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Godawari Power and Ispat Ltd
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Ladies and gentlemen, good day, and welcome to Godawari Power & Ispat Limited Q1 FY '23 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Sana Kapoor from Go India Advisors. Thank you, and over to you, Ms. Kapoor.
Thank you, Nirav. Good morning, everybody, and welcome to Godawari Power & Ispat Limited earnings call to discuss the Q1 and FY '23 results. We have on the call Mr. Abhishek Agrawal, Executive Director; Mr. Siddharth Agrawal, Executive Director; Mr. Sanjay Bothra, CFO; and Mr. Dinesh Gandhi, Executive Director.
We must remind you that the discussion on today's call may include certain forward-looking statements and must be therefore viewed in conjunction with the risks that the company faces.
May I now request Mr. Dinesh Gandhi to take us through the company's business outlook and financial highlights, subsequent to which we will open the floor for Q&A. Thank you, and over to you, sir.
Thank you, Sana, and good morning, everyone. I welcome you all to this conference call with Godawari Power & Ispat Limited to discuss the Q1 FY '23 results and the way forward. I'm sure that you must have looked at the earnings results and the presentation uploaded to stock exchanges and the company's website. I will briefly discuss the results, and then we can have the Q&A and some other developments taken place during the quarter.
We had a good start of the financial year 2023. Then I will discuss the quarterly performance in detail and before that, there are a few recent developments and the strategic initiatives which the company has taken. I'll just update you on that. As committed in last call, GPL is constantly working towards simplification of its structure, and we have already increased our stake in HFAL from 75.66% to 91.82%. We have also acquired 78.96% stake in the Hira Ferro Alloys Limited. Then we have acquired Jagdamba power plant through a slump sale route during the quarter and we did somewhat 75 megawatt power plant asset has become the asset of the Godawari Power & Ispat and Godawari is running that unit from the date of acquisition that is June 7, 2022. This entire power of 25 megawatts will be consumed captively in-house. Simultaneously with acquisition of 25 megawatt power plant in the slump sale route, we have tendered 26% share that GPIL was holding in Jagdamba for the purpose of qualifying for the captive user while no more required. So we have surrendered under the Buyback Scheme launched by the company.
With regards to the CapEx, we have already announced a CapEx which are ongoing and close to INR 500 crores of CapEx is planned in the current financial year, out of which we have done INR 150 crores in the first quarter. Despite the imposition of beauty and other developments in the marketplace, we are committed to commission this CapEx of INR 500 crores in the current financial year, which mainly includes setting up of 155 megawatt of solar power, out of that 70 megawatt power plant has already been almost commissioned. It is just awaiting this synchronization of grid and remaining capacities for some part of the land acquisition is still pending.
And once that is done, we will start the construction process, and we are quite hopeful that within FY '23, we will be able to complete the entire 155-megawatt solar CapEx. And this entire power will be consumed -- will be for the captive requirement, which will be mainly replacing the grid power.
Due to some strategic vision, we have changes in certain business plans, and therefore we have changed the expansion of steel billets project from 0.4 million to 6 million ton on hold. We are working on a revised scheme. And as and when that is finalized, that time this expansion of capacity will be taken up in due course and will be updated to the investors accordingly.
As you're all aware, we are also focusing on reducing the carbon footprint that I already discussed, 3 projects with a total capacity of 155 megawatts. This 155 megawatts capacity plus 42 megawatt of wasted recovery, plus 8-megawatts -- 8.5 megawatts of biomass power plant in IraPero and 1.5 megawatt of wind mill, with all these commissions, our existing capacities, we will have achieved the carbon utility so far as the existing plant is concerned.
So as regards the update on the Greenfield power project, we have announced certain plan for expansion of the capacity at a greenfield project. We are still in the evaluation process and finalize the design, size, capacity, technology, et cetera. And this investment will be taken up in due course of time once all these processes are completed, including environmental approval and land acquisition, and the resulted investment will be announced that will be purely based on the evolving market conditions and the future cash flow of the Company. We will further keep you updated on this.
I'd like to mention that to cope up with the export duty on pellet, we have increased the sale of sponge iron, steel billets, MS rounds, HB wire, Ferro alloys. The Company has a competitive advantage as it produces high-grade pellet, hence we are confident of achieving the targeted volume for the current year. Coming to the operational performance, Q1 -- I'm happy to share that GPIL has achieved the record high quarterly turnover for iron ore mining, iron ore pellet production, sponge iron production, all of them up 26%, 11% and 12% respectively on Y-o-Y basis; 13%, 9% and 99% achieved respectively on the Q-o-Q basis. The sale of iron ore pellet, sponge iron and steel billet MS rounds were up during the quarter by 6%, 835%, 29% and 22% whereas sale of HB wires has reduced to 51%.
As regards the HB wire, as you may be aware, during the last financial year, we were not making substantial quantity of HB wire, because we were mainly exporting the wire ores in the international market. With the imposition of export duty, now, logical process is to convert the wire rod into wire partially to that kind of capacity available and then sell it in the market. And gradually the HB wire utilization rate will increase going forward.
Channelized volumes in all the 3 plants, that is GPIL, HFAL, Alok Ferro have shown encouraging trend during the quarter-on-quarter basis. This new acquisition definitely added to the profitability as well as the sales turnover of the Company. On a quarter-to-quarter basis, you might have noticed a drop of 19% in sale of iron ore pellet. This drop is because of increased captive use of pellet for sponge iron.
Last quarter, the sponge iron production was very low and therefore pellet sale was higher. Now, we have converted pellet into sponge iron and sold, and therefore the drop in the 19% in the sale of iron ore pellet.
Realization of pellet and sponge iron have dropped slightly by 3% and 1% quarter-on-quarter basis. This is empty because of fall in the market rate after imposition of export duty, realization of other products like steel billet, MS round, HB wire and other increased sequentially by 12%, 13% and 17% respectively. The current prices of the long product and the current prices for the HR [indiscernible] product now coming closer, yes, the [indiscernible] substantially higher during the last financial year. Now, gradually the prices are coming in line with the long product price. Of course, there is some amount of gap will continue to be there in the market.
The total expenses increased during the quarter. This is mainly attributable to the increase in the coal cost. We have required to import the coal for this sponge iron plant with a substantially higher price. And this is the end, to some extent, on the inflationary pressure on the procurement of the other raw material consumption item.
The consolidated EBITDA is INR 461 crores, which is up 16% quarter-on-quarter and down 20% year-on-year. The reason for drop Y-o-Y basis is increase in the cost of transportation of fuel -- transportation, the increase the royalty and as well both these items have resulted into higher cost of production. The consolidated PAT adjusted for exceptional item is up 5% sequentially and stands INR 327 crores. As you already know, GPIL balance sheet is now fully repaid, and debt has been fully repaid, long-term debt. We continue to have some working capital limit worries utilization of certain limit. We have a net cash position of INR 560 crore as on 31st of -- as of now.
Now, coming on to the market position, starting with the international market outlook, the iron ore prices from $158/ton on 1st April, the iron ore prices have fallen to $100 as recession worries take hold. Demands and consumption of steel and other commodities is reduced to -- China due to COVID and real estate crisis as in China and in the rest of world interest rate hikes. Expectation is that H2 FY '23, things will improve due to China's stimulus and the support from economic growth. However, uncertainty remains due to the zero COVID policy by China.
In regards to iron ore, Vale has already announced cutdown in the production guidance. Russia and Ukraine iron ore supplies are already reduced. And with this, the iron ore prices, in our opinion, is likely to range between $100 to $120 during the current financial year.
Coming on to domestic market. As you are all aware, government levied export duty on iron ore from 0% -- iron ore fines to 0% to 30%; and iron ore lumps, 30% to 50%; in pellet, from 0% to 45%; and synergy steel, the export duty levied to 15% in May 2002. This has led to sharp drop in the domestic iron ore prices. NMDC has also cut the iron ore prices by approximately INR 2,000 a ton. Pellet prices decreased from an average of INR 12,000 to INR 14,000 a ton in the upper end to INR 7,575. Presently, the pellet prices are only at about INR 8,800.
Domestic iron ore prices are likely to bottom out at much higher level than the historical levels. The support has come from the cost curve, which has moved up by INR 1,000 to INR 1,500 post auction of iron ore mines. The current iron ore prices -- domestic mines have become -- at the current iron ore prices, many domestic iron ore mines have become unviable. Some support has also come from the improvement in the domestic demand of steel and due to increased take off of infra projects. Going forward, improvement in the iron ore and the pellet prices will depend on impact of the export duty. However, downside remains largely -- downside is largely projected as the current volume level and the selling prices.
With this, I will open the floor for the question-and-answer. Thank you very much.
[Operator Instructions] The first question is from the line of Kunal from Reliance Securities.
Congratulation on a good set of numbers considering the current environment. Sir, just some questions. Firstly, what would be the quantum of exports of pellets in 1Q FY '23?
1Q FY '23. I think -- Bothra ji, you know how many consignments have gone in Q1 FY '23?
So yes, I'll give an update on that. On the export side, in Q1, we did about 3 shipments.
Okay. So that would be...
At INR 1,50,000.
And who is bearing the export duty?
The sellers.
Sorry?
We have to -- if we happen to export now, then we have to bear the export duty.
Okay. So I mean, what would be -- how much export duty would have been born in 1Q FY '23? I mean...
Nothing. So by the time the duty was imposed, so we only had 1 shipment, which is pending and with the long-term relationship we had with the buyer, so that contract was amicably canceled. So we didn't export after the duty was imposed.
And sir, going forward, what's your guidance on exports for FY '23 overall?
Till the time, the duty is not revoked. So we don't think so we will be able to export [indiscernible] out. So we will focus 2Q on domestic market till time the duty is not revoked, where these prices, it's totally unviable to export after sales 45% duty.
So my second question is what's your overall pellet sales guidance for the current year?
See, we are operating the plant at almost 100% capacity. So with the DRA consumption about, say, 0.75 million tonnes rest will be totally for domestic sales. The sales guidance would be around about 1.75 million tonnes in this financial year.
Sorry, 1 point...
1.75 million tonnes.
Sir, then one more question I had. Our iron ore costs have been increasing, actually. I mean, it's increased substantially from say INR 2,800 in FY '22 to INR 3,150 in the current quarter. And if you see the trend has been -- overall, it's burning on a rising trend. So could you throw some light on this?
Primarily, there are 2 reasons for the cost of iron ore to go up. One is on account of diesel. As you are aware, the diesel price because of crude has been hovering at the all-time highest level, which is about INR 100. So that has increased the cost on account of mining operations as well as on account of transportation for mines to plant. And second is substantially royalty. So as you're aware, see we are supposed to pay royalty, which is the IBM publish rate, so and IBM rates are lagging by 3 months. For example, right now, we're paying royalty, which is the IBM price of May and we're sitting in August. So as the prices start coming down, the royalty portion will start going down. So in a count of royalty and the diesel, the cost has gone up by almost INR 450 compared to previous quarters.
And then just one more question is, if I could squeeze in, what would be the current realization of pellets and sponge iron?
Current realization, pellets, at the moment, pellets are hovering about INR 900 domestic level and sponge prices are about INR 34,500.
Okay. So sponge iron gain prices haven't corrected that much. Is it my right understanding?
No. So just to give you a graph, so before duty was imposed, the prices were about INR 35,000, it came around INR 30,000. And then, again, because of extreme coal shortage at India level and with the global domestic prices being on very high side, the sponge prices have again come back from INR 30,000 to around INR 34,000. So thermal coal cost is not going down; the index is still about $300.
So I think, my next question was on that only. I mean, we are buying the prime quality coal, prices of which are continue to remain very, very high. So how do we plan to tackle that, I mean?
So see, no. So we do realize that in these markets it's difficult to procure prime-quality thermal coal. So we have shifted -- we have changed our charge mix. We are trying to import good quality cheap cargo. So now, from RB1, we fit back to RB3 levels now. So going forward, we should be buying RB3 coal, which is basically a 1,300 levels NCV coal.
Okay. But I thought that our DRI unit could not take anything other than RB1 input?
No, no, no, that's not the case. The DRI plant is designed in such way they can absorb any coal. Depending on the quality of coal, your production keeps varying. So with usage of RB3, there might be sudden drop in production about 2% to 5%, but technically there is no issue due to an RB3. Now, RB1 is totally unable to procure with the current prices globally.
Kunal I want to add one more point on this. We have been bidding for the other coal mines also. So in order to protect the long-term requirement of the Company, and regarding price fluctuation, we are bidding for the coal mines. As and when we are successful in that, there is no thermal coal. After that, the dependency on the other market will reduce.
Okay. Sir could you please throw some more light on this because this is quite an interesting point that we are planning to acquire attractive coal mines. So...
Acquire under the auction by Government of India.
Okay. So at what stage are we...
We have been bidding. Sometimes we have not been so successful, so we try up in the next round. So that's how it has been so far. We have been unsuccessful, because of the cost restructure. And we continue to monitor the situation and as and when we are able to get the cost, the coal cost, all of the premium within our range, then I think we should be able to acquire a coal mine, which will feed all the requirement of GPIL and Hira Ferro Alloys and Alok Ferro Alloys, because we are also dependent on the linkages of Coal India.
[Operator Instructions] Next question is from the line of Vignesh Iyer from Sequent Investments.
Congratulation on good set of numbers in spite of tough situation that we are functioning...
Sorry to interrupt you. Can I request you to speak a little louder, please?
Yes, sure. Am I audible now? Hello?
Yes.
So sir, in case of your iron ore pellets, since it is -- our product is a high-grade pellet, Do we have a better realization than what the domestic price is? I just wanted to know.
Just to throw some light on this. See, definitely, we do get a premium over and above the domestic market. But at the moment, what is happening is since we were totally into exports and we were doing a little bit of domestic as well. Now I am sorting for new buyers who can rely the actual value of the product. So at the moment, we are getting about INR 1,000 more compared to the domestic market. And going forward, once we are able to establish our quality at different plants, I'm confident we will get better premium going forward.
Okay, fine. And sir, you have given sir, around guidance as per your investor presentation, around 2.4 million tonnes for iron ore pellets. And we have managed around 6 lakhs, if I'm not wrong, in current quarter. So the guidance continues, right? We'll be able to...
100%, definitely.
Okay. Okay. Just one last question. The 70 megawatt the plant in Rajnandgaon will be commissioning in this quarter only, the 70 megawatts...
Yes. So the plant -- the projects will be completed, we are just waiting for the permission to be given by the state government for connection to the grid. [Technical Difficulty] But we will commission the plant. So I'm hoping this should happen this quarter. That is it should happen this month only.
Okay. And that 70 megawatt is going to replace your grid power, right, immediately?
Yes. So whatever volume we are importing from the grid on account of power that will be replaced to be with the solar power.
[Operator Instructions] The next question is from the line of [ Sagar, ] individual investor.
So the question out here is, if I could see, we have increased our realization in almost all of the products from Q4, if you say in this quarter. So going ahead, how do you think we'll be managing this regarding the commodity prices, et cetera, where will be -- will we be able to stay above the current realization levels and margin levels? Or will we see a softening in there? And if I consider a 2- or 3-year period, okay, where do we see Godawari going at or growing at. Some light if you could throw on it?
Sir, in the first side, in terms of realization, it's difficult to ascertain, because [indiscernible] commodity market, and at the moment everything plays in demand and supply, right. So it's difficult to ascertain how prices will unfold going forward. So at least on the revenue side, we don't have a control, but yes, in terms of cost margins, we are working very minutely on each and every cost. And we are hopeful, see, we should be able to maintain the current margins.
Okay. That's good. And sir, regarding...
And demand. Demand is going off in domestic market. Sorry to interrupt. And you are seeing despite the imposition of export duty, at least the intake of from export duty is much higher on the play product. But so far as long product is concerned, you are seeing that the -- after imposition of the export duty, the low product prices are slightly -- has been better than the Q4 FY '22 versus Q1 FY '23. So we have realized higher prices on the sponge iron, steel pellet even for that matter HB wire started production. So like you have to see it in 2 parts. One, the iron ore will definitely will not be able to export it, although it may get dumped, unless the government gives some relief on the export duty. And the number requirement will continue to be there in the domestic because whatever sponges we're exporting, to that extent, there is an impact pellet, we are exporting because the realizations are much better or at par with the domestic market and in order to validate the domestic market.
Now even despite the export duty, we are still able to sell the pellet at about INR 8,000 to INR 9,000 a tonne. And that is a handsome price and we believe that because as I said in my opening remarks, the international ore prices are likely to hover between $100 to $120, $125. And if that remains, then the pellet prices in my opinion, may not go down below INR 8,000 a tonne. Temporarily, it can go, but only average realization on a medium- to longer-term basis, I think INR 8,000 crores to INR 9,000 is a benchmark where the prices should trade in the market in the normal circumstances. And we will see a major impact of this after the monsoon.
Sir, regarding your view, where do we see in the next 2 or 3 years?
In terms of what?
In terms of you could say growth by how many percentage could we basically grow?
Growth in volume. We have been trying, and that is there, whatever the CapEx which we have done on recently is INR 500 crores odd, it is more aimed towards the cost reduction rather than the increase in the volumes, except steel pellet, everywhere, it is the cost reduction, like solar power plant, we are -- that will be reducing our cost rather than adding on the volume of the cell, benefication plant in the mine.
So earlier we were mining say 1.8 million tonne. Now we are aiming at 1.2 million tonnes. So the margins are going to -- the turnover may not increase substantially. It will depend on the selling price of the product. But cost side -- on the cost side, there will be a substantial reduction in the cost going forward, which will like iron ore mines and the solar power plant will aid to the bottom line of the company.
So this is how you have to look at for next 1 to 2 years. And so far as greenfield is concerned, we are still working on the greenfield expansion project. I'm not able to do any guidance at this point of time because, number one, we have to freeze the technology. We have not been able to get the government land despite continuous possible. And with the revised scenario on our imposition of export duty, so my cash flow is definitely going to be lower than what we have done in FY '22.
So all these factors will depend and based on that, we are going to announce the final CapEx at the greenfield and greenfield CapEx, then it is going to take 2, 3 years' time. So top line growth, some top line growth may be there but for the next 2, 3 years, I'm not expecting any substantial topline growth in Godawari Power except whatever acquisitions which we have done in Hira Ferro Alloys and Alok Ferro Alloys to that extent, it will add.
Sir, just to add on what you said, when we are looking at cost reduction, let's say, from the power plant, okay, the 150 megawatts that we may commission 70 and 70 by the end of the year, if I assume. So after, let's say, FY '24, okay, what is the cost reductions that we'll be getting just from the power -- we invested INR 500 crores odd for the 150 megawatt power plant. So what are we going to save every year based on this investment?
See, grid power cost, including interest and depreciation, may not go beyond 2.25 whereas the grid prices are INR 6 plus at our mines, where we plan to utilize 25 megawatt of solar power, there the rate is INR 14 per unit. So you're replacing INR 6 to INR 7 per unit in the steel plant. And at mines, you will be replacing the power with solar power. And that is we are buying at about INR 14 per unit. So definitely, it is going to aid to the operating EBITDA of the company going forward and by reduction in the cost.
Then we are doing -- investing out of this all INR 500 crores, we are investing about INR 70 crores to INR 80 crores for replacement of old turbine. So that we can have the higher generation without setting up the other facilities. Only sales in turbine with the lead turbine will increase our power generation by 10 megawatts.
So my thermal coal power -- coal cost will also go down. Thermal power cost will also go down. And for growth, we are working because at existing location of our plant, whatever we could have done, I think, with this INR 500 crores of investment, we have achieved what we wanted to achieve so far. And growth will come from the greenfield project or increasing the selling price.
[Operator Instructions] Sagar do you have any follow-up questions?
Sure. So if I may add, just a last one. So we increased our stake in the subsidiaries currently. So any plan to make it a wholly-owned -- increasing it to 100% buying the residual, any plans for doing it in FY -- the current year '23?
Whether it will happen in current year, it will happen in next year. At some point of time, it will happen.
[Operator Instructions] Next question is from the line of Ashish Kumar from Infinity Alternatives.
Sir, congratulations on a good set of numbers. The question which I had was in relation to your capital allocation. We -- after a long time, we are seeing a net cash balance sheet, and we continue to generate cash, significantly more than the CapEx. Obviously, there's a room to leverage up a little bit more as and when the CapEx programs are finalized. So are you thinking of a large distribution back to the shareholders, given the bonanza over the last couple of years from dividend or a buyback.
So far as I understand, we have rewarded investors like last 2 years, substantially by way of distribution of dividend. And dividend, we have -- again, we are -- we'll be distributing about INR 115 crores once the AGM is over. So distribution will continue to be there, but then we have to look at the growth as well, the cost reduction, improving profitability. So if I'm using -- and whatever this CapEx money we are using is primarily coming from my divestment of the stake in the solar thermal power plants, which we divested in the last quarter.
Absolutely. No, I was hinting more towards a buyback. [Multiple Speakers]
No, no, let me complete. Depending upon the cash flow of the company and the near-term plan or at least medium-term plan, we will drive our dividend distribution or maybe other mechanism for rewarding the investor through buy back or any other arrangement.
Sure, sir. And sir, in terms of the...
In fact, I'll tell you, the planning for the buybacks, but with the imposition of export duty. Now we want to be very conservative and keep the case in hand rather than going out of the cash.
Sure. No, no, I understand.
One simple government order, they changed the head of the industry.
That I fully understand. But in terms of the immediate short to medium term, what I heard on the call was that the prices seem to have stabilized. And what will be the current EBITDA run rate based on where the prices have stabilized?
Apparently, we have not worked on that number, but we have guided you the pricing, what is the current pricing. Now, 5% to 10% here and there, the prices are going to range in between till the export duty is withdrawn. Whether the export duty will be withdrawn, it will be reduced, we really don't have any answer on the question. So based on this and selling prices on there, cost restrictions are there, you can work it out how much EBITDA we can generate from Q2 onwards. Because we have past 2 months in export and our realization of pellet was much higher. So pellet realizations will now definitely in the current quarter will be lower than what we have done in Q1. All other products are likely to remain where I think we have done in Q1.
Right. And in terms of the -- going forward -- in terms of going forward, what's your expectation in terms of the export duty. Any color that you can share on that?
See, I'm not an expert on the sector where players are there. What I understand is like there is a surplus pellet about 20 million, 25 million tonnes in India. Steel also India started almost 20%, 25%. Some demand growth will come. There also, there is a surplus if steel is available in domestic market, for production versus the domestic supply. Similarly, iron ore, iron ore will also -- is higher than what is required in the current year. So at some point of time, the export duty should get released. And to what extent it may get released, it depends upon the government. And I'm sure looking at the data and the sensible coal will be taken by the government in due course of time.
Next question is from the line of Sachin Kasera from Svan Investments.
Congrats for a good set of numbers. Three questions, sir.
Sorry, to interrupt you. Your voice is not clear. Can I request you to speak through the handset?
Is it better now?
Yes, please.
First question, there was a mention that you are getting INR 1,000 premium. So this is on this INR 8,800 or INR 8,800 the realization that you have indicated, including the premium we are getting.
No. So see, the prices when the duty was imposed had gone down to about 7,500 levels, 7,500. So at that time, we were getting to 8,500 levels. And now with the current market being stabilized, we are confident if you get 1,000 over and above the current level of 8,500 levels.
Sure, sure. Secondly, the government -- that's what the government has been seeing, one is to continue efficient. Secondly, they want more valuation to happen. So hypothetically assuming that for some -- a little longer time, the duty remains, what is the -- company must also have altered plan be right? One is that the government sees some rationality behind this and reduces the rate on the export duty. But for example, for whatever reason it is not reduced. What is the alternate plan b for the company from '23 perspective?
See pellet being one of the major drivers. So we don't find any challenges because of premium quality, we have established a good domestic market. And we've also added new clients on the list decline. So on the pellet side, we don't see any issue selling the product. Even the import duty is not evolved like totally not evolved. We are totally open with that.
Because, see, why I am asking is, in the presentation we have mentioned about some quite aggressive plans in terms of increasing both the pellet, as well as the mining production next 3, 4 years. So in case the duty is not removed, we think that we will be in a position to sell so much in the domestic market over the next 3 to 4 years.
No, see, the mining -- whatever power guidance we provided, that is basis the new greenfield project. So that will happen timely to the greenfield project. So the pellet guidance is given basis because we happen to go from the greenfield project, they will be installing a pellet plant there as well for our in-house consumption. So for that, the mining capacity that should go up. At the moment, we have no plans of starting the pellet plant only for merchants sake. We have no plans of doing that at the moment right now.
So fair to assume that this 1.7 million to 2 million tonnes is what we think in the next 1, 2 years, what a best we can sell in-house.
So current capacity is 2.4 million tonnes, out of which about 30%, 35% is consumed for our DRI production, and rest will be sold in the merchant market. And we continue to do so going forward as well.
Sure. Next question is on this CapEx. And you mentioned that if you are looking at INR 500 crores CapEx. Currently, we are on cash of INR 500 crores. So are we looking to calibrate the next 2, 3 years in the sense, we will continue to remain debt free or net cash? Or is it that if we have to do a greenfield, it will be okay to again go into some sort of it and if you could give your thoughts on that?
They've been depend upon the size of the greenfield project which we finally announced with the requirement of funds and the -- what is my generation at this point of time, the cash flow generation from the business. So that will depend. And if required, we may not be able to take small debt from the market. It is not that we cannot raise debt, we can definitely raise the debt. But we would like to keep the debt either at very substantially lower level or otherwise manage everything with this external accruals.
Sure. Sir, can you give us some sense on this leverage and the debt and IRR. So what is the minimum IRR you would look on a conservative basis before we go into a large CapEx? And secondly, we maybe...
Simple theory. Our previous periods would be 3 to 4 years.
Okay. So unless we get that confidence, we're not going to do any large...
Yes.
And secondly, you mentioned were taking...
That also I'm talking over a longer period of time. So in interim, like it can happen. In some year, margins can go down, margins can go up in some years. But on an average, 2 to 4 years should be the basic.
Sure. And what type of absolute or debt-to-EBITDA will be comfortable going up for this project if you need to be?
See, we have not talked about it much in much detail about it.
[Multiple Speakers] as a corporate now because we had a lot of stress 4, 5 years back, and we have been talking of being very, very conservative. So I'm just saying, not specify in generally, if you are to a large CapEx, what type of debt are you can, like INR 500 crores, INR 1,000 crores or like onetime debt to EBITDA. What is the number where...
That is what I'm telling you. We will decide the size of the debt as and when we have the size of the project and the cost required is ready. So it's not that we are averse to taking a debt. We will take the debt and we have taken a debt and grown the balance sheet at least from INR 200 crores, INR 300 crores, size of balance in sheet in 2006, then we came out with IPO. Today, we have -- I think the size of balance sheet has already gone down in terms of INR 4,000 crores to INR 5,000 crores. So it's not that -- we have taken the debt a number of times. We are not averse to take debt, but yes, we wanted to keep the debt at a very low level. So any kind of like -- situation, the Company should be able to survive, like obviously [indiscernible] conservative in terms of our investment, but I have taken INR 1,500 crores of investments in 2011 and after that we have -- due to change in government and fall in the interest rates and prices of commodities, we came to a stage where we were able to earn only interest payments.
Sure. And just one last question.
So we will continue to be conservative in our approach, but definitely when required, we will some debt and I'll tell you previously also, we have taken some debt, indirect debt like, we have taken [indiscernible] facility for our import of solar modules, rest we are importing is through internal accrual.
Sure. Just one last question. This was also a [indiscernible]. So see, I understand that we have to be converting all that, but the type of cost structure we have and the type of sustainable EBITDA, we can make even at deepest prices. And the type of correction using the stock prices, I think it would also make human sense if the company could look allocated not large a small sum to match buyback. So I think that may also be probably one of the best opportunity to deploy cash at a point of time when there's so much volatility in the steel market and we're not getting much clarity. Spending say, INR 100 crores, INR 200 on a buyback, I think will obviously set a good message to the investor and may also be good investment...
No, no, I understand your point. And as I said, we were working on that plant, although we have not announced it and because of sudden imposition of export duty, you have to wait and see at least for 5 to 6 months to see where the market goes and stabilize it and that point of time if I go ahead and open the buyback and use the money there. And if I need the money for the operations. So we took a call that we will not do the buyback at this point of time. We'll wait for a suitable opportunity and do that.
The next question is from the line of Yogansh Jeswani from Mittal Analytics.
Sir, one question on the benefication part that we have announced. So if you could share a bit more details in terms of the economics of this project that you are taking up, for example, what would be the benefication cost for the -- and in terms of the increase in production that we have mentioned, how much of that would be because of the benefication and not actually increase in mining?
Yes, I'll take it up. At Godawari complex, we have already achieved a real capacity of 3.2 million tons of benefication. The new benefition plant is coming up in mines because the main reason is to reduce our internal costs on the mines, because right now, whatever we get from mines, we are beneficating in Godawari facility, in which about 20% of wastage is generated, which are no use to us. So we are basically losing 20% on account of [ fit ]. So today the study is about saying INR 1,000. So 20% cost is going up on account of fed. So to say that cost, we've taken decision to install the benefication plant in the mine area only. So that will substantially reduce our cost. That is the reason. And the project is already underway for 0.6 million tonnes. And the first phase should be completed by end of the financial year.
Understood. So one part of it, I understood that instead of beneficating and supply, you'll be doing it directly on the mine. So that will save you some cost but in terms of benefication cost, what would that be for...
It's very minimal, I will tell you. So with the beneficating cost will be INR 150 only per tonne of iron ore. That's it.
Okay. And this will increase the grade also or it will just be able to be utilized our wastage better?
No, this will only help us with guiding the wastage better.
Low efficiency in terms of the grade.
No, because we are already able to produce what we desire to. This is just a perspective measure to reduce our cost of iron ore. And I will tell you one more thing. The another reason for doing it is, earlier we decided to beneficate at the plant area the reason was there was issue in terms of royalty, which has to be paid to the government of India basis, the current structure. But now IBM has come with a different gate called concentrate. So moment you beneficiate iron ore, it jumps to the category of concentrate.
So with that, they have started positioning the royalty for concentrate now. It becomes much easier for us to analyze the total value and pay the royalty. And this motivation has come into place in the last 3 months only. Royalty Is a big impact, because currently, there already of 55, 65 iron ore, the difference is almost at about INR 800 a ton, which is substantial going forward. So that is another reason. That has been certified by Indian Bureau of Mining.
That's really helpful. Sir, second, just one more clarity on the greenfield project that you are taking up. So here are we sure that we want to take up another similar kind of setup with Sponge, billet and bar? Or are we also...
No, no, no. The greenfield project will be a primary group will be blast furnace basis. We are not expanding into the current structure of sponge, billet and all these things. We want to make good quality steel. So the main projects will be based at blast furnace.
Next question is from the line of Tarang Agarwal from Old Bridge Capital.
A couple of questions from my side. One given the incidence of export duty, one would have imagined that the realizations would take a material impact. But that hasn't really played out. So -- and I mean, to an earlier comment where it was indicated that we are already sitting at about 20 million to 25 million tonnes of pellet surplus. So just wanted to understand how things played out on the ground and why we haven't seen the impact, would we probably see the impact? It doesn't seem like we'll see the impact in Q2 also in terms of whatever external data that is available. So just wanted to get a sense how things really played out in the market. That's one. And then I will follow it up.
See, I'd like to correct what we just said because the prices before the duty was imposed was hovering about INR 9,500 in Orissa and about INR 10,500 in Raipur sectors. So from INR 9,500, the prices have already gone down to INR 6,000 ex-plant Orissa about INR 7,500 ex-plant Raipur. The only reason, the only thing which played on favor was the monsoon. With the onset of monsoons, spun prefer to use pellet over lump. And the production also of mines actually goes down at India level, whether it's NBC or OMC, being the biggest miners in India at the moment. So ability of dumps has gone down, plus drilling monsoons most of them rip out using pellets over lumps. So that is why the demand has come back into the market. When the monsoon gets over, we need to see where the market will stabilize. It might go down, it might stay here. There are a lot of factors deciding it. So we have to wait and watch.
Okay. And given that there is a certain cost base to iron ore.
And just update you. So June data of pellet at India level, the production was down 20% compared to May month. So you already see reduced production at India level when it comes to pellet. So June was 20% lower than compared to May. So some people have also reduced their production. For example, big players like there are lot of big players like Rashmi, Sham and other players. So what they decided initially was to run the captive plan and probably take little bit of maintenance for the merchandize in plant. So the strategy keeps changing depending on the market. So we have to wait and watch and see how it unfolds going forward when the monsoons are over.
Okay. Got it. Second question on your downstream business. Typically, from billets to rounds to galvanized, typically, how would the conversion costs change?
See, the operating cost remains more or less the same. It's only on the input side, for example, sponge iron. Sponge iron today, thermal coal prices are at all-time high. So that plays an essential role in deciding our operational profit. So depending on sponge prizes, billet prices keep moving up and down because there are other factors like CPC, which is again all-time high and then Ferro alloys, then pig iron, scrap. So a lot of factors there decide what the operating cost is going to be. But on an annualized basis, the cost remains plus/minus 10% here and there. It is very good to operate at full capacity.
No, no, my question is between pellets, rounds and galvanized, right? I mean, typically, how would the cost structure for you change between billets to rounds and rounds to galvanized, right?
See, galvanized, we are not using the captive material, for your information. Galvanize plant is using the material and the plate, et cetera is bought from the market, it is converted into galvanized product in whatever shape and sizes required, segregated through segregation unit and then exported. We are working on steel melting capacity in order feed the galvanize line and therefore we have said that the -- this expansion of the steel billets delayed from 0.4 to 0.6, we have kept in hold because we are working on the technology and the size of the unit. If we can set up so that the segregation unit which will become part of your value chain. Otherwise, fabrication business today, they are buying especially from the market or players in the market thus converting to the various requirement in galvanized unit and selling to the market. It is purely a conversion business at this point of time.
Next question is from the line of Aman from Augmenta Research.
Sir, can you throw some light about like what would be the conversion cost from, let's say, part of iron ore to the pelleting? Because we are seeing that the price of iron ore are going down and like currently, if you look at the difference between the land cost and the cost of iron ore in the market difference comes out to around INR 5,000 a tonne. So can you just highlight about what could be the per-tonne cost of conversion from iron ore to pellet?
The conversion cost of iron ore to pellet at the moment, see for us, most of the material in mine for us. So if prices are going down in the domestic market, it doesn't change our conversion costs. being a captive minor. Currently, with the coal prices hovering all-time high in the oil towards all-time high towards crude, currently the conversion cost from iron ore to pellet is about INR 1,800 tonne, 1,800.
Next question is from the line of Kunal from Reliance Securities.
Sir, just a follow-up question. Are there any inorganic growth because we've heard that a lot of AU units who are exporting pellets have shut down. So are we looking at any inorganic growth?
No. On the pellet side, we have no intention of doing that. Because I'll tell you why because even for the EOU unit, the duty imposed by the government, it is also imposed on those plants as well. So for example, KICL. KICL is shut, although it's an EOU unit because it has to pay 45% duty for exporting pellets. So does that make sense?
Next question is from the line of [ Ganesh, ] individual investor.
So do we have any constraints on expanding at the current side, at least with the value-added downstream products?
Yes. We have limitations on account of not land, but primarily because the current area there a plant situated, it is designed -- it is being designated as CPA, which is critically polluted area by Government of India, by Central Pollution Board. So any expansion in this particular plant totally depends on the conversion of energy. So anything related to coke, coal, we will not get permission from the Pollution Board to install the unit. So there are limitation in this particular power premises.
Okay. My next question is, I just want to get a sense on why the steel pellet expansion was put on hold. So it be capacity or bottleneck for more downstream products like TMT rod, et cetera?
No, no, no. We have all because we want to make different products, which can be fed into those fabrication shop. And for that, we are working on the module, what kind of capacity will be suitable, how much it can be done. We can feed galvanize and that is better. So that we have kept it on hold. As we can all increase the capacity in 3 months' time from 4 to 6.
On being important hold, eventually, we will expand the capacity going forward.
[Operator Instructions] Next question is from of [ Adia Shah, ] individual investor.
Sir, am I audible?
Yes.
Yes. So I just wanted to understand, sir, compared to Q4 FY '22 and in Q1 FY '23, how was the EBITDA per tonne for pellet moved?
No. We don't have the number ready [Technical Difficulty].
Would it be correct to say that the entire dip in basically in NSR that we saw INR 3,000 is the dip in the NSR in pellet, that would be the dip that we have seen at EBITDA per tonne level or there is some volume impact also?
No, only in [Technical difficulty] The volume was higher than what it was in Q4. So far as conversion costs, as already mentioned in the call, INR 100 a tonne. INR 100 a tonne cost of iron ore. This is what the cost of the pellet.
Sir, my second question is on thermal coal. So do we have the number, sir, what was the average thermal coal cost for Q1 FY '23? And how do we see that going for the rest of FY '23 standing today? I know it's governed by a lot of other global things happening in the commodity parts. But sitting today sir, I were to ask you what's your sense on the prices?
So Q1, the Q1 average pricing for sponge iron was about INR 14,500 tonnes. And in Q2, it will be somewhere about INR 15,500 tonnes. So our margin increase. So we are able to maintain at the same level because of advance mine.
Sir, I was asking about thermal coal, sir?
I mentioned thermal coal only. The thermal coal which we are using as sponge iron, the landing cost to the plant is about say, INR 17,000 tonnes, INR 17,000 in Q1 and in Q2, it will be the similar amount INR 19,000.
Next question is from the line of Nilesh Gandhi from Metadesign.
All my questions have been answered. Thank you so much. Congratulations to the team.
The next question is from the line of Sachin Kasera from Swan Investments.
Can you just give a brief sense of what would be your current cost of pellet production? This is whatever the increase you're seeing in all the costs?
[Technical Difficulty] we don't discuss this point. Conversion cost.
1,800. So totally around INR 5,000, including -- around INR 5,000 crores, including all the cost, all taxes.
At the moment it will keep varying between, say, INR 5,500 plus-minus 10%, because of the coal we use for gasifier or we have to use oil because of availability and others [indiscernible] all the cost has gone up. So I would say INR 5,500 plus-minus 10% would be a receipt number.
Sure. And do you expect any reduction in terms of the cost of production going forward? Because you mentioned regarding some are all that you have to pay will probably...
Going forward, with iron ore prices going down domestically, we expect a reduction in royalty about INR 200 to INR 300 a tonne. So that that will sort of add to our cost going on the lower side. And the second would be, once the monsoons are over and the ability of coal becomes better, we should be able to reduce our operating cost as well by INR 200. So overall, I see INR 400 to INR 500 savings going forward. It is about 10% of our current production costs.
Sure. And in terms of mining also, sir, as we ramp up the production, do we get any cost benefits? Or this is will be at INR 3,150, the cost of mining.
As I mentioned earlier, the INR 3,150 -- the average cost should be about INR 2,700, but a count of royalty and the dealer escalation the cost is a at INR 3,150. Once the operations further ramp up, I don't see a substantial saving, probably INR 100, INR 150, will be here and there which is not very big.
So we should not assume that INR 5,000 is more or less going to be like the base cost of production for pellets according to you...
Yes. As I said, INR 5,500 plus/minus 10% is to be [indiscernible] figure. Because INR 500 here and there is not a big number. The coal is not there, the oil prices go up or anything else goes up so all depends.
Next question is from the line of [ Ganesh, ] individual Investor.
Yes. So coke and coal price last quarter, it was around INR 400-plus odd, now it is INR 200-plus out. Does it affect our pellet premiums?
See, to be honest, since the out of the export market and domestically, I do agree at a certain amount of time, it does impact the pellet premium on the high grade. But with the current scenario, we think, the more players buy -- start buying premium products, we will like the actual value rate. So I'm confident it will not impact to very good extent. We should be able to get the desired premium going forward.
Got it. Just one more question...
What has happened in India is because of low ability of high grade, I don't know, which is about cheaply earlier. Now everybody in India is making a parade of 62, 62.5. That is the benchmark in India for pellet makers. So when the [indiscernible] goes down your contain goes up in your pellets. So that will increase the tag volume and the cooking coal cost for the blast furnace. So I'm confident with our in the product, we should be able to get the better license. I mean, maintain the same premium which we were getting earlier in the next 4 months.
Just one curiosity question. So compared to your nearby peers, Godawari's ferro alloy's volume seems to be very low. So any reason they are not scale that portion of our product.
Sorry, which one ferro alloys?
No, I think we are -- our current capacity what we have, I think we're operating close to 95% of capacity.
[Technical Difficulty] what is the question please?
Yes, my question, any reason why we have not scaled the volume in that area? Ferro Alloys.
I think -- no, no, no. So our current capacity of ferro alloys at Godawari, which is about 16,500 on annual basis. So we produce about 4,000 tonnes in Q1, which is in line with the capacity. Then ferro alloys capacity is about...
60,000 tonnes is capacity operating at about 45, 000 tonnes. So 75%, 80%.
Yes. So what we're doing now is right now, thermal coal is a big, big issue, right? So operating plants, which are coal-based, becomes difficult in challenging. So depending on the current market scenario, we keep changing the chart mix, because of which the portion keeps there. For example, if you make ferro manganese, the production volume goes up. But we're making silicon manganese the production volume goes down because of power consumption. So depending on the market relation, we keep changing the target.
So my original question was, even our rated capacity is pretty low compared to some peers. So...
You're right, because we have not done expansion in the ferro alloys business. If you do ferro alloys business expansion you need to have a long-term energy requirement and the power of thermal power plants. So that is the reason we have not expanded because if you want to put up one furnace, then you have to put up a missing capacity of your power plant as well.
And you have seen -- if you see the right from 2011, '12, '13 onwards, but between 2011 and '13 we committed a substantial amount of CapEx in building solar thermal power plants, increasing the telescapacity. And we wanted to expand on the size of CapEx, but because of the fall in the commodity market, those plants were kept on hold. And with the improvement started from 2017, '18 onwards, we have been debottlenecking wherever it's possible in doing that.
So similarly, we are working on ferro alloys in debottlenecking, improving the capacity up to 60,000 tonnes. Current production is 45,000 tonnes. And that we will be achieving by another 8 to 9 months. So wind mill project, again, the requirement and other issues are there. We have not thought about it earlier that we'll expand the capacity in ferro alloys and the greenfield locations and Raipur market being is not close to the port.
So transportation cost is very high. If you have to import the net lease and if you have to sell the finished product in the international market. So the agent expansion takes place, will be taking place closer to the port area. There you can say on the logistics cost.
The last question is from the line of Kunal from Reliance Securities.
Sir, during the last call, you had mentioned that for domestic players to use our hybrid pellets, you will require coking coal prices to remain high. Now that coking coal prices are expected to, I mean, come down significantly in the second half of the current fiscal, what's your view, sir?
See, as I said earlier also, I am confident because of the overall pellet quality in the domestic market is going down from 65 to 62. So -- and our pallet being 65-plus. So I am very hopeful we will still get the same premium which were desiring the export market. I don't see an impact happening on that side.
Okay.
Eventually, people as to compare active numbers versus the other raw materials available compared to a pellet. So at the moment, we are getting a desired premium. And I'm confident we'll be able to continue to do so in the near future as well.
Thank you very much. Ladies and gentlemen, due to time constrain, we close the call. I now hand the conference over to the management for closing comments.
Thank you ladies and gentlemen for joining the conference call to discuss the Q1 FY '23 numbers of Godawari Power & Ispat Limited. We have been able to -- I hope we have been able to answer to your questions. If you feel [Technical Difficulty] contact our investor relations Go India Advisors. Thank you very much.
Thank you very much. On behalf of Go India Advisors, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.