See growth in second quarter of FY16: HEG

Reema: It looks like a weak set of earnings top down. Your revenues have declined by 40 percent, your margins are under pressure and even the profits have collapsed now in single digits in Rs 4 crore. What was the reason for this weak performance and will the performance improve in the coming two quarters?

A: What you are seeing is factually right. The turnover is down, the profit is down and this is not specific to HEG. The entire industry is affected by weak demand position. We are linked to steel industry and steel is running under capacity for quite sometime. We are also running low capacity and that is the prime reason of our profitability lower from last year.

The other major reason is that the sale prices are under pressure continuously quarter after quarter for graphite electrode, which is affecting our bottomline in a big way. For the coming two quarters, since we are carrying inventories and our manufacturing cycle is a long three month cycle, we will be affected by inventories that we are carrying.

Our first quarter result may not be as good as anticipated but from effective Q2, we will come back to normal stream as our raw material prices settle for next year. It will take care of the reduced sale prices. Our margins are going to be better effective Q2 onwards of FY16.

Latha: That is a very candid admission of the situation, but can you give us a little more colour when you say that things are a little under the weather. What has been your capacity utilisation and what might it be in the current quarter?

A: The capacity for the entire year including the last quarter of 2015 financial year is around 70 percent and we hope to go into 75 category in the coming year.

Latha: Is it already visible? You had a little bit of help with the rupee depreciating slightly. Is that helping at all?

A: Absolutely, in fact, you are bang on. The rupee depreciation is helping us because the imports are becoming costly. The other major impacts that will benefit us in the coming year is the position of anti-dumping duty the Government of India on import of graphite electrodes into the country, which is ranging from as low as USD 222 to as high as USD 900 per tonne. We are seeing an opportunity for us for capturing this import market from China, which is almost like 13,000 tonnes a year.

Latha: What would you like the rupee to be; the dollar to cost? You can always ask for 75 or 100/USD. Pragmatically, would a 65/USD suffice?

A: Not to overstate the number, but 65/USD looks quite optimistic and we are fine with it.

Reema: You said Q1 will be impacted because of the inventory that you are carrying. What is the value of this inventory and what will be the extent of write-down? How much have the prices come down by?

A: Inventory is mainly the in-process inventory that we have. Our manufacturing cycle itself is from two months to three months; from raw material to finished product. This entire three months inventory is what we are carrying at the previous prices. The drop in prices in raw materials is in excess of 30 percent.

Reema: Would you have to lower the prices of your output as well?

A: You carry some order book which is pre-booked prior to December. You would be supplying those inventories, those orders at reduced prices and the fresh orders are getting booked at lower prices.