Vardhman Special Steels Limited (VSSL) Q1 FY23 Earnings Concall Transcript

Vardhman Special Steels Limited (NSE:VSSL) Q1 2023 Earnings Concall dated Jul. 26, 2022

Corporate Participants:

Sachit Jain — Vice-Chairman and Managing Director

Sanjeev Singla — Chief Financial Officer

Analysts:

Shreya Manivannan — IIFL Securities Limited — Analyst

Umesh Gupta — Individual Investor — Analyst

Rithwik Sheth — One Up Finance — Analyst

Devang Shah — Retail Investor — Analyst

Anil Kumar Sharma — Individual Investor — Analyst

Roshan — RS Capital Service — Analyst

UdhayaPrakash — Value Research India Private Limited — Analyst

Rohan Mehta — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Vardhman Special Steels Limited Q1 FY 2023 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions]

I now hand the conference over to Ms. Shreya M. from IIFL Securities. Thank you and over to you, ma’am.

Shreya Manivannan — IIFL Securities Limited — Analyst

Thank you, Inder [Phonetic]. Good afternoon, everyone. On behalf of IIFL Securities, I welcome you all to the earnings conference call for the Q1 FY 2023 for Vardhman Special Steels Limited. We’re pleased to have with us Mr. Sachit Jain, Vice Chairman and Managing Director; and Mr. Sanjeev Singla, CFO. We will have the opening remarks from the management, followed by a question-and-answer session.

Thank you, and over to you, sir.

Sachit Jain — Vice-Chairman and Managing Director

Shreya, thank you. Ladies and gentlemen, welcome to our earnings call. With me are new ED of the company, Mr. R.K. Rewari; our CFO, Sanjeev Singla, our company’s Secretary, Sonam. We also have with us our — one of our new Board members, Shumone Chatterjee, who is joining the call. He is based in Gurgaon. And my daughter Soumya is also on the call. So a lot of us from the company side.

And as before, we will start with a few comments in the beginning. But, as you know, most of — the large part of our con-call is mostly questions raised by you that we will answer.

But let me share with you that we had a very special quarter, which just went by. Why is it special? In many ways. The most important way in which I would say the special is, we have really strengthened our company board.

So we have four new board members. Mr. Rewari already talked about, who is a new ED. He joined us as a Chief Executive in February and now made ED in the company. He has about 40-year experience and 30 years of that is with our group. And I’ve worked with him very closely when I began my career, in setting up our Baddi operations in Vardhman Textiles.

We have three other directors that I’d like you to introduce you to. One is Ito-san from Aichi who — for the Steel Division. Ishigami-san, the earlier president of the Steel Division has retired. And Ito-san has come in his place. And Ito-san is a steel man, but he also has deep forging experience, and he was Head of — MD — President of Shanghai Forging. So he has got forging experience, as well as China experience, and he’ll be a very good addition to the Board.

And two new independent directors. Mr. Shumone Chatterjee, who’s on this call. He is an IIM-Ahmedabad graduate of 89. He started with levers, became the MD of Levi’s India and was the MD of SC Johnson India and the Chief Revenue Officer of Lenskart, now he’s an independent consultant, and he happens to be a batch mate of mine. That is aside. But he’s core expertise is marketing, of course, general management after that.

The other board member who’s joined us is Mrs. Divya Shah. She is from the Edelweiss Group. She — her carrier is finance. She’s also an MBA from Ahmedabad. Same batch as our’s, 89 batch. ICICI, investment banking and few investment banks and then, of course, Edelweiss since it was founded. She was the CFO of Edelweiss. And now she is the Head of the Edelweiss Foundation. So, she — her expertise is finance as well as CSR of NGOs and so on. So that — she’s going to be chairing our CSR committee in addition to being a Board member.

So, with the addition of these Board members introduction, let me also share why else this quarter was special. We have had record production, record sales. For the first time, we crossed 50,000 tons, actually 52,000 tonnes of sales. We had record profits after tax, of course, aided by Bharat — we moved to the newer tax regimen of 25%. So that is the main reason why we got record profits.

But within the quarter, we have had it — within the quarter, in one particular month, we have hit 19,000 tonnes of sales. So, this shows that the company’s ability to sell and of course, production has kept matched to that record production in our SMS, in our rolling as well as [Indecipherable]. So, all around, the company has functioned well. So, I wanted to thank my colleagues who are — very few of them are here, but Mr. Rewari, as the Head of all our operational team is here, so on your behalf — I mean he is here on behalf of the team. These are the main reasons why it was special.

If you recall, some of you were there in the earlier call. In the previous call, I said there is, this year is totally unpredictable. We have no way of giving any forecast. So, I said for this year, all forecasts are out. Volatility was crazy. Ingot prices range from 38,000 at the low to 63,000 in the mid, came down to 42,000, went back to 52,000. So there was no way of predicting when to buy, when not to buy, when to stop, when to hold. So, it is an absolutely crazy quarter. I have never seen something like this in my 30-year career.

And when the price negotiates, the OEs happened, we have got price increases from most of the OEs. Some of the OEs are still not settled, but most of them have settled. So INR9,000 is the common increase, most of the OEs have given for this quarter, our expectation was higher. We were expecting between 12,000 to 15,000 and we deserve that. We deserve 15, we’re expecting 12,000 to 15,000. The OEs haven’t given that because the sentiment of the steel industry changed on the 21st of May, when the government changed the rules of doing business of steel in the country by imposing a 15% export tax on steel.

Now this tax that we understand is temporary, how temporary it is, still when it is, we don’t know. But for the moment, it disrupted the steel pricing, change the sentiment drastically as steel prices crashed and therefore, the OEs could manage by giving us a lesser increase and was perhaps due to us.

In addition to Q1, we have also settled Q2 for most of the OEs, so there has been a price reduction of INR4,000 per tonne for Q2. Of course, the raw material prices have also come down in Q2, so a reduction was warranted, perhaps not to the extent that the OEs have managed to get away with.

So this is the overall scenario. Our EBITDA per tonne is within the INR7,000 to INR10,000 range that we set at that normal range. It is lower than Q1 of last year, which was over 12,000. And this year, it’s about INR9,800 or something, so around that figure. So it is within that range. And we do believe that despite the uncertainties going on continuing, because the fluctuations of raw materials continue, and the lesser than what we deserve increase, we will still be able to maintain our EBITDA per tonne for the full year between the range of INR7,000 to INR10,000.

Demand continues to be robust. Cars are strong, motorcycles are medium, so are tractors and commercial vehicles. But really, cars are strong. So overall, on that front also, we believe that we would like to up our target of — earlier we had announced that last year, 173,000 tonnes, this 80,000 tonnes, but we believe now we would like to target 190,000 tonnes, maybe 195,000. But let’s say, 190,000 tonnes with hopefully an upward bias from that, but that is what we’ll be targeting for this year.

So these are the overall update, a specific positive event I want to share that, as you are aware that you’re looking at environmental approvals for our expansion of the existing plant, we got the central environment approval. We needed the consent to operate from Punjab Pollution Control Board. I’m happy to share with you that that has also been received by the company, and which means, of course, subject to our fulfilling all the conditions, which, in our opinion will be done by the end of December this year, maybe even earlier than that, but by December surely all the conditions we’ve made. So the point is, it is not on our hand, it is not in governmental bodies hand to get the approval.

These are the general opening remarks at this stage. And we’ll wait for your questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Umesh Gupta [Phonetic], Individual Investor. Please go ahead.

Sanjeev Singla — Chief Financial Officer

Yeah, Umesh, go ahead please.

Umesh Gupta — Individual Investor — Analyst

It’s a very good set of numbers. Congratulations for that.

Sanjeev Singla — Chief Financial Officer

Thank you.

Umesh Gupta — Individual Investor — Analyst

My first question is, sir, EBITDA…

Sanjeev Singla — Chief Financial Officer

Umesh, your voice is muffled a bit. So can you speak a little slowly that I can hear it clearly?

Umesh Gupta — Individual Investor — Analyst

Okay. Now is it okay sir?

Sanjeev Singla — Chief Financial Officer

It is better, yeah.

Umesh Gupta — Individual Investor — Analyst

So our EBITDA guidance is INR7,000 to INR10,000 per tonne. So my question, sir, why is there such a wide range in guidance? Like from the bottom end to the top end, there is a difference of 40%. Why I’m asking this is, I mean, there is a company is structured [Indecipherable] and their also EBITDA guidance through per tonne only, but that is a difference only of 10% and their raw material is also [Indecipherable]? So this is my first question.

Sanjeev Singla — Chief Financial Officer

Okay. So maybe they have a better grip on their company operations, and they can predict exactly what numbers will come. We maybe don’t have that strong in operation that we can’t predict exactly. There are so many variables out there, so many fluctuations happen. There’s a price negotiation which happens. There is not a mathematical formula that the cost goes up and automatically the price will increase by that much.

So there’s a demand scenario. There’s a government uncertainty, which comes in. For example, the sudden government policy, which came in has suddenly shifted the price increase that we were going to get dramatically, which has changed the EBITDA that we would have got for Q1 and then for Q2 also because the reduction would have paced — would have happened on a higher base. So there are so many unpredictable out there that it is difficult to predict now.

Another company may be in a pure conversion business, where it is possible for them to predict exactly, and they have set formulas with which prices change. So I cannot comment on another company, but in our company, there are too many variables. So this is why the range will be there.

Umesh Gupta — Individual Investor — Analyst

Okay. And sir, my second question is on — I mean, in this quarter, we have got a 42% increase in our revenues. In that 42% increase, 2% is on account of the value-added results. So I mean, what kind of reps are — is this like 2% going to increase in next quarters or in next year and in the long term?

Sanjeev Singla — Chief Financial Officer

Yes. So in the next three years, this 2% is going to become — and 2% is not total is a shift. So the increase in margin because we already have a lot of value-added products. But 2% is the — is a shift in the increase in the turnover because of the value-added products. So please don’t think it’s just 2% of the entire company sale.

But to share with you that we have already said in public, and said it several times, Aichi business, our partners for some of you joining the call for the first time, Aichi Steel Corporation of Japan, which is part of Toyota Group is our JV partners. And they expect to source between 30,000 tonnes to 50,000 tonnes per year in three years’ time. So maybe 2024, 2025 or 2025, maybe a spillover. But by 2025, 2026, we expect — I think 2024 – 2025, we should get between 30,000 tonnes to 50,000 tonnes will be sourced bAichi itself.

In addition to Aichi, there are other Japanese OEs that are approaching us and other Tier one suppliers of Japanese OEs that are approaching us independently because they know with Aichi coming in, our costs are going to become much stronger. So those, kind of, inquiries coming in, we see this figure of 30,000 tonnes to 50,000 tonnes, in my opinion will actually cross 50,000 tonnes as a total.

So — and today, as of now, the payers are miniscule. So a big chunk is going to happen in the next three years starting this year itself. So starting already approvals from Toyota has started coming. So already marked manufacturing for some parts has begun. The every quarter, we’ll have more products coming online. So the mass manufacturing of Toyota products is going to be increasing every quarter.

Umesh Gupta — Individual Investor — Analyst

Okay. Sir, that’s it for myself. I’ll again join. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Rithwik Sheth from One Up Finance. Please go ahead.

Rithwik Sheth — One Up Finance — Analyst

Yeah. Hi. Good afternoon, everybody. And sir, congratulations on a great set of numbers.

Sachit Jain — Vice-Chairman and Managing Director

Thank you.

Rithwik Sheth — One Up Finance — Analyst

Sir, I had a few questions. Firstly, what would be the production for Q1 FY 2023?

Sachit Jain — Vice-Chairman and Managing Director

Let me share the numbers.

Sanjeev Singla — Chief Financial Officer

Its 54,000 tonnes of billet production, and about 47,000 tonnes of rolled production.

Rithwik Sheth — One Up Finance — Analyst

Okay. Okay. So then I would assume that we would have sold 5,000-odd from our inventory, and that means our inventory, which had increased in — at the end of March —

Sachit Jain — Vice-Chairman and Managing Director

You are right, partly it is from the inventory and partly it is from outside rolling.

Rithwik Sheth — One Up Finance — Analyst

Okay. From outside rolling also. Okay Okay. And sir, sir, —

Sanjeev Singla — Chief Financial Officer

So we seem to be cut off — are we cut off? Or is he cut-off?

Rithwik Sheth — One Up Finance — Analyst

Can I hear you?

Operator

No, sir, you’re audible.

Rithwik Sheth — One Up Finance — Analyst

Sir, we can hear you.

Sanjeev Singla — Chief Financial Officer

Oh, questioner is got cut off, then okay. So yes, to answer this question, yes, inventory levels have come down partly. So sales are partly from inventory and you also do outside rolling for certain products. So partly has come from that.

Rithwik Sheth — One Up Finance — Analyst

Sir, connected question to this is what will be the net debt after June — at the end of June 2022?

Sanjeev Singla — Chief Financial Officer

It’s 180 crores.

Rithwik Sheth — One Up Finance — Analyst

180 crores. Okay. Sure.

Sanjeev Singla — Chief Financial Officer

And to share with you the current net debt is higher than what it should be — the reason for that is because we had higher price inventory, which is getting eaten up because raw material was higher in Q1. Second, the price increases for the OEs happened in July.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

So the 9,000 rupees is a big chunk and the invoicing of that has begun to happen now.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

And therefore, those amounts are lying is outstanding. So roughly over INR30 crores is extra outstanding just because of the price increase.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

And therefore, the debt is higher because of that — to that extent. So you will see these numbers normalizing by Q2. So Q1, actually, we have a net negative cash flow despite having high — I mean, record profits — the cash flow is negative for Q1. But Q2 — by end of Q2, we would be back to normal levels. End of the year, our net debt levels will be below 100 crores.

Rithwik Sheth — One Up Finance — Analyst

Right, right. As inventory — okay. Sure. Got it. Okay. Sir and you mentioned that we have received the final regulatory clearance from the Punjab Pollution Control Board. So, should we assume that our brownfield expansion is on track and should be completed by Q4 FY ’23?

Sanjeev Singla — Chief Financial Officer

No, no, no, no. See, there are several parts with this brownfield expansion. One part is the furnest part increasing the production of the melting.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

So that part is completed.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

Second part of the environmental parts, which we said will get completed by December.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

Third part is rolling mill, right? That will be — that will take some more time.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

And then fourth part is some addition to the rolling mill, which will increase our production, further improve quality and so on. That will take still further time. And then there is the quality, the entity, the nondestructive testing line which is still is a big chunk of investment, which will also take something like two years, 1.5 to two years from now. So there are several parts to it. The point is capacity now is no longer a constraint for sales for the next two years.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

So as the market demand picks up, we have the ability to service the market through our internal sources and through a bit of outsourcing.

Rithwik Sheth — One Up Finance — Analyst

Okay. Okay. So if there’s demand earlier, our capacity expansion was to be completed by Q4 FY ’23, which would have been the…

Sanjeev Singla — Chief Financial Officer

I never said that. We’ve always said the melting will be done first. The rolling will take a little longer. And the rolling has got delayed because as you are aware that because of this global supply chain issues, the supply from all equipment manufacturers has got delayed.

Rithwik Sheth — One Up Finance — Analyst

Okay.

Sanjeev Singla — Chief Financial Officer

So for that reason, otherwise, you are right that by end of this year, we were expecting our rolling mill expansion to also have got completed. It’ll take one year more. But we have been able to improve our productivity of our rolling mill. So the rolling — I mean, what I’m saying very clearly is, capacity is no longer a constraint for sales.

Rithwik Sheth — One Up Finance — Analyst

Okay. Okay. So if there is a demand of say about 30,000 to 40,000 tonnes in the market, then we will be able to…

Sanjeev Singla — Chief Financial Officer

Next year we will be able to match to 20,000 to 30,000 tonnes — 30,000 to 40,000 if the demand happens at, we will be able to meet that demand. I’m not expecting that kind of demand. So let’s not — let someone get a wrong impression.

Rithwik Sheth — One Up Finance — Analyst

Right, right, right. So that will be from debottlenecking and some rolling outside as well, right?

Sanjeev Singla — Chief Financial Officer

And sometimes we buy billets from outside. So we’re able to do all those things sometimes to meet servicing requirements and so on.

Rithwik Sheth — One Up Finance — Analyst

Okay. Okay. And sir, in last couple of calls, you’ve mentioned that, there could be some update on the greenfield capex, you are expecting ICE representatives to come to India. And so would you like to highlight anything on this or…

Sanjeev Singla — Chief Financial Officer

Things are still being discussed. So, I’m afraid nothing is going to be announced very soon. The good part of Japanese is they are very thorough in the work that they do. So whatever ramp it is decided, everything is decided together, will come up as an absolutely world-class plant, so…

Rithwik Sheth — One Up Finance — Analyst

Okay. And sir, just one…

Sanjeev Singla — Chief Financial Officer

No update as of now. But the fact is everyone in IT understand that we will have a capacity problem in 2024, 2025.

Rithwik Sheth — One Up Finance — Analyst

Sure. Point taken. And sir, just last point, you mentioned that scrap prices were very volatile in Q1 FY 2023. So have they stabilized now? And with this increase and then subsequent decrease in prices, you think that any fluctuation has been taken care of?

Sanjeev Singla — Chief Financial Officer

You see, I am not a suit there. I cannot forecast where commodities will move. The best of world experts fail in predicting commodity movements. So I will not even try to venture in that area.

Rithwik Sheth — One Up Finance — Analyst

All right, sir. Okay. Okay, sir. Thank you and all best, sir.

Sanjeev Singla — Chief Financial Officer

But just for the information of everybody out here, since we do not have very high stocks of raw material, normally, we don’t. So we take raw material based on the market prices of that particular point. Once in a while, when we see a massive arbitrage, as we saw last year, then we stocked up heavily on local raw materials. But those kind of opportunities will come once in a while when it’s a clear arbitrage from trends that you see. And we did that, we took advantage of that.

So really for graphite electrodes, we saw at the level of graphite and network prices that were available, we stocked up for one year on graphite electrodes. So that was a big call I took — increase our inventory, but also gave us benefit as a company in terms of lower graphite electrode prices than the market prices. So once in a while, we will take that kind of call, but that is not the way we do business. And its clear arbitrage is visible only then we do it. Because we do not want to speculate on prices of raw material.

Rithwik Sheth — One Up Finance — Analyst

Sure, sure. So that’s helpful. Thank you.

Operator

[Operator Instructions] The next question is from the line of Devang Shah [Phonetic] a Retail Investor. Please go ahead.

Devang Shah — Retail Investor — Analyst

Yes. Hi, sir. Good afternoon, first of all. It’s the first time I am also tracking the company. So that would be — Is it possible to speak in Hindi, that would be okay for you.

Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

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Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

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Devang Shah — Retail Investor — Analyst

But sir, debt would also take three to six months?

Sanjeev Singla — Chief Financial Officer

No, No.

Devang Shah — Retail Investor — Analyst

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Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

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Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

Okay. So but that is going to come after 2025?

Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

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Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

Okay. So from next year. So that would be how much of proportionate ratio of the sales?

Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

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Sanjeev Singla — Chief Financial Officer

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Sanjeev Singla — Chief Financial Officer

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Devang Shah — Retail Investor — Analyst

Okay. Okay, sir.

Sanjeev Singla — Chief Financial Officer

Thank you.

Devang Shah — Retail Investor — Analyst

Thank you. Thank you for taking the questions.

Operator

Thank you. The next question is from the line of Anil Kumar Sharma [Phonetic], Individual Investor. Please go ahead.

Anil Kumar Sharma — Individual Investor — Analyst

Good afternoon, sir. And congrats for the great numbers again. Sir, my question is, as you said, they have give the — OEMs give increase on industry-wide level. So, there are three — as you said, there are three competitors, mainly. But for example, Sunflag, their process is different. They are not using electrographite. So, are they in a better position or we are in a better position in this scenario?

Sanjeev Singla — Chief Financial Officer

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Anil Kumar Sharma — Individual Investor — Analyst

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Sanjeev Singla — Chief Financial Officer

[Foreign Speech] So, as this environment consciousness improves, you will see that Vardhman Special Steels is the biggest benefit of environment consciousness, because we use a recycle process Electric Arc Furnace. Our impact on the environment is the lowest.

Anil Kumar Sharma — Individual Investor — Analyst

Right, sir. And my best wishes for your great numbers. You are doing great efforts for that. [Foreign Speech] very good act from [Indecipherable].

Sanjeev Singla — Chief Financial Officer

Thanks, Anil Kumar.

Operator

Thank you. The next question is from the line of Roshan [Phonetic] from RS Capital Service. Please go ahead.

Roshan — RS Capital Service — Analyst

Hello.

Operator

Go ahead.

Sanjeev Singla — Chief Financial Officer

Yes. Please go head.

Roshan — RS Capital Service — Analyst

Yeah. Hi, sir. So, actually I’m first time joining. I’m just trying to understand, sir, your vision. I was just going through presentation, like — as turn the — car is transitioning from gasoline to hybrid to EV, and we are — transitioning towards more specialty products for EV. So, from a three to five year perspective how does the pricing power with the OEMs change? And also in the terms of volumes, as you said, more and more export will come into the picture, so you will have more steady business going forward? Sir, could you please explain me as such?

Sanjeev Singla — Chief Financial Officer

So first of all, this is your assumption that is a logical change to EVs. That is your assumption.

Roshan — RS Capital Service — Analyst

There is a presentation that the industry will shift — one of the slide does —

Sanjeev Singla — Chief Financial Officer

People are saying — people have things to put in the presumption, but this is an assumption, and this assumption could actually may not play out in the next 10 years. May not. We don’t know. Okay. So, we are preparing ourselves for both the worlds. We are preparing ourselves for the world in which EV is going to be the dominant player. We don’t think that is the — we don’t believe that, that is a scenario. But if that is a scenario, we have to be ready for that. So, we are preparing for EV and currently, about 6% of our business last year was sales to EV. And going ahead, we will be increasing our percentage towards EVs because we are ready with those products.

Roshan — RS Capital Service — Analyst

Okay.

Sachit Jain — Vice-Chairman and Managing Director

Second, the negotiation power, please understand we’re talking to global OEs. As a small steel company, there is no negotiating power that we have with these companies. So, even to think that you can have a negotiating power with these global OEs is a misconception. So, we don’t venture on that area. If we had a negotiating power, would we say we’ll be with the INR7,000 to INR10,000 range in EBITDA per tonne, you would say will be INR20,000 EBITDA per tonne.

Okay? And — so our belief is that gasoline engine will stay for a longer time than most people think. We also believe that hybrid cars is the way forward for the environment. And actually, the more and more studies are coming out that EVs — actually the carbon footprint of an EV over the lifetime of the car is higher than that of even a diesel engine. Yes. So, it’s a shocking thing, but I just came across the study. So, I’m not — this is not my view. This is a study which has come out in a reputed journal. So, I’m just sharing that that there are enough counterviews coming in now — more and more contributes coming in that EV is not the way for the future — from the environment point of view, it’s a better car to drive, somebody who wants to use it. It’s — somebody has driven a Tesla, it’s an excellent car and so on.

But when the subsidies get withdrawn from this industry — highly subsidized. And where is the actually grid, where is the power. So, all those are questions that have to come in. Anyway, this is not my area of expertise, but I’m just saying that EVs may or may not be the future for the next 10 years, beyond 10 years, who knows. And I’m not saying they will not be, I’m just saying that questions have started coming up that it may not be as attractive as people are thinking it to be.

Roshan — RS Capital Service — Analyst

Correct.

Sachit Jain — Vice-Chairman and Managing Director

That’s what I’m seeing.

Roshan — RS Capital Service — Analyst

In terms of [Technical Issues] you said you would be targeting for Japanese OEs and growing — so with most of the capacity will be towards fulfilling that going forward? Then given the — export going forward?

Sachit Jain — Vice-Chairman and Managing Director

So, let me say that we are not particularly oriented towards Japanese, but if you look at the Indian market, it is dominated by Japanese companies. It is Maruti, Toyota, Honda, Nissan, four Japanese OEs. If you look at motorcycles also, Hero is originally from the Japanese — from the Hero Honda technology. So, it’s a Honda technology-based material. So, is Honda, so is Yamaha, so is TVS. So it is just that those — India is a market dominant by Japanese.

There’s of course Hyundai. There is Tata and in addition, Southeast Asia also, largely, it is the Japanese-oriented. So, keeping these two scenarios in mind, I think that is why we searched for a Japanese partner. We were lucky. We got IT as our partners. And so we have catered to the Japanese, but that is what the market is. If the market was — let’s say, if Indian market was dominated by Volkswagen and Peugeot and Renault, and if that was a nomination, we would have probably look for a German partner.

Roshan — RS Capital Service — Analyst

And sir, you just mentioned that Mukand is your competitor now they have some tie-up with Sumitomo?

Sachit Jain — Vice-Chairman and Managing Director

Sir, they were always a competitor. They now they’re Kaabe. Mukand is number one in this industry, okay. So they are the — they set the industry benchmark.

Roshan — RS Capital Service — Analyst

Okay, okay.

Sachit Jain — Vice-Chairman and Managing Director

So they haven’t become a competitor now. They were always the competitor, and they are the market leaders.

Roshan — RS Capital Service — Analyst

And so post this time they become even more better enough because they have tie-up with Sumitomo?

Sachit Jain — Vice-Chairman and Managing Director

Not necessarily. Not necessarily, because Sumitomo is not a steel company.

Roshan — RS Capital Service — Analyst

Yeah, yeah.

Sachit Jain — Vice-Chairman and Managing Director

Sumitomo is a trading company.Sumitomo is a trading company.

Roshan — RS Capital Service — Analyst

Okay. Okay. Thank you.

Sachit Jain — Vice-Chairman and Managing Director

If my view you want out here amongst all the special steel companies, our alliance with Aichi is the strongest alliance because Aichi is acknowledged in Japan as the best automotive steel maker. The tie-up is with a steel maker, — with the — with an automotive steel maker and which is acknowledged as the best automotive steel manufacturer in Japan and probably the world. So going forward, I don’t think any other company will be able to stand up to us and the full advantage of Aichi technology comes to us.

Roshan — RS Capital Service — Analyst

Okay. Okay. Thank you so much. All the best.

Operator

Thank you. [Operator Instructions] The next question is from the line of UdhayaPrakash from Value Research India Private Limited.

UdhayaPrakash — Value Research India Private Limited — Analyst

Hi, sir. Thank you [Indecipherable].

Sachit Jain — Vice-Chairman and Managing Director

Thank you, Uday.

UdhayaPrakash — Value Research India Private Limited — Analyst

I have a couple of questions. I just have a couple of questions.

Sachit Jain — Vice-Chairman and Managing Director

Your voice is muffled Uday, I can’t tell you clearly.

UdhayaPrakash — Value Research India Private Limited — Analyst

Yes, can you hear me now?

Sachit Jain — Vice-Chairman and Managing Director

Yes, much better. Thank you.

UdhayaPrakash — Value Research India Private Limited — Analyst

In the last quarter.

Operator

I am sorry to interrupt you. Sir, there is a slide disturbance. One moment, sorry to interrupt you. There is a slight disturbance. Participants please stay connected while reaching the management line back to the call. Ladies and gentlemen, thank you for your patients we have the line for the management reconnected. Sir, please go ahead. Uday, can I request you to repeat your question from the beginning.

UdhayaPrakash — Value Research India Private Limited — Analyst

Yes. Sir, in the last quarter management have stated that in May sample orders of Aichi’s are coming. So have we received any response on that maybe on quality or something? And are we still sitting to the plan of commencing production in FY ’24?

Sachit Jain — Vice-Chairman and Managing Director

Yeah. So, Uday, the process of trial orders has — is continuous and regular production has also started. So because there are so many parts for, which the steel is growing and so many steels that are getting approved. So every quarter, we are receiving approval of one or the other steel quality. And then prior order for that is going on. And for the ones where the trial orders have gone earlier, the manufacturing order started coming in, production orders started. So the process is in full flow.

UdhayaPrakash — Value Research India Private Limited — Analyst

Okay, sir. My second question is, you have stated that many other OEMs other than your product are also inquiring. Are we having any further discussions with any of them with the potential to covert them into sales, or are they just in the environment…?

Sachit Jain — Vice-Chairman and Managing Director

So these are in the serious discussions. So Yamaha very clearly is coming in. There are a few others that are, I think, for Yamaha is an existing customer, but thanks to IT support being there, now they’re looking at us for global operations. There are a few other OEs, which are being discussed. And thankfully, IT is using their offices for each of these OEs also, which is in addition to their business. We’re getting the support of IT fully in all, because all the Japanese OEs are contacting them straight.

UdhayaPrakash — Value Research India Private Limited — Analyst

Okay. So my third question is, price increase from OEMs that received are at INR9,000, and then you stated that there was a price reduction also of INR4,000 per annum in Q2. So what is the effect, sir, can you please make it clear, when does the INR4,000 reduction will have an effect in our revenue?

Sanjeev Singla — Chief Financial Officer

Yeah. So let’s say, only one OE has not yet given the price increase of Q1, which is Tata Motors, okay? So there’s only one OE that has not given the increase. Of course, in our portfolio, it’s a very small amount, so it really doesn’t matter too much. But, yes, so all other OEs have settled Q1. In Q2, the costs have gone down and the market sentiment of steel has gone down for both reasons, the steel– the auto OEs have reduced prices.

So from 1st of July, that is Q2, all invoicing will be at a lower price. So the OEs have agreed on a INR4,000 reduction, so a INR9,000 increase, if you look at March prices, Q1 is a $9,000 increase for most of the OEs, and Q2 is a INR4,000 reduction from that, which means still a INR5,000 increase from March prices. This is for most of the OEs. But one of the OEs has not yet agreed on Q2, though have agreed on Q1. And Tata, they’ve not even increased on — agreed on Q1. There’s no question of agreeing on Q2.

So there is some things still pending. But most of the OEs have settled for Q2 also. So we have a reasonable handle, not a complete handle, but a reasonable handle at least on the profitability of Q2. Now since Tata has not given any price increase in Q1, sorry, it’s not been settled so far. So we have not taken impact of any increase, which was given by Tata, if they give any increase in Q1, those — that will be added to Q2 numbers.

UdhayaPrakash — Value Research India Private Limited — Analyst

Okay sir. So sir, how long would it take actually for us to reflect this reduction or increase? Would it take a month, please understood the effect?

Sachit Jain — Vice-Chairman and Managing Director

No, no. The — it is put into effect within a couple of days because once the OE increases, then the next process is then they get internal approvals and then the paper work gets done, then they send it to us, then they send it to their Tier one, with the whole process takes about 15 days or so, roughly.

Sanjeev Singla — Chief Financial Officer

Yes. Roughly.

UdhayaPrakash — Value Research India Private Limited — Analyst

Right now, the prices are fluctuating highly. So if the prices increased once again next quarter, let’s say, in Q3, is it possible for us to have an increment once again, will the OEM associate? Or because we’ve already done with for Q1, would it be difficult?

Sachit Jain — Vice-Chairman and Managing Director

No, there’s no such thing. So if the cost increase in Q2 and the raw material cost increase in Q2 where the market situation indicates towards that, we will justifiably ask for a price increase in Q3. As of now, we’ve settled only Q2. So, till 30th September, our price for most of the OEs, Q3 is wide open.

UdhayaPrakash — Value Research India Private Limited — Analyst

Okay. Thank you, sir. That’s it.

Operator

Thank you. [Operator Instructions] The next question is from the line of Rohan Mehta [phonetic], individual investor. Please go ahead.

Rohan Mehta — Individual Investor — Analyst

Good afternoon sir, and congratulations on a great quarter.

Sachit Jain — Vice-Chairman and Managing Director

Thank you, Rohan.

Rohan Mehta — Individual Investor — Analyst

Most of my questions are already answered and I just had a couple of more. So with the expansion plans that we have over the next few years, would capex be funded mainly from the funds that we received from Aichi and internal accruals? Or is there any chance of any equity dilution as well or any other scheme?

Sachit Jain — Vice-Chairman and Managing Director

So if I look at the capacity expansion has two parts. One is the capacity expansion in the existing locations. So which is what is going to happen in the next two to three years. So that it can be funded totally by internal accruals and a little bit of incremental debt. So we don’t need dilution from the company’s point of view.

Now moment we put up a new plant, the greenfield plant, which will cost anywhere between INR1,500 crores to INR2,000 crores, we will need an equity dilution. So this is as far as need is concerned from purely financing angle.

There is another need which comes in, in terms of demonstrating to the Japanese OEs, the seriousness of Aichi and the importance of Vardhman Special Steels in Aichi and the Toyota system. So it would mean that at some stage, though the company may not financially need any further money. We — there could be a possibility of Aichi increasing the stake from the current levels.

Rohan Mehta — Individual Investor — Analyst

Okay. Okay.

Sachit Jain — Vice-Chairman and Managing Director

So that possibility is clearly there. In fact, we have — when we signed the agreement, there is an agreement with them that at some stage, they will increase their stake from the current levels. 11.5% is too smaller stake, as we become extremely important in Toyota’s global system, they will — in all probabilities, they will want to increase the stake from the current levels.

Rohan Mehta — Individual Investor — Analyst

Right, right. So you had mentioned this in one of the earlier calls as well, sir.

Sachit Jain — Vice-Chairman and Managing Director

Exactly. So I’m saying, yes, the company doesn’t need any money. But for strategic reasons, there could be a possibility of dilution at some stage.

Rohan Mehta — Individual Investor — Analyst

This would — we are looking closer to the latter half of the decade, right, sir?

Sachit Jain — Vice-Chairman and Managing Director

See, there are two parts, again. One is need. The need will be in the second — as you rightly said, the latter half of the decade, where we put up the new greenfield. Then there will be need. But the strategic part can happen — anytime it could happen, next year, it could happen two years from now, three years from — I don’t know.

It is when I see it is the right time, because when the — when we see — just now — the business for Toyota has just started. When it picks up a little bit of momentum at some stage, they may want to increase their stake.

Rohan Mehta — Individual Investor — Analyst

Okay. Right.

Sachit Jain — Vice-Chairman and Managing Director

And we’ll facilitate that. So as a company management, we have already agreed. As Vardhman Group, we have agreed that at some stage, they want to increase their stake, we would welcome them to increase the stake in the company.

Rohan Mehta — Individual Investor — Analyst

Okay, okay.

Sachit Jain — Vice-Chairman and Managing Director

Now, but the probability that Vardhman will sell shares to them is very low. And therefore, any increase in stake that they put in will be through further dilution, fresh equity. So which means the company becomes even stronger with more infusion, rather than the probability that promoting companies will be selling their stake.

Rohan Mehta — Individual Investor — Analyst

Fair enough, fair enough. That is good to hear, sir. So — and about the immediate expansion at the current facilities that you mentioned. So what kind of incremental capacity would be at our disposal, over the next two, three years?

Sachit Jain — Vice-Chairman and Managing Director

Currently, our capacity is two lakh tonnes of billet making and 180,000 tonnes of rolled products.

Rohan Mehta — Individual Investor — Analyst

All right.

Sachit Jain — Vice-Chairman and Managing Director

By the time we complete the current phase of expansion in the existing location, our capacity on the existing product mix will go up to about 250,000 to 260,000 tonnes of billet making and about 225,000 to 230,000 tonnes of rolled production.

Rohan Mehta — Individual Investor — Analyst

Okay. Great.

Sachit Jain — Vice-Chairman and Managing Director

But — now, some of the products that — from Aichi that will come in, will perhaps lead us with lower productivity. So then the capacity will be dependent on the product mix that comes in and may fluctuate, may come down a bit. But in all probabilities, the capacity with the enhanced product mix will be 240,000 tonnes or above in billet making.

Rohan Mehta — Individual Investor — Analyst

All right, all right. Got it, sir. Just one last question, sir. Speaking of Aichi, now that you’ve mentioned in the presentation that the trial orders have also — supply of trial orders has begun. So if you could just shed some light on how that’s going and if there’s any feedback from Aichi.

Sachit Jain — Vice-Chairman and Managing Director

See, trial orders have been approved, which is why the production orders have begun.

Rohan Mehta — Individual Investor — Analyst

Right.

Sachit Jain — Vice-Chairman and Managing Director

So — but there are several parts, because we are to be the dominant supplier of one of the major auto platforms of Toyota —

Rohan Mehta — Individual Investor — Analyst

Correct.

Sachit Jain — Vice-Chairman and Managing Director

— till 2025. So one by one, various parts are being added to our kitty. So as each part, the approval comes in. And it’s a tedious process to get approvals of each part.

Rohan Mehta — Individual Investor — Analyst

Right.

Sachit Jain — Vice-Chairman and Managing Director

The part-by-part approval, it’s not that Vardhman Steel is approved and we can produce anything. So Vardhman Steel has to be approved, then the steel has to be approved and then for each part, it will have to be approved.

Rohan Mehta — Individual Investor — Analyst

Approved. Right.

Sachit Jain — Vice-Chairman and Managing Director

Yes. So all that process is going on and saying the final approvals have started coming in, and so the manufacturing orders have begun. Now in the next few months, we will know how is the impact of these of the manufactured products that are going in.

But Aichi’s own people are here, there all quality people are here. So they are making sure that the product is as per Toyota specification.

Rohan Mehta — Individual Investor — Analyst

All right. Got it, sir. Okay. That’s all from my end and thank you. All the best.

Operator

Thank you very much. As there are no further questions, I will now hand the conference over to Mr. Sachit Jain for closing comments.

Sachit Jain — Vice-Chairman and Managing Director

Ladies and gentlemen, thank you so much for showing your interest in our company. We remain committed to our vision of being the number one company in India in specialized steel and when I say number one, it means in quality, in safety and in customer appreciation. We will never be number one in terms of size, there will be much bigger companies than us in this area.

The other area we want to be in is to be a world-class company that anywhere in the world when people talk about the leading special steel companies that are equivalent to the best in the world, we want to be up there in that name, so that is what drives our company. And thanks to our partners, Aichi we are — started off on a good footing.

I wanted to share this also, this first three years term with Aichi will be coming to an end by September, and we are in the process of negotiating the fees and other terms, etc. for the next three years. So those will be finalized in the next couple of months. From 1st of October, we’ll be working with the contract for the next three years.

So overall, this year will remain a bit choppy and uncertain still. But on an overall basis, I remain optimistic about the business, primarily because of our partners and the support and the clear runway that we’re getting, thanks to them. Our team has worked well and our banker has supported us well. So, our EBITDA to capital employed and all these things, we remain — our eye is on the ball, on all growth parameters that you and investors are also looking at. So, thank you so much once again for showing your support in our company.

Operator

[Operator Closing Remarks]

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