HEG Ltd

NSE:HEG

Earnings Call Analysis

Company Faces Revenue Dip, EBITDA Slump

In the latest quarter, the company experienced an 8.5% revenue decrease from the previous quarter, with EBITDA falling to INR 110 crores from INR 130 crores, and net profit after tax declining to INR 37 crores from INR 62 crores. Despite this contraction, sales volume is expected to grow by 10-12% compared to last year. The company remains debt-free with a treasury of INR 950 crores. Profit margins are affected by declining product spreads due to a lag in the alignment of input costs and product prices. Moreover, stagnant steel production has kept electric arc furnace output consistent with no growth. Looking ahead, the company plans to invest INR 2,000 crores in a new business, targeting a start in March or April 2025, forecasting a 25-30% EBITDA margin for this venture.

Performance Snapshot for Q3 FY2023

In the third quarter of the fiscal year 2023, the company faced challenging conditions, marked by a decrease in financial performance compared to both the previous quarter and the corresponding quarter of the previous financial year. Specifically, EBITDA, including other income, came in at INR 110 crores, a significant reduction from INR 130 crores in the preceding quarter and INR 170 crores in the same quarter of the previous year. Additionally, the net profit after tax saw a decline to INR 37 crores from INR 62 crores in the prior quarter and INR 103 crores year-over-year. Despite these decreases, the company remains debt-free with a substantial trading size of close to INR 950 crores.

Sales Volume and Pricing Pressure

The company is expecting to end the fiscal year with a positive note in terms of sales, projecting a 10% to 12% increase in volume sold compared to the previous year. However, it confronts a continuous narrowing of profit margins ('spreads'), which is evident through a consistent decline across the three consecutive quarters. The executives refrained from disclosing specific figures in dollar terms but implied that thorough analysis of quarterly results would elucidate this trend.

Outlook on Sector Dynamics

Steel production, a key demand driver for the company's products, has remained stagnant globally, with electric arc furnace output not showing growth. Although there is an anticipated increase in the electric arc furnace's share of total steel production from 45% to a projected 55% to 58% over the next 6 to 8 years, there wasn't any significant uptick in production for the calendar year '23. This indicates a steady but unchanging demand in the short term from this sector.

Potential in Anodes Business

Investor interest in the anodes line of business was addressed, revealing promising future prospects. The company is making a substantial investment of around INR 2,000 crores, with expected output potentially matching or slightly exceeding the investment. Looking ahead, the company anticipates an EBITDA margin of about 25% to 30% for this new venture, which is slated to commence production in March or April of 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to the HEG Limited Q3 FY '24 Earnings Conference Call organized by SKP Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agarwal, Head Institutional Equities at SKP Securities Limited. Thank you, and over to you, sir.

[Navin Agarwal, analyst]

Good afternoon, ladies and gentlemen. It's my pleasure to welcome you on behalf of HEG Limited and SKP Securities to this financial results conference call with the leadership team at HEG. We have with us Mr. Ravi Jhunjhunwala, Chairman, Managing Director and CEO; Mr. Riju Jhunjhunwala, Vice Chairman; along with their colleagues, Mr. Manish Gulati, Executive Director; Mr. Om Prakash Ajmera, Group CFO; and Mr. Gulshan Kumar Sakhuja, CFO. We'll have the opening remarks from Mr. Jhunjhunwala, followed by a Q&A session. Thank you and over to you, Raviji.

[Ravi Jhunjhunwala, executive]

Thank you, [indiscernible], and friends, good afternoon, and welcome to our Q3 financial results. conference call for the year '23, '24. As per World Steel Associations data, total world steel production did not register any growth in 2023 as compared to 2022 and remain more or less similar at the same level of 1,882 million tonnes last year. Similarly, world steel production outside of China also remained similar at the similar levels at 2022 at about 868 million tonnes. Chinese steel production, while growing in the first half of 2023, dropped significantly in the second half and full year period of '23 to 1,020 million tonnes which was, again, in the same region as 2022 due to demand erosion.

However, persistent low demand -- domestic demand within China resulted into increased Chinese steel exports, which increased by about 34% from 67 million tonnes in 2022 to 97 million tonnes in '23, obviously, putting pressure on steel production in rest of the world. Amongst some of the large steel producing regions, U.S. stood at the same level in 2023 at about 81 million tonnes as in 2022 while production in EU declined by about 7%. India at the same time grew by about 12% on the back of healthy domestic demand from infrastructure and real estate sectors. Here, we need to remember that in India, steel production is predominantly through blast furnace route and also a significant portion of steel is also produced from induction furnaces, which is not our customer segment.

We continue to concentrate on our exports, which remained at about -- which remained at above 70% of our total sales in the first 3 quarters in the current year. Coming specifically to our Q3 performance, as we can see from our results, the electrode pricing remains under pressure, although we operated at about 85% capacity utilization for all the 3 quarters combined at 80,000 tonne capacity. Due to long duration of production cycle for our products, till the previous quarter, the commercial production from our expanded capacity to 100,000 tonnes did not go into the market.

We will start selling electrodes from this quarter, from this expanded capacity. However, our capacity utilization remains the highest amongst all the Western world graphite electrode companies. The needle coke prices keep correcting due to difficult market conditions, but there is always a time lag between needle coke procurement time and sales of finished electrodes. As you know, our production cycle varies between 2, 2.5 months to 5, 5.5 months. Our raw material inventory levels are now normalized, and we do not have any inventory overhang. Global economic uncertainty continues to limit steel demand and thus constraining steel production. We do not see much improvement in steel production in 2024 also.

However, the positive for our industry is that the decarbonization effort has now become an irreversible process with more and more electric arc furnaces -- greenfield electric arc furnaces being announced every month. Till date as per our information, more than 90 million tonnes of new greenfield capacities have already been announced in different parts of the world with U.S. and EU leading these numbers. And we keep seeing such announcements regularly. Out of this, about 9 million to 10 million tonnes is already into operation. Another 30 million tonnes is expected to be operational between current year and 2025 and rest of it post '25.

As we have said in our earlier calls, we expect graphite electrode demand to increase gradually by about 150,000 to 200,000 tonnes by 2029, 2030. This is a significant increase over current demand of about 500,000 to -- 500,000 to 600,000 tonnes of ultrahigh power electrodes excluding China. Just to repeat the context for anyone who is new listening to this call, steel industry causes 7% to 8% of total manmade pollution in the world and about 23% of all industrial solutions.

Steel produced through blast furnace emits about 4x more carbon than the same steel produced through the electric arc furnace and this is what is giving a very strong push all over the world, where companies are switching from blast furnaces to electric arc furnaces. The Western world production through Electric Arc Furnaces without China, which used to be around 44% 6, 7 years ago, has already reached 50% in 2023 and is likely to exceed 55% in the next 3, 4 years.

Friends, as you know, we have successfully completed our expansion and our new facilities are running perfectly well. Other than HEG, no other company has announced any new capacity in the Western world. It takes at least 4 to 5 years to build a new greenfield capacity and about 2 to 3 years to expand an existing brownfield plant. On the contrary, one of the graphite companies, one of the leading graphite companies has recently announced closure of one of their plants in U.S. with a capacity of about 25,000 tonnes. You are aware that HEG has been exporting more than 2/3 of its production to some 30-plus countries for a very long time, and we have a diverse and established customer base, and we are working hard to get a larger piece of the requirements, and we also keep adding new customers from time to time in several countries.

In this backdrop, our expanded capacity of 20,000 tonnes per annum has come at an opportune time when the electrode market is likely to expand at a fairly fast pace around the world. While we remain solidly upbeat about the continuous growth of electric arc furnace production in the coming decades, resulting into continuous rise in electrode demand. At present, we are seeing a period of subdued steel production due to several [indiscernible] factors, which is likely to continue through the first half of 2024 resulting into subdued demand for our products for the next few quarters.

We believe electric arc furnaces will grow at a CAGR of about 3% to 3.5% in the next decade which would directly translate into a substantial increase in electrode demand. And in the backdrop of a fairly high technology area that we are operating in, we don't see any newcomer or any new electrode company coming into business. We at HEG have been operating world's largest graphite plant under one roof with a capacity of 80,000 tonnes for a long time. And currently, with our expansion to 100,000 tonnes, which is now operational, we are now amongst the lowest cost producers in the world due to economies of scale and our operational efficiencies.

Now a couple of words about our new subsidiary, TACC. Due to economic -- economies of scale in the CapEx outflow and considering the huge demand expected in the EV sector, the Board has approved the decision to start with a 20,000 tonne graphite anode powder plant in one go, which initially we were planning to do in 2 phases of 10,000 tonnes each. The land is already acquired, and the construction has started, which we intend to complete by mid-2025. We'll keep you informed about this progress from time to time.

In conclusion, friends, our third quarter '23-'24 has been satisfactory, given the tough market conditions under which we are operating. The next 2, 3 quarters may see margins remaining under some pressure, but we are hoping that the demand would come back sometime from second half of 2024, and we are going to take full advantage of our expanded capacity. We have all the technological capacities, operational efficiencies and market reach to take our company forward and to succeed and thrive in an all emerging situations, creating long-term value for our shareholders.

With this, I'll now pass on the floor to our CFO, Gulshan, who will take us through the financial figures. Following that, our Vice Chairman, Riju, and our Executive Director, Manish, and I will be delighted to address any inquiries you may have regarding electrodes and also graphite anode powder. Over to Gulshan.

[Gulshan Sakhuja, executive]

Thank you, sir. Good afternoon, friends. I will now briefly -- I will now briefly take you through company's operating and financial performance for the quarter ended 31st December 2023. HEG recorded revenue from operations of INR 562 crores as against INR 614 crores in the previous quarter and INR 530 crores in the corresponding quarter of the previous year. Revenue for the quarter saw a decrease of 8.5% as compared to the previous quarter.

During the quarter ended 31st December 2023, the company delivered EBITDA including other income of INR 110 crores as against INR 130 crores in the previous quarter and INR 170 crores in the corresponding quarter of the previous financial year. The company, on a stand-alone basis, recorded a net profit after tax of INR 37 crores for the quarter ended 31st December 2023 as against INR 62 crores in the previous quarter and INR 103 crores in the corresponding quarter of the previous financial year. The company is a long-term debt-free and having trading size of nearly INR 950 crore as on 31st December 2023. Now we take more questions from the participants, a detailed presentation has been uploaded on the company's website and on the stock page. Now we would like to address any questions or queries you have in your mind. Over to Navin.

[Operator]

[Operator Instructions] The first question is from the line of Pritesh from Lucky Investments.

[Pritesh Chheda, analyst]

Is there -- you mentioned the capacity utilization at 85% in 9 months. Can you give us the capacity utilization for quarter 3?

[Ravi Jhunjhunwala, executive]

Quarter 3 alone. It's more or less same, a couple of percentages plus/minus in the same region. We have been consistently running, let's say, at that level for the last few quarters.

[Pritesh Chheda, analyst]

So which means the volume growth in 9 month over 9 months is largely flat, right? It's a flat volume.

[Ravi Jhunjhunwala, executive]

See, if we -- you will see our volume growth compared between the 2 fiscals. So 9 months, yes, there has been a volume growth. And by the time we close the year, we believe that we would have sold about 10% to 12% more than last year. So you can take this figure of 10% to 12% for the 9 months.

[Pritesh Chheda, analyst]

Okay. And sir, on the spread side, so what we see is that there is a continuous spread reduction from quarter 1 to quarter 2 to quarter 3, when you said that the capacity utilization is largely similar. So if you could just share the spread in dollar terms, what should be the spread?

[Manish Gulati, executive]

Dollar terms will be very -- will become a very specific answer to be given in public domain. But if you just take our results, I think you can make a very good guess yourself about how our spreads have fared between the 3 quarters. They have been coming down that so -- that is what you see in our bottom line. And the main reason for that is, see, the needle prices have also been coming down. But actually, there's a lag effect, the electrodes take 2 months to make and [ needles ] take 5 months to make. So this -- when electrodes fall, it takes time to spread for the spread to adjust.

The consumption for needle coke is higher and the electrode prices are lower for that particular quarter. So that's what hurts. That's very unique to us just because of long process times.

[Pritesh Chheda, analyst]

And sir, my last question is, we're hearing about this electric arc furnace led capacity addition from your side and electric arc furnace led steel growth from your side for the last 5, 6 quarters now. So let's say, when you're giving the steel production number of [ 1,883,000,000 ] and saying it's flat. What is the electric production from electric arc furnace and the growth rate.

[Ravi Jhunjhunwala, executive]

You see as I gave you that figure in my short speech, it used to be 44% until about 5, 6 years ago minus China and -- which has gone up to about 50%. So in the international concept, 44% to 50% is like 15%, 17% increase, which is pretty substantial, if you look at the whole world. And in the next 3, 4 years, this is probably going to go beyond 55% to 58%. So which will be like from 45% to 57%, 58%, or close to 60% over a 6, 7, 8-year period.

[Pritesh Chheda, analyst]

Sir, I was asking about calendar year '23 what is the production growth from electric arc furnace. Is there any growth?

[Manish Gulati, executive]

I'll give color to that. You see the electric arc furnace steel will be about 430-odd MMD in rest of the world and add about 120 coming from China. 110 or 120 other than they will be late to coming with figures. So should we view to -- if your question is, how much of that 1,888 million metric tons is electrical arc furnace, my answer would be about [ 540 ] to [ 550 ].

[Pritesh Chheda, analyst]

And this [ 430 ] has it grown this year?

[Manish Gulati, executive]

See, [ 430 ], as you have seen in the figures, in the [indiscernible] position, we also mentioned in the call, it's absolutely stagnant for all regions. China did grow in the first half and dropped in the second half and then the rest of the world exactly at the same level. If you look at '22 figures, team figures and '23, they add up to almost exactly the same number with barring 1 million or 2 million tonnes in such a large base. So the steel production has been stagnant and thus, the electric arc furnace as a proportion of that has also been stagnant. Thank you.

[Operator]

The next question is from the line of Mihir Viaj from [ Nine Ways Equity Research ].

[Unknown Analyst]

I wanted to ask, can you give some color on potential revenue and margins from the anodes business?

[Ravi Jhunjhunwala, executive]

Riju, will you take that?

[Riju Jhunjhunwala, executive]

Yes. Yes. The potential see we are investing around INR 2,000 crores into this particular business and the investment to output ratio should be more or less 1 is to 1 or depending on the qualities around 1 is to 1.3. And as of today, as per our business plan, we are assuming a safe margin of around 25% to 30% EBITDA on this particular business going concern, as I mean, second year onwards, kind of, you can say. And the plant production should start around March or April of 2025.

[Unknown Analyst]

Okay. And one more question I wanted to ask, how much drop in EBITDA margin is expected due to the drop in demand and excess supply from China?

[Riju Jhunjhunwala, executive]

I mean India cannot produce -- if you're asking about the anode powder today, India does not produce any anode powder.

[Unknown Analyst]

I am asking about electrodes.

[Ravi Jhunjhunwala, executive]

Electrode, Manish will answer that, I think.

[Manish Gulati, executive]

Yes, sir. See, you're specifically asking about what is the impact going to be because of China. My answer to that would be that China predominantly makes and also exports the high-power grade, which is not the ultra high-power grade. They're not yet established as the main players are, we are trying. But we do not see that we do not relate this to in this way, that because of China, what is going to be the margin reduction. We don't look at it this way. We look at our segment in which we operate, where we are strong, that is ultra-high power grade, where the -- our Western producers are the main competitors in that segment.

[Unknown Analyst]

So I believe there won't be any reduction in capacity utilization for the same reasons.

[Ravi Jhunjhunwala, executive]

Sorry. Can you repeat? Can you repeat that question?

[Unknown Analyst]

I believe there will be capacity -- reduction in capacity utilization for the same reason, right?

[Ravi Jhunjhunwala, executive]

Still not clear. Your voice is cracking in between.

[Operator]

Mr. Viaj, may I request you to use your handset, please. Your voice is breaking. [indiscernible].

[Unknown Analyst]

So I was asking, I hope there won't be any reduction in the capacity utilization because of these reasons, right?

[Ravi Jhunjhunwala, executive]

At 85% all through the year, we are working at highest capacity utilization in all of the industry. And as we go to this '24, we'll be counting ourselves as 100,000 tonne capacity. So of course some 1 or 2 quarters just because we now base our utilization percentage of 1 lakh tonnes, you will see a little bit of reduction in that, but we'll climb up on that, and we are sure that within a matter of 1 to 2 years, we'll be -- within a matter of 1 year, we'll be back at 85% on 100,000 also. So if you compare some of our -- I mean, they have only 3 or 4 main competitors in the world. I mean if you exclude China's and as Manish rightly explained, we are not really competing with China in that segment.

So in this higher segment, there are only 3, 4 companies in the world. And if you are tracking them, it's all public information. At least one of them is operating at low 40s, 40%, 42%, 45% kind of utilization. The others are in the region of 60%, 65%. And we still believe that we are at 85%, which is probably the highest in the industry.

[Unknown Analyst]

And one more question. How is our arrangement with suppliers, contracts on a quarterly, half yearly or yearly basis?

[Ravi Jhunjhunwala, executive]

It's normally quarterly. In a declining market of electrodes and a declining market of raw materials, it is quarterly.

[Operator]

[Operator Instructions] The next question is from the line of Saurav Jain from Sunidhi Securities.

[Saurabh Jain, analyst]

My question is about graphite, anode facility. Recently, there has been articles that new article that says after Toyota, BMW has also said goodbye to electric cars. So what are your thoughts for our upcoming anode facility considering the huge CapEx we are doing. Also, there have been other articles saying that lithium and battery performance has reached a plateau in recent years. And using silicon instead of graphite enables a significantly higher energy density and faster charging. So that's why it's been focused by many OEMs, global OEMs like GM, Mercedes even Airbus.

So I know on the last call also, you had clarified that you don't seem threatened by this development. But this news has been quite persistent for last couple of quarters. And -- now it is a strong signal for after Toyota -- what BMW did last week. Yes, your thoughts, please.

[Ravi Jhunjhunwala, executive]

So there is -- I mean, you can -- and the new developments happening almost on a weekly basis, new kinds of technologies, new kind of things. But as far as the core goes, I think lithium-ion batteries are here to stay for the next 2 decades, at least 2 to 3 decades. And some kind of improvisation will keep happening, mixing of silicon, mixing of some other elements. But graphite, as the core conductor of this thing would not be the -- we do not foresee a big change in volume.

Again, like you have lithium-ion batteries, everyone's talking about sodium-ion batteries as far as the [ stationary ] well applications go. There also, I mean, we will be in a position to produce sodium-ion, the raw material for sodium-ion batteries as well. And in the next few years, I think lithium ion as the main infrastructure for moving batteries is not something that will -- that we at least seem to this thing about of being replaced by something else.

You keep seeing changes, you'll keep seeing whatever, but the infrastructure once made for lithium-ion in terms of charging, et cetera, et cetera, we do not see that thing changing. And plus the big plants of lithium-ion batteries that are coming up in India, they have already been announced and they have already been implemented, and they have more than 50,000 gigawatt-hours of facility that is coming up within India by established names like [indiscernible], Amara Raja, Reliance, Ola, et cetera, et cetera.

That itself means a graphite -- the powder consumption of around 50,000 tonnes, which will include stationary applications also. So I mean, this question will keep happening. I mean, every 1 month, some guy -- some new technologies will come. And [indiscernible] happening over there. And rest assured, there's a lot of innovation happening at our own end also how to keep pace with all these innovations so that we can keep trying to produce the raw material that will ultimately be required for these applications.

[Saurabh Jain, analyst]

Okay. That's helpful. Sir, my last question is, if you can point out some difference on your opinion on how come we are -- our utilization is around 85% while other players are running at 40% to 60%, 65%.

[Ravi Jhunjhunwala, executive]

We are more competitive. This is the relative performance, that's all I can say, competitive on cost, competitive in marketing, whatever. I mean, but that's true.

[Operator]

Next question is from the line of Rajesh Majumdar from B&K Securities.

[Rajesh Majumdar, analyst]

So I had a few questions. I just wanted to know, you mentioned about the world's largest producer operating at 40% utilization. It's common knowledge now. So is there any takeover opportunity for any M&A activity available within the space right now?

[Ravi Jhunjhunwala, executive]

I mean there are only 3, 4 players. I mean, there's nothing hidden in this industry. I mean, if you really study whatever is available, there are only 3, 4 players. So whatever will happen, if at all it happens, it has to be only between these 3, 4 and nothing else.

[Rajesh Majumdar, analyst]

Actually, let me ask this question the other way around. I mean now that the -- even at 40% utilization, the cash losses are above $1,000 for this player. So how is it likely to play out, either it shuts down or it gets acquired and then the prices start moving up? Or will the prices start moving up on its own? And related question to that is the prices start moving up again, is there enough capacity in the world today to absorb this -- the new demand? Because if the industry is operating at around 50% or 60% rate, then even if the demand grows in the next 2 or 3 quarters, then there's adequate capacity available to absorb this [ depot ] so we can put a cap on the price here?

[Ravi Jhunjhunwala, executive]

See, as far as your first question is concerned, I mean, obviously, nobody can talk about it in public domain. I mean, the second question, yes, you are right. I mean whatever is the overall capacity utilization, whether it is 40% or 70% or 80%, it will keep going up as the demand keeps growing. But just to clarify one point, which is very typical in our industry, it takes, as I said, between 2 to 2.5 months for the easiest electrode to produce, and it takes as long as 5 to 6 months, for something called nipples, which is a pin, which joins the 2 electrodes.

Although the weight is only 4%, but without that nipple, the electrodes are of no use. So that takes anywhere between 5 to 6 months depending on the size, quality and things like that. So given that the process is very long and not just long, but there are 4 or 5 different processes in which -- within which the electrode is produced. So even in the very peak demand or highest prices that this industry saw in 2017, '18, '19, the overall capacity utilization of each one of us combined or separately, I don't remember the exact number, but it would be -- it would not be more than 90% because it's not easy to run the entire plant with 5 different processes at more than 90%, 91%.

I mean something or the other in the large plant does break down, and that has an impact on the whole supply chain -- on the whole production chain. So given that, given the peculiar issues with regard to our industry, where you -- when let's say, 100% is the 90% and not 100%. So this is what it is. So the demand of electrode, I mean, if we are talking about 90 million tonnes, which is already 90 million tonnes of new electric [indiscernible] capacities, which are already announced. And it is -- a lot of this information is in public domain as to who is putting up, how -- what size of the plant. And -- but when are these plants going to be operational. The growth is going to be very large. I mean once this 90 is all established and operational, the increase in demand will be -- I mean, I'm just quoting somebody else, somebody else meaning one of our competitors. I mean, they are talking in terms of 200,000 tonnes. And this 90 million tonnes is not a fixed number.

I mean, as you can imagine, we track this part of the information very closely every month, every week. And this number keeps increasing. I mean, as late as 3, 4 weeks ago, this number used to be 84,000,000, 85,000,000 tonnes. So in the last 30 days itself, the revenue announcement of 5 million, 6 million tonnes. So it keeps increasing because this carbon emission and environment is here to stay. It is not going to go away anytime soon. And especially in America and Europe and other parts of the Western world, they are taking it extremely seriously. So basically, this is the answer to your inquiry.

[Rajesh Majumdar, analyst]

And my other question was regarding additional 20 kt. who is the supplier of needle coke for this? Because as I understand that there are a limited number of needle coke -- petroleum grade needle coke suppliers. And there is a big constraint in the graphite electrode space?

[Ravi Jhunjhunwala, executive]

So it's not a constraint. I mean there are 4 or 5 suppliers. But yes, I mean, the electrode industry, it gets back to 90%, 92%, 95% capacity utilization. Then the demand of needle coke and the capacity of needle coke and the demand of needle coke for the graphite industry will be more or less matching. It is -- there is still enough capacity to supply. I mean, there will be occasional mismatch where maybe 1 month, 2 months, 3 months somebody will be short of supplies. But at the current level of 80 million, 90 million tonnes of additional capacity of electric arc furnaces coming in, resulting into more demand of electrode, the supply of needle coke and demand of needle coke is more or less going to match.

[Rajesh Majumdar, analyst]

And if I can have a last question. Is there any capacity coming in needle coke anywhere in the world in research capacity?

[Ravi Jhunjhunwala, executive]

No, nothing. And I don't have that figure in mind, but probably the last needle coke plant would have been put about 45, 50 years ago. So it's like exactly like graphite. I mean we came into production in 1977. And today, we are in 2024 so close to 50 years, 47 years. There has not been any new Greenfield plant anywhere in the world. So it's exactly the same situation in needle coke. Probably I'm wrong when I'm saying 47, 50 years, I mean needle coke -- last needle coke plant would have been more than like 60, 65 years. In both the cases, it's all a question about technology.

[Operator]

The next question is from the line of Sahil Sanghvi from Monarch Networth Capital.

[Sahil Sanghvi, analyst]

So my question is more of about the supply demand dynamics. I mean while we -- on this call, we discussed that probably the world ex China demand for electrodes has not gone up or down much. And on the other side, world ex China, electrode manufacturers utilization has slightly reduced. So I just wanted to understand that why in that case, is the pressure so much on pricing. And is this because one of the reasons is the Chinese electrodes because I hear that some of the HP electrodes also can be blended along with the UHPs, so just if you can explain this a little bit in detail.

[Ravi Jhunjhunwala, executive]

I'll take the second part first. I mean it's not possible to replace UHP electrode by HP. I mean, because there's a difference in definition. I don't know what you mean by HP and UHP, these are very loosely used terms. But to answer specifically in a furnace, if you require a particular quality of electrode, which is, let's say, called UHC, you can't replace it by HP. It is -- basically, it's not a matter of that instead of 2 kilos per tonne of steel, you can use 3 kilos per tonne by switching from UHP to [ UFI ] HP. HP will just not work. It is not a question of 20%, 30%, 40% more consumption. So you need an electrode which will withstand the high temperatures in the UHP furnace. So that's the first answer. And what was the second question, if you just repeat that?

[Sahil Sanghvi, analyst]

Yes. So my question was that what is the primary reason for the pressure on the prices of electrodes because I mean, on one side, we are seeing that the demand for electrode world ex China has not grown or moved much. And on the other side, there has been these utilizations of few companies ex China, which has come down. So I mean, what's the real reason for the pricing pressure?

[Ravi Jhunjhunwala, executive]

I mean you're answering your own question. I mean obviously, there are 4 or 5 players in the industry. And whoever is more competitive will sell more. I mean we believe our quality is as good as anybody else. And we also believe that our cost structure is better than most of the others. So this is obvious.

[Operator]

The next question is from the line of Sandeep Majar from [ Majar Industries Limited ]. Yes.

[Unknown Analyst]

So basically, I am an investor. I have 2 questions. One, you said that you have already running at a capacity utilization of 85%. And now as I understand that we are ready with the additional expanded capacity of 20,000 tonnes. So that means, first, we'll be able to achieve 100% capacity utilization of existing capacity, then only we can, I think, go for the additional expanded capacity. So by then, we expect the additional capacity to be used? That is my first question.

The second question is regarding the new expansion you just mentioned that you have started construction for graphites, which are used by EV industry. So I just wanted to know by when we expect that expansion to be completed and commercial production in place. These are the 2 questions.

[Ravi Jhunjhunwala, executive]

Okay. I'll answer the second one, which is EV. I mean I already said in my opening remarks. We expect to be in production by, let's say, second half of 2025. So let's say, sometime in July, August, September.

And the first question about capacity utilization, so we can observe, it can be 1 to 2 years, it really depends. I mean it's very difficult, I mean, to pinpoint a month or a period when the demand will increase. It's an extremely difficult question. But the only thing which is very satisfying for us is that we are still operating at 75%, 80%, 85% utilization, which obviously indicates that our quality is acceptable. Our margins are better than most of the other players. So which obviously means that we have some competitive advantage and our quality is similar to what others are doing.

[Operator]

The next question is from the line of Vipraw Srivastava from Incred Research.

[Vipraw Srivastava, analyst]

Okay. Just had a question on Turkey. So based on the data as far as electrodes import in Turkey are concerned, China is a very big player in Turkey. So I wanted to understand what kind of electrodes does Turkey import from China, is it UHP, or would it pose a significant risk to our business? How do you look at that?

[Ravi Jhunjhunwala, executive]

See, most of the electrode, you will see -- the data which you are referring to, you will find that most of them are HP grade.

You will also see some qualities here and there of the ultra-high power grade because the furnaces are different, and there are very high power furnaces. There are no low power furnaces. So when you will yourself look at the data, you'll be able to figure out and in Turkey also, they might be doing a trial here and there. But all I can say is that if you look at the big steel companies, they're not at that level yet that they will be reliably given 30%, 40% of the business consistently year after year. Also that level is not there. Of course, we can make trial here and there.

[Vipraw Srivastava, analyst]

My second question was on the anode facility coming up. So just had 2 questions on that. First of all, about the technical expertise required for manufacturing of anodes. Do we have that technical capabilities? Or are you doing it to tie up with some other companies? How are we going about that?

[Rajesh Majumdar, analyst]

So in terms of the people listening, I mean, that consists of 6, 7 various processes, but the main process there also remains the graphitised

[indiscernible]. And in graphitised [indiscernible], we are talking more about the older type of furnaces that HEG does not almost use today, which are the adjacent furnaces, which are widely used for the anode applications. So there we already have a very good pool of resources in-house, which we are already deploying on the design and development phase also of the facility. The rest of the facilities are more or less machine-led, which do not require too much of manual intervention.

But yes, there's a lot of R&D required on which kind of raw materials to process. And so there's a lot of trial and error over there for which one needs work very closely with the customers that we are already doing with our pilot currently. So we already have a state of the art pilot plant that is fully producing around 10 tonnes per month, and that we've already started [ tampering ] with some large companies and trying to work along with them for their kind of requirements. So there is no technical tie-up with one particular company. But from time to time, we will be taking help from whichever technical resource required.

[Vipraw Srivastava, analyst]

And the other thing is for manufacturing of anodes, one significant cost is power cost, right? Because it's a very big component of anode manufacturing. So how will be the facility sourcing power for this anode facility.

[Manish Gulati, executive]

We've selected the state of Madhya Pradesh for this particular industry in which we are getting a lot of subsidies from the government. And one particular subsidy is around INR 0.50 reduction on the power cost for this particular facility. So the net cost of power to us should not be more than INR 5.50 for this facility when it comes up. And apart from that, obviously, the whole focus of the buyers in this particular industry, is how much of green electricity are you producing for which we are already in touch with a lot of solar and wind manufacturers to work closely along with us to have a kind of dedicated facility of 200 megawatts, 100 megawatts, that kind of a number in which we can do a buyback arrangement from them for electricity.

So that is still work in progress, but that will further bring the cost of power down for us, which we hope it will not be more than INR 4 or INR 5 at a weighted average cost of power. We have assumed around [ INR 5.56 ] in our business plan, but I'm quite sure by the time we work on it, we should be able to save on some power cost over there.

[Vipraw Srivastava, analyst]

Okay. Okay. Last question. So as far as Indian anode market is concerned, how do you see it developing? I mean, are there customers who are thinking of manufacturing batteries? And how -- because currently, a lot of these batteries are imported from China. So how do you see this landscape changing? How is the ecosystem developing as far as the anode manufacturing in India is concerned?

[Manish Gulati, executive]

So the Indian battery, we are [indiscernible], you must have already read around 50 gigawatt hour of lithium-ion battery manufacturing has already been signed up by the government. They've increased this by 10 megawatts, 10 gigawatt hour more. So there is a lot of scope for anode production over there. And apart from us, Himadri and some other 2 more players. No one has announced a very, very serious kind of capacities for the lithium-ion batteries so far. So we see ourselves, as you know, I mean HEG has to be the leader in this as far as the timing goes, and that's what Chairman also mentioned when he said that we will start commercial production by the second half of 2025.

[Operator]

Thank you very much. Ladies and gentlemen, that was the last question in the queue. As there are no further questions, I would now like to hand the conference over to Mr. Jhunjhunwala for closing remarks. Over to you, sir.

[Ravi Jhunjhunwala, executive]

Thank you, friends, for asking some very confident and very pointed questions. I'm grateful to you for your interest in our company, and I will continue to engage with you on a quarterly basis and hopefully with some better results, with some better numbers. Thank you very much for that and see you again after about 3 months.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of SKP Securities Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.