HEG Limited (HEG) Q2 FY23 Earnings Concall Transcript

HEG Limited (NSE:HEG) Q2 FY23 Earnings Concall dated Nov. 17, 2022

Corporate Participants:

Navin B. Agrawal — Investor Relations, SKP Securities Limited

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Gulshan Kumar Sakhuja — Chief Financial Officer

Manish Gulati — Executive Director

Riju Jhunjhunwala — Vice Chairman

Analysts:

Sonali Salgaonkar — Jefferies — Analyst

Nikhil Saboo — SKP Securities Limited — Analyst

Bhavin Chheda — Enam Holdings — Analyst

Amol Rao — Kitara Capital — Analyst

Yash Dantewadia — Dante Equity — Analyst

Pratim Roy — B&K Securities — Analyst

Sanjay Jain — — Analyst

Presentation:

Operator

Good day, ladies and gentlemen. Welcome to the HEG Limited Q2 FY ’23 Earnings Conference Call organized by SKP Securities Limited. [Operator Closing Remarks] Please note that this conference is being recorded.

I now hand the conference over to Mr. Navin Agrawal, Head, Institutional Equities at SKP Securities Limited. Thank you, and over to you, sir.

Navin B. Agrawal — Investor Relations, SKP Securities Limited

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 Limited. We have with us Mr. Ravi Jhunjhunwala, Chairman, Managing Director and CEO, along with Mr. Riju Jhunjhunwala, Vice Chairman, and 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, Ravi ji.

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Thank you, Navin, and good afternoon, friends, and welcome to our Q2 financial results call for the current year.

As you are aware, the geopolitical developments resulting into an ugly war still continues after nine months with no immediate end in sight. This has resulted into changing the dynamics in most parts of the world, resulting in many changes in all parts of the world, some with very serious consequences and some others with moderate consequences. The developed parts of the world like U.S., EU and Japan, seem to be the hardest hit leading to high inflation in some countries, high interest rates and lower demand for most of the products, etc. Obviously, steel which is where our products are used, has also been hit hard in the last six to nine months, leading to a drop in overall production by about 8.7%, while some major steel producing countries like Japan and Western Europe had declined between 5% to 11% in the last quarter. However, our Company took some proactive steps to tide over these issues. And due to our focus on infrastructure spending, steel production continued to increase till June, July of this year and then started declining. But still a fairly small decline compared to the rest of the world. European steel industry has been especially negatively impacted by the exorbitant gas and energy prices, which are also having an adverse effect on regional steel demand. In the short-term, the outlook for the steel industry still appears to be bearish. Steel demand is still being impacted by the fear of a global recession.

Steel production is closely linked to the economic terms. World steel production, except China and Iran, showed a decline of 5.8% in the first nine months of January-September ’22, compared to the same period last year. There has been a quarter-on-quarter decline of steel production of 6.6% between Q2 and Q3 calendar year 2022, again excluding China and Iran. The price path in the otherwise bearish outlook of steel production has been U.S. and India, where demand is still strong. As per WSA’s latest Short Range Outlook, world steel demand is expected to drop by 2.3% in 2022 after it increased by 2.8% in 2021.

The electrode demand, which is a derivative of steel produced through electric arc furnaces, what we in India, typically call mini-steel, also fell in July-September quarter, due to pushback of orders, mainly by European steel producers, and slow down of production in other countries. We continue to see lower demand of electrodes in the current and next — current and the next quarter, but we continue to still run the plant at full capacities currently. Having said that, I would like to emphasize that decarbonization focus all over the world is gathering steam, leading to closures of many blast furnaces and replacements — replacing them with new electric arc furnaces, which is a huge positive for us, for companies like ours in future. U.S. which produces over 70% of its total steel through electric arc furnaces, new greenfield capacities with a tune of between 20 million to 25 million tons have been announced, 6.5 million tons is set to start in next two to three months, 11.5 million tons by 2024 end and the rest in the first half of 2025. Besides this, EU wants to replace about 16 million tons of blast furnaces by electric arc furnaces starting from 2023 end. Although China still produces only 12% of its steel through electric arc furnaces, but this has increased from 4% in the last five years, so 3 times. They’re also on the path of increasing their electric arc furnace share to about 20%, as they also try to control pollutions.

We feel that medium- to long-term growth of EAF is unquestionable, which keeps us confident of the growth prospects of our industry, and that’s where our current expansion kicks in. About two and a half years ago, we had announced taking our capacity of existing 80,000 tons per annum to 100,000 tons by end of this year. I’m glad to say that out of six different processes that go into production of electrodes, four are already commissioned. The fifth one is getting commissioned in the next two weeks, and the last one by early January. Once it is done, our capacity will go up to 100,000 tons. Our plant with 80,000 ton capacity till now has been the largest plant under one roof in the world for a very long time. And in the next few months, once it reaches 100,000, the gap between our plant and the next large plant will further increase, and we would start getting further economies of scale and cost advantages. And furthermore, our expansion is coinciding with the new demand of electrodes coming in from these new capacities of electric arc furnaces as I just spoke.

This quarter’s performance was in line with the first quarter, despite lower sales volumes, due to benefits of rupee depreciation, higher profits from our several hydro power generation facilities in Madhya Pradesh and Himachal and also higher income from our hydro operations of our associate company, Bhilwara Energy, both of which did well due to early onset of monsoon this year and power prices going up substantially in the first half of the current year. The needle coke procurement for the last three quarters have been flattish without any significant increase, and continues to remain so. There is no shortage of needle coke in the market due to slowing down of offtake by major graphite producers. Meanwhile, as some of you have seen our public announcements, we plan to diversify into making graphite anodes for lithium-ion cells, which form the battery for electric vehicles. And given that it is the first such plant coming up in our country, we’ll see a good opportunity here over the long-term. We are forming a wholly-owned subsidiary of HEG for this new business and our Board has approved a budget of about INR1,000 crores for manufacturing 10,000 tons of anodes in Phase 1, which should be ready by early 2025. We plan to invest another INR1,000 crores for the second phase of 10,000 tons, after the first phase is successfully implemented. At present, these cells or battery parts are all imported into India and soon there will be a huge domestic demand for graphite anode powder as cell manufacturing starts shifting to India. We see tremendous growth in this business in the next decade, as India starts more and more — using start — as India starts producing and using more and more electrical vehicles.

Friends, with this, I would now hand over the floor to our CFO, Gulshan, to take you through the financial numbers; and then Riju, our Vice Chairman; and Manish, our ED will — between all of us, we’ll be very happy to answer any queries relating to electrodes or our new products and old products. Thank you. And over to Gulshan.

Gulshan Kumar Sakhuja — Chief Financial Officer

Yeah, thank you, sir. Good afternoon, friends. I will now briefly take you through the Company’s operating and financial performance for the quarter ended 30 September 2022. For the quarter ended 30 September 2022, HEG recorded revenue from operations of INR598 crores as against INR722 crores in the previous quarter and INR518 crores in the corresponding quarter of the previous financial year. Revenue for the quarter saw a decrease of 17% as compared to the previous quarter, while it witnessed an increase of 15% on a Q-on-Q basis. The fall in this quarter is due to lower volume offtake.

During the quarter ended 30 September 2022, the Company delivered EBITDA, including other income of INR198 crores as against INR205 crores in the previous quarter and INR167 crore in the corresponding quarter of the previous financial year. The increase in employee benefit expenses over the corresponding quarter of the previous year is on account of annual increment in salaries, incentives to employees and provisioning for profit-related commission payable to CMD and ED of the Company under contractual terms of their employment.

The reason for the increase in finance cost is due to the hike in the repo rate from 4% to 5.9% by the RBI to keep the rising inflation in check. Other external benchmarks like MIBOR and TBIL have also moved in the same direction, along with increase in the working capital requirement in the business. Apart from the [Technical Issues] increase in finance cost from corresponding quarter of the previous year is on account of reduction of the interest subvention from RBI from 3% to 2%.

The Company recorded a net profit after tax of INR130 crores in the second quarter of FY ’23 as against INR134 crores in the previous quarter and INR113 crore in the corresponding quarter of the previous financial year. The expansion plan is going on full swing and we expect the expansion project will be completed by December ’22 and ready with commercial production by early 2023.

The Company is a long-term debt-free and has a treasury size of nearly INR1,250 crores as on 30 September 2022.

Now, we would like to address any questions or queries you have in your mind. Thank you. Over to Navin. Hello?

Questions and Answers:

Operator

Sir, should we start the floor for Q&A?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Yes, please.

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Sonali Salgaonkar from Jefferies. Please go ahead.

Sonali Salgaonkar — Jefferies — Analyst

Thank you, Ravi, sir, for the brief. It was very informative. Few follow-up questions. Sir, firstly, 70% of HEG sales are exports. Could you help us with the country-wise revenue breakup broadly? And which countries have been instrumental in the weaker demand this quarter apart from Europe?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Manish, will you take that?

Manish Gulati — Executive Director

I would say, Sonali, revenue breakup instead, let me just give a tentative volume breakup, rather than the revenue breakup [Speech Overlap]

Sonali Salgaonkar — Jefferies — Analyst

Yes, that would be helpful.

Manish Gulati — Executive Director

Yeah. About, let’s say, 20% is Americas, about 18%, 20% is Southeast Asia, about 27% is Middle East, something like that. So these are the very broad figures I’m giving. So actually we’re very well diversified as you can see. So our shares in the major steel-producing regions of the world, which are the Americas and the Europe and the Southeast Asia and Middle East. These are the four areas. And in all these major countries we have our presence. So tentatively, if you take, that’s a 20% share plus-minus 2%, 3% each and every area. Europe will be low this year, otherwise, our — it was about 10% [Technical Issues] going into Europe — European nations. I’m talking about total. And then again, one-third of our production [Technical Issues] in India. So if you add all this up, you reach your [Phonetic] 100%.

Sonali Salgaonkar — Jefferies — Analyst

Right. Sorry, sir. I missed the number, you gave for Europe.

Manish Gulati — Executive Director

10%. We used to be there. Now, it is — now it’s probably going to slip to 7% to 8% of the total volumes.

Sonali Salgaonkar — Jefferies — Analyst

Understand. Sir, and what was our capacity utilization in Q2 and currently, because you did mention that your plants are operating at a healthy operating utilization. And also, what is the inventory position in the system for the electrodes?

Manish Gulati — Executive Director

See, we continue to run at a 90-plus level and that’s what we have been doing for last six quarters. We have not slowed down yet, and as Chairman said, we have no intention to slow down, at least for this quarter. Our sales till April to June quarter was — I mean, we sold as much as we made again in the 90s — early-90s. That’s what our sales utilization was. But for July to September, it’s in early-70s and October to December as we see maybe in being 60, mid-60s or something. So we continue to produce at full capacity, but only from July to September quarter, we have sold less compared to our production and October to December quarter also seems to be in the same way.

Sonali Salgaonkar — Jefferies — Analyst

And the inventory position?

Manish Gulati — Executive Director

Inventory position is still fine. We are — it’s not unmanageable per se, let’s say, we can say a month and a half first half inventory, which is quite normal. For one month it is considered very normal. And in our operations where we make so many sizes, so many grades. So put together if we have a month worth of inventory that [Technical Issues] right, we have one and a half month.

Sonali Salgaonkar — Jefferies — Analyst

Understand. Sir, and about the pricing of electrodes, what has been the trend in pricing that we saw in Q2? Because in the first half we did see some price increases panning out in electrodes like in last year. So what’s the pricing trend in Q2? And also, what do you expect to be the pricing trend in H2?

Manish Gulati — Executive Director

See, Q2 pricing is virtually almost the same, I would say, very, insignificant increase between Q2 and Q1. You can consider they were just exactly the same. And — but in Q3, in which we are in, there is probably going to be — our average price might be about 3% to 4% down. And Jan to March, still you’re not looking at it. If things continue to go like that, maybe that quarter also remain under pressure. Or if things turn around, it can revert to the current price levels we saw in July to September quarter. So that remains to be seen because we are also booking very gradually, but we still aren’t booking for Jan to March quarter.

Sonali Salgaonkar — Jefferies — Analyst

Understand. Sir, and for our new products, this lithium-ion product that we are entering, could you help us with the overall TAM, that’s the total addressable market, which you foresee would be panning out in India? And correct me if I’m wrong, but your revenues will start accruing from FY ’26 onwards. Is that correct?

Manish Gulati — Executive Director

Yeah. I’ll — Sonali, I’ll have this question better answered by Mr. Riju Jhunjhunwala, as he is leading this project. So it’s better that he answered it for you.

Sonali Salgaonkar — Jefferies — Analyst

Sure. Riju, and would also help — it would help if you could give us the revised breakup of capex at least for the Phase 1 of INR10 billion, which is set out for the next three years? Thank you.

Riju Jhunjhunwala — Vice Chairman

So, Sonali, you asked about the overall market size. Let’s say, by 2025, according to all conservative estimates, the overall battery demand, the cell demand for India would be 50 gigawatt hour. And this is what all the companies have signed up in their PLI schemes, etc., also, which would mean very pessimistic side and annual graphite anode demand of 50,000 tons, just for the domestic market. I mean, if you understand more in detail, this means around 10 lakh EV cars or, let’s say, 1 lakh buses. So, I mean — and our total size that we are putting up in Phase 1 is 10,000 tons. And you are talking about the market size, very conservatively of 50,000 tons in Phase 1. Our total investment is around INR1,000 crore which includes working capital, etc., and this would be in stages between, let’s say, March of 2023 to March of 2025. So spread over two years and we hope to start commercial production by — I mean, latest by 1 April 2025.

Sonali Salgaonkar — Jefferies — Analyst

Understand, Riju. Very helpful. And could you help us understand the needle coke pricing trend right now? I mean, if you’re expecting the electrode pricing to be slightly under pressure, is it safe to assume that even needle coke could stabilize going forward?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Needle coke has stabilized, I mean, there has not been any change in the price of needle coke. As I said, availability is not an issue. And before you ask that question, let me clarify, in our case, the conversion cost being fairly low, our fixed costs are probably the lowest amongst all the graphite producers. So the total cost of converting needle coke to finished electrode is not very significant. And as we see, especially America. America is still going very strong on cells [Phonetic]. And as Manish just responded to your question, America also happens to be our single largest location for exports after India.

So it doesn’t take two months to keep the inventory of finished stock rather than keeping the inventory of needle coke per se. So we have taken a very conscious decision that this is a small, short blip in the market. And we see this market turning around, maybe in one quarter or maybe in two quarters. So it doesn’t tie up a lot of your money if you keep needle coke or you convert the needle coke into electrode. So for any short-term blip, we don’t want to take the risk of losing the markets and losing the market share. So that’s the only reason we keep producing at 90%, even if we are not selling all that product.

Sonali Salgaonkar — Jefferies — Analyst

Understand. Sir and just one last question from my side, probably a clarification of a number which you gave in your opening remarks. For the new — for the decarbonization trend, you mentioned that 20 million to 25 million tons of EAF capacity, greenfield capacity, it’s likely in the U.S. Am I correct? And by which year are we expecting?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

See, I — we gave some breakup about 6.5 million tons is already starting in the next three to four months. We have the names, we have the locations, we have the capacities of each one of these, about 25 million tons overall that I’m speaking about. So 6.5 million to 7 million tons is starting in the next three months to four months. And my middle of 2023 or, let’s say, by end of 2023, we expect another 10 million to 12 million tons. And the rest from early 2025 onwards. It doesn’t take too long to put up a electric arc furnace, very much less compared to a blast furnace.

Sonali Salgaonkar — Jefferies — Analyst

Got it, sir. This has been very helpful. All the best and thank you.

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

And this is — mind you, this is — this 20 million to 25 million is only America. And it’s only America because America produces more than 70% of its steel through electric arc furnace.

Sonali Salgaonkar — Jefferies — Analyst

Got it, sir. Very helpful. All the best and thank you very much for answering my questions.

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Nikhil Saboo from SKP Securities. Please go ahead.

Nikhil Saboo — SKP Securities Limited — Analyst

Yeah. Hi, sir. Sir, recently GrafTech has to close down their Mexico plant, which was having an annual production capacity of 60,000 or representing 30% of total GrafTech production. It is the only site, which is also producing pins, which has been utilized by all the GrafTech graphite electrode production. So in the recent con call, they have highlighted that they are trying to mitigate this new production by shifting it to either at St. Mary facility or at one of the European facility, but which will take some time. Thus, they have given the guidance of a lower Q4. And if the Mexico plant remain closed, then they are saying that their — 50% of their sales volume will get impacted in H1 calendar year ’23. So in such a scenario, if the plant remain closed — Mexico plant remain closed for at least for next three, six months, how you foresee the graphite electrode supply shaping up?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

See, it is one of the three largest plants in the world. I mean, ours if we call it the largest with 80,000 tons going to 100,000 tons, there’s another plant in U.S. of Showa Denko which is 70,000 tons and this plant of GrafTech in Mexico is the third one with 60,000 tons. And as you rightly said, the nipples which is a very critical product with electrode, one electrode goes with one nipple. It’s basically just 4% weight of the total electrode, but without that nipple, you can’t join the next electrode. Electrode being consumable, every couple of hours, every six hours, eight hours, as you consume one electrode, you keep adding one more piece of electrode and that is where you need this pins or nipples as you call. So typically both these large companies, who have more than one location for producing electrode, they have this tendency of concentrating their nipple production all at one place and then they air freight the nipples to their other locations to sell electrodes and nipples together. So unfortunately, in this case, Mexico is the location where 100% of nipples of GrafTech’s entire 180,000 ton capacity were produced in Mexico. And that is the plant, where there have been problems for about two months now.

Now, whatever we know, we only know from the public discourse and a lot of papers that they have disclosed in the public domain. So, basically, I — we don’t have any more information than what you have. But the fact is that, this plant has been closed for two months, and they have themselves said that they don’t see an early resolution, and they are themselves saying that, in the current quarter, which is the October-December quarter, they will only — their sales will go down by about 25% to 30%. And going forward, as their nipple inventory keeps coming down and down, because they’re not producing anymore nipples, and without the nipples, electrodes cannot be sold. It cannot be used. So going forward, if this problem continues for, let’s say, the next even six months, then it is a problem. It is a problem for the whole industry. I mean, then this, whatever tonnage is available with GrafTech, will get hampered and they have clearly said that in their recent reporting to the SEC.

Nikhil Saboo — SKP Securities Limited — Analyst

Okay. So, sir, can we expect in windfall volume coming up in first half of next financial year? Since we are already producing at around 90% utilization levels, where our sales volume would be somewhere close to 65%, 70%. So can we expect to liquidate our excess inventory, if there is any windfall gain coming because of this?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

No. We will be — of course, I mean, if a large part of GrafTech sales comes down because of nipples, then obviously everybody else, I mean, we are not only ones, I mean, whoever else is in the production of electrodes, that’s the only option. And we have already started seeing some movement there. I mean, as Manish said, America happens to be one of our largest export market. And the Mexican plant was majorly supplying to U.S. Graftech doesn’t have operating facility for electrodes in U.S. So most of their U.S. sales were coming from Mexico, which is very close to them, which is closed — which is next door to U.S. So we’ve already started seeing that kind of a movement. I mean, the inquiries and the pace of negotiation and the new orders which are trickling in now, we are getting a feel that more and more demand is getting, let’s say, distributed to the remaining two, three producers of electrodes.

Nikhil Saboo — SKP Securities Limited — Analyst

Okay. Got it, sir. Thank you.

Operator

Thank you. The next question is from the line of Bhavin from Enam Holdings. Please go ahead.

Bhavin Chheda — Enam Holdings — Analyst

Yeah, sir. Few questions. First on the graphite anode new project what you’re planning. Can you give some economics on what kind of product this NSR is, what’s the raw material use? What kind of EBITDA margins this product can generate? What are the critical raw materials would be for — what would be the payback you are targeting for INR1,000 crores capex you’re planning for first 10,000 tons? Can you give some economics there? Yeah.

Riju Jhunjhunwala — Vice Chairman

So on the capex, you spoke about a INR1,000 crore capex. We’re expecting a turnover to capex ratio of approximately 1:1. The raw material — and that’s why we have ventured into this particular segment is that, the raw material that we use for our graphite electrodes, let’s say, the needle coke and the Indian coke that we use, it will be more or less the same for this particular venture as well. So the raw material price would really kind of depends on the prices of that day. The selling price, of course, this is a highly value-added product, which is not sold in tons, it is sold in kgs, etc. So you’re looking at a much higher per unit realization of more than double of what you were currently seeing in our graphite electrode business. And basically the processes are quite similar and that is why in terms of the technology, etc., we feel confident that we’ll be able to do a good job of it. And again, the payback period, etc., what you’re looking at, if everything works out the way we are seeing it, should be between five to six years.

Bhavin Chheda — Enam Holdings — Analyst

Sir, just one question here. Sir, since you said that the NSR is almost double and more or less the processes raw material is the same. So can we assume that this business will have much higher EBITDA margins than your current electrodes business? And obviously since this been a high-value material [Speech Overlap]

Riju Jhunjhunwala — Vice Chairman

Yeah, our electrode business, as you know well, it fluctuates between year-on-year, but if you take the current margins that we have in our electrode business, the margins in the anode business should be significantly higher than that.

Bhavin Chheda — Enam Holdings — Analyst

Sure. Other question is on the existing electrodes business, you mentioned there’s some 6.5 million, you mentioned starting in U.S. in next four, five months. If you have the list, can you name two, three players who are expanding this 6.5 million electric arc furnace in U.S.? And I think you said by middle of 2023, another 10-odd million. So can we get some large capex, which is happening in U.S., so easy to track for us?

Riju Jhunjhunwala — Vice Chairman

I can send it to you separately, but you will find most of the known large steel companies in U.S., led by Nucor. I’m sure you heard of Nucor.

Bhavin Chheda — Enam Holdings — Analyst

Yeah. So, Nucor, U.S. Steel and those are the most of the guys who are — and are they replace [Speech Overlap]

Riju Jhunjhunwala — Vice Chairman

No, U.S. Steel is primarily blast furnace. Nucor is 100% electric arc furnace. Then the second large producer of electric arc furnace steel in U.S. is a company called Gerdau, originally a Brazilian company, which was acquired by Americans. And then there is a company called Steel Dynamics. There are several others. So there are at least eight to 10 large EAF steel producers in U.S. who are adding these capacities. We can send you the details separately.

Bhavin Chheda — Enam Holdings — Analyst

Sure, sir. And sir, they are adding this capacity — sure, sir.

Riju Jhunjhunwala — Vice Chairman

Because it is public information and if it really interests you, I can just take the names quickly. One is the Steel Dynamics at Corpus; the second one is North Star at BlueScope; the third one is Nucor at Gallatin; fourth one is again a Nucor plant in Brandenburg; and then there is a group called CMC, that’s in Arizona, the two plants. One is ArcelorMittal, they’re coming with electric arc furnace. And there is a Algoma in Canada and U.S. Steel. All this is public information. And you can always ask us offline, we’ll provide it. No problem at all.

Bhavin Chheda — Enam Holdings — Analyst

Sure. And these are the new capacities adding and they are not replacing the existing either electric arc furnace or [Speech Overlap]

Riju Jhunjhunwala — Vice Chairman

No, these are the new electric arc furnaces. There are anyway very few blast furnaces in North America. As Chairman said, they are already at 70% electric arc furnace share they have. So the names which we are taking are for the newly announced EAF capacities. The replacement is occurring more…

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

These are additional capacities. These are not…

Riju Jhunjhunwala — Vice Chairman

These are additional capacities.

Bhavin Chheda — Enam Holdings — Analyst

Sure. And the existing capex, I think what you — ongoing capex from 80,000 to 1 lakh, if I remember this was a INR1,200 crore capex. If I see your CWIP, it looks like INR853 crore. So I think another INR400 crores is the pending number on this expansion, which should be done by March?

Riju Jhunjhunwala — Vice Chairman

INR200 crore by March. Actually there were another two shops which you are not taking in there. Actually put together, we have spent INR1,000 crores. There were some two shops, which were came before the expansion where they will also be, of course, a part of the…

Bhavin Chheda — Enam Holdings — Analyst

So, the pending is INR200 crore only now you are saying?

Riju Jhunjhunwala — Vice Chairman

INR200 crores, yeah.

Bhavin Chheda — Enam Holdings — Analyst

And there are no other projects. So INR200 crore and you’re running capacity would be 1 lakh probably by Feb-March?

Riju Jhunjhunwala — Vice Chairman

Yeah, yeah.

Bhavin Chheda — Enam Holdings — Analyst

Okay. Thank you, sir. Yeah.

Riju Jhunjhunwala — Vice Chairman

Okay. Thank you, Bhavin.

Operator

Thank you. The next question is from the line of Amol Rao from Kitara Capital. Please go ahead.

Amol Rao — Kitara Capital — Analyst

Sir, good afternoon. Sir, I remember that we were talking about tying up our power requirement, especially now that we are going to be operating another 20,000 tons, we’re talking to, I think, the Madhya Pradesh State Electricity Board for a good — power purchase agreement on good terms. Is there some change in that plan? Has that been done? Anything — any comments on that?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

No, we’re not getting any power from Himachal. We have our associate company which produces about 300 megawatt of hydro in Himachal Pradesh, but that is all sold in the Power Exchange on a daily basis. So we don’t use any — we don’t get any power from Himachal. It’s not practical in India to get power from Himachal to Madhya Pradesh. The transmission charges and everything is so high, that it doesn’t make sense. So we are buying 100% from the Madhya Pradesh Electricity Board, and more so 100% because in the last 12 months, 18 months, given the cost of coal and the issues related with carbon emissions of coal and all that. So we have about 65 megawatts of captive coal generation at the same location as graphite, so which is not operating for the last two, two and a half years now, because we’re able to get everything that we need from the Electricity Board, which is much cheaper than producing our own power today.

Amol Rao — Kitara Capital — Analyst

Got it. And sir, will this arrangement also continue for the additional 20,000 ton that is coming onboard?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Yeah, yeah. We have that agreement.

Amol Rao — Kitara Capital — Analyst

All right. And sir, about the new capex, sir, this is going to be, again, at the Mandideep facility only that we operate currently?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

You’re talking of the graphite expansion?

Amol Rao — Kitara Capital — Analyst

Yes, sir. The anode…

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

No, no, anode is not coming in Mandideep. I mean, we are still to decide the location. We are weighing two or three options within Madhya Pradesh.

Amol Rao — Kitara Capital — Analyst

All right. So within Madhya Pradesh itself?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

It will be Madhya Pradesh, but not — it has nothing to do with the existing graphite plant.

Amol Rao — Kitara Capital — Analyst

Got it, sir. Thank you so much, sir.

Operator

Thank you. The next question is from the line of Yash Dantewadia from Dante Equity. Please go ahead.

Yash Dantewadia — Dante Equity — Analyst

Hello, hi. Sir, this existing capacity is 80,000 and you’re coming up with 20,000 more…

Operator

Sorry to interrupt you, Yash. The audio is not clear from your line. Please use the handset mode.

Yash Dantewadia — Dante Equity — Analyst

Hello? Am I audible now?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Yeah, yeah, we can hear you.

Yash Dantewadia — Dante Equity — Analyst

Yeah. Your existing capacity is 80,000 and you’ve added 20,000 more. So by when you will see this 20,000 capacity getting utilized by, let’s say, 90%, 95%? How much time do you think it will take you to reach that?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

You see, as I explained earlier, I mean, there are five — there are six different processes into the production of electrodes. So out of six — so there are six shops or six processes, which are being newly built for this 20,000 tons. Out of which, four have already started. The fifth one is starting in the next two, three weeks. And the last one will start in early January. And the total cycle for producing electrodes is between two to three months, two to four months, let’s say. So in the real sense, the entire 20,000 tons will be available, let’s say, from April, May. We’ll start the sixth process, the last process in January, but it will take us between three to four months for us to produce finished product out of this because the process itself is anywhere between three to four months.

Yash Dantewadia — Dante Equity — Analyst

And when do you see this reaching to your — what’s your existing capacity utilization for your 80,000 capacity?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

No, as Manish said, I mean…

Manish Gulati — Executive Director

Yes, we are running at 90 — by the way Riju said in the beginning, we are running at 92%, 93%, 94% level for all these quarters and continue to do so. And from this quarter onwards it’s depressed.

Yash Dantewadia — Dante Equity — Analyst

So, this 20,000 that’s coming up, which will take another six months to get on full fledge, how long do you think this will take to reach 90% capacity utilization?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

It depends upon global conditions because steel is — as soon as the steel production in the world gets back on track, I mean, we’ll be soon seeing this capacity absorbed. But let’s say, internally what we talk about, let’s say, between one to two years, we should be able to — let’s say, within by 2023 and/or 2024, we should be at that 90% level because the new demand of electrodes will come in, in the world with new electric arc furnaces. So we expect to get back at the 90% level within one to two years, that is 2023 and 2024.

Yash Dantewadia — Dante Equity — Analyst

Thank you. Thank you so much for taking my questions. Have a great day.

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Pratim Roy from B&K Securities. Please go ahead.

Pratim Roy — B&K Securities — Analyst

Yeah. Hi, sir. Thanks for the opportunity. Current year, just you mentioned that you are working with a 90% capacity utilization. So what is the volume numbers and how much you have sold in the market and what is the NSR, if you can throw light on that? You did mention that the 2Q and 1Q NSR is almost in line with [Indecipherable]. So just — I just want to understand [Phonetic] the number, how much is the NSR currently?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

See, if I’ve heard you clearly, as I didn’t hear you clearly, but I think you were just asking, how much we sold in this quarter of Q2? So that is in early-70s. And for the October to December that’s probably be in mid-60s because we’re already in the middle of November. So we can see where we are going. And for the next quarter, we now have started booking for Jan to March quarter. So that remains to be seen what level we can achieve.

Pratim Roy — B&K Securities — Analyst

Okay, sir. What is the current realization for the graphite electrode that you are enjoying right now?

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

I mean, it’s — I cannot give a specific figure on a price which is very easy for you to calculate because all we do here is electrodes. So if you have the capacity utilization, which I’ve already said, when you have the [Speech Overlap] first have to divide it, but don’t let me do that for you.

Pratim Roy — B&K Securities — Analyst

Got it, sir. Thank you, sir. 70% is the level. Okay. Got it, sir. That’s helpful.

Ravi Jhunjhunwala — Chairman, Managing Director and Chief Executive Officer

Yeah, thank you.

Pratim Roy — B&K Securities — Analyst

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Sanjay Jain, an Individual Investor. Please go ahead.

Sanjay Jain — — Analyst

Hi, sir. Thanks for taking my question. I wanted to get little bit more sense on this graphite anode that given capex that you have announced about INR1,000 crore. What — like where are we getting this technology from? And what could be the — could you give something little bit more on the process? Like I want to get some sense on what kind of conversion cost would be and what parameters would be driving those conversion costs?

Riju Jhunjhunwala — Vice Chairman

So technology-wise, today, let’s say, 90%, 95% of the entire anode production in the world is in China. And process-wise, this comprises of, I mean, four, five different processes like crushing, grinding, coating the raw material with pitch. And then the main process in this is the graphitizing of raw material, in which basically where we see, as HEG, we have a 50-year experience in the main process, which is the graphitizing of the raw material. So technology-wise, we are pretty confident that a lot of technology is inbuilt in what we have within HEG. Some bit of technology we will be outsourcing from some European companies and Chinese companies. And process itself, like I said, it’s like you have five or six different processes in electrodes, you have five or six different processes in this, but the raw material for both the products is the same and the [Technical Issues].

Sanjay Jain — — Analyst

Hello?

Operator

Hello?

Sanjay Jain — — Analyst

Yeah. I’m not able to hear now.

Operator

Ladies and gentlemen, please hold the line while we reconnect the management. Thank you. [Technical Issues]

Ladies and gentlemen, thank you for patiently waiting. The line is reconnected. Over to you, sir.

Riju Jhunjhunwala — Vice Chairman

Hello?

Operator

Mr. Jain, please repeat your question.

Sanjay Jain — — Analyst

Yeah. I was asking about what kind of process is there in this making of graphite anodes? And you were talking — you were explaining there are multiple processes including graphitization. And then we lost the line.

Riju Jhunjhunwala — Vice Chairman

Yeah. So that’s what I was explaining that the four or five processes and one of the major processes is the graphitization in which the process is quite similar to what we have in the electrode space, which is where our expertise comes in. And here the final product is basically crushed graphite powder, which is very, very small in size and made according to the customer’s requirements, in different shapes or in different kind of qualities. So really in terms of the technology and processes, we are very confident that we’ll be able to do a good job in this particular product. And seeing the kind of demand that’s going to be there in the next 10 years, the potential to keep adding capacity in second or third phases is tremendous.

Sanjay Jain — — Analyst

Okay. Another thing that I wanted to understand is, what kind of yields are there in this, like if you take, what are the raw material like, what needle coke you mentioned and you also talked about pitch. So for making 1 kg of finished product, what kind of — how much — what quantities of raw material is needed?

Riju Jhunjhunwala — Vice Chairman

I mean, you can talk about it. It’s something very similar to graphite electrode which will be around 1.2, 1.3 kgs for the finished raw materials. 1.2 kgs to 1.3 kgs of this thing, raw material to the finished product. And the raw material would be a mix of — depending on quality, a mix of Indian coal — coke and the imported coke that you have, needle coke. But the needle coke would be very, very limited in its application, mostly our entire requirement should be met out of the Indian coke itself.

Sanjay Jain — — Analyst

I see. Sir, you’re saying that there is less requirement of needle coke, more requirement of Indian coke?

Riju Jhunjhunwala — Vice Chairman

Correct, correct.

Sanjay Jain — — Analyst

Okay. So overall raw material cost could be actually lower per ton of finished product?

Riju Jhunjhunwala — Vice Chairman

Well, raw material — obviously, the raw material cost as a percentage of selling price will be significantly lower. But even on a per kg basis, it should be overall lower because the raw material requirement is not what we have for our UHP electrodes. It’s more or less what we have for the other electrodes that we have.

Sanjay Jain — — Analyst

Okay. So now since the raw material is cheaper on per ton basis, and why is the price of the finished product twice as compared to graphite electrode? Is there too much of processing cost involved in this? Or is it because of the lower throughput per amount of capex that we are incurring?

Riju Jhunjhunwala — Vice Chairman

It’s a mix of all. It’s a mix of demand-supply, it’s a mix of technology. And obviously it’s a mix of the lower throughput. If you’re talking about a 1:1 capital turnover ratio, obviously, we will need to have a very high EBITDA over here, in order to be, I mean, financially very viable. But even today, what we are seeing in the last five, seven years, the selling prices are stable for this particular product and the processing cost is very similar to what we have for the graphite electrodes. And going forward also, this is not expected to come down drastically because of the simple fact that the requirement for anode powder is going to go up very, very substantially, not just in India, but across the world. So that demand-supply mismatch will always be there. And then you have this two-year lag time of putting up any new capacities.

Sanjay Jain — — Analyst

Got it. So basically you’re saying that raw material cost per ton of finished product will be lower, conversion cost would be similar?

Riju Jhunjhunwala — Vice Chairman

Correct.

Sanjay Jain — — Analyst

And I missed, I think you mentioned in earlier discussion that what will be the tonnage out of this INR1,000 crore capex?

Riju Jhunjhunwala — Vice Chairman

Our — we are talking about the 10,000 tons per year plant, which would give us approximately a 1:1 capital investment to turnover ratio or so.

Sanjay Jain — — Analyst

Got it. Thanks so much.

Riju Jhunjhunwala — Vice Chairman

In the first phase, we are going for 10,000 tons. In the second phase, we’ll add another line of 10,000 tons.

Sanjay Jain — — Analyst

Got it, got it. Thank you so much for answering all my questions [Phonetic].

Riju Jhunjhunwala — Vice Chairman

Thank you.

Operator

Thank you.

Navin B. Agrawal — Investor Relations, SKP Securities Limited

Thank you very much. As there are no further questions, I’d like to hand over the conference to Mr. Riju Jhunjhunwala for the closing remarks. Over to you, Riju. Hello?

Riju Jhunjhunwala — Vice Chairman

Yeah. I think — Manish, I think the closing remarks would be directed towards you, I guess.

Manish Gulati — Executive Director

Okay. So, let me say, friends, thank you very much for attending our call and we remain very optimistic for our business electrodes, especially with the sunrise thing, anode coming up, we see a bright future for HEG, not only in our bread and butter business of graphite electrode, but also for this new product called anodes, where we are positioning ourselves as a green energy company.

So we look forward to speaking to you after the next quarter results are out. Thank you so much and take care.

Navin B. Agrawal — Investor Relations, SKP Securities Limited

Thank you, Manish ji. Thank you, Riju.

Operator

[Operator Closing Remarks]