, management stated "buyback is not a viable option at the moment for us."
• Domestic demand pivot: As domestic demand is expected to rise, the company plans to cater more to the domestic market.
• New geographies under exploration: The company is looking for new geographies and spreading its marketing strategies, though management deflected a specific question about revising existing off-take agreements (e.g., POSCO volumes).

Prem Khandelwal: "Saket, we have dealt with this point several times and the management view is very clear that buyback is not a viable option at the moment for us."

Guidance & Commitments

Key Metrics