HEG — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
Moderator · Conference Operator
MR. NAVIN AGRAWAL – HEAD INSTITUTIONAL EQUITIES – SKP SECURITIES LIMITED HEG Limited May 29, 2024
Ladies and gentlemen, good day and welcome to the HEG Limited Q4 FY '24 and FY '24
Questions and answers
Moderator · Conference Operator
First question is from the line of Deep Mehta from Bank of India Mutual Fund.
Deep Mehta
Couple of questions.
First question is regarding our graphite electrode business.
I would like to understand the supply-demand scenario of graphite electrode business.
From what we have read, it looks like some of the capacities in developed markets have shut down.
So, a, is this correct?
And how much market share we would have gained because of our high utilization as well as competitors' lower utilization?
Ravi Jhunjhunwala
See, as I said, if you look at the last 6, 7 quarters results closely and compare ours with most of the other peers, including Europe and American, Japanese, our capacity utilization has been by HEG Limited May 29, 2024 far the largest in every quarter.
So obviously, in a shrinking market because of demand constraints, we -- if we are adding -- if our capacity utilization is the highest, obviously, we are gaining market share.
And this is more or less in maybe more than 15, 20 countries.
We are very well diversified in terms of our export reach.
As I said in my opening remarks, we have been exporting about 2/3 of our production for more than 25, 30 years.
So we have a good grip of this market.
And so -- unfortunately, the steel industry is not doing well worldwide, so we are affected to that extent but the future looks pretty promising.
And up till now, most of the consultants were talking about it.
But now, in the last 2, 3 months, we have got in the official domain a report from BCG and another report from SMS.
And SMS probably knows the most about this industry because they are suppliers of most of the electric arc furnaces and all the related equipment.
So they are all projecting a very bright future for electric arc furnace simply because there's a carbon emission.
The carbon emission through electric arc furnace steel is practically 20%, 25% of the same steel which is produced from blast furnace.
So that is gathering steam in the rest of the world.
India is still behind that because we are still not -- we -- our commitment to Zero Carbon is very far away.
But rest of the world has taken a note of this carbon emission and as I said, about 90 million tons of steel capacity -- new greenfield plant capacities have already been announced all over the world.
And all the expectation is that it will be about 200 million tons additional capacity by 2030.
So -- and with our expansion and our highest capacity utilization that I spoke about, so we are very well placed to take advantage of that as soon as there is a small tick in the market.
Deep Mehta
That is very helpful.
If I have to take a slightly shorter-term view, like you've said that there is a lead and lag between needle coke in our books as well as current price on which there's margin volatility.
So going ahead, what -- is the difference between the inventory in our books and the current price of needle coke still very high?
And how should we see the raw material volatility going ahead?
Ravi Jhunjhunwala
No. See, currently, there is no shortage.
There's no problem at all.
As the electrode prices have dropped in the last 6, 7 quarters, so have been needle coke prices dropped.
So if you are talking about the margin being the difference of the selling price of electrode versus the buying price of needle coke, it hasn't changed much.
It has kept pace with the drop in the electrode prices.
And this is true in the past also.
And fortunately, our buying has been pretty decent.
And unlike most of the other peers in the industry, who have taken fairly large NRV hits in their balance sheet over the last 3, 4 quarters.
We haven't taken any hit.
So our inventory overhang of high-priced needle coke has not affected our results.
Deep Mehta
Very clear, sir.
And now coming to other businesses.
Now we are merging a couple of business and separating 2 listed companies.
So if you can talk about other businesses for which our M&As might be slightly lower, specifically battery storage business as well as power business.
What are the current numbers?
And how should the future look like for this newer businesses?
Ravi Jhunjhunwala
So Riju or Puneet, one of you.
HEG Limited May 29, 2024
Riju Jhunjhunwala
Yes, I think I can take that one off and I can just give a slightly longish answer so that the other queries are also answered as well.
So as you guys -- as everyone must be already aware, HEG holds 49% in a company Bhilwara Energy Limited, which is owned 51% by the promoters directly and 49% by HEG.
Bhilwara Energy in turn hold 51% in a 300-megawatt hydroelectric power venture.
Both these hydro plants are run of the river plants and merchant power plants.
One has been operational since 2002 and the other one has been operational since 2011.
Now, under Bhilwara Energy Limited, we have started a business of RePlus, which is into providing energy storage solutions, both for stationary applications of solar and wind power energy storage as well as for moving electric vehicles, where we're already working with some renowned names Pinnacle, Lyca, etcetera, etcetera, for manufacturing the battery packs for their electric vehicle.
So this -- so Bhilwara Energy owns 74% in this and the balance is technically for the promoters who have started that event.
TACC, which is the large graphite anode manufacturing project that HEG had undertaken, had conceptualized around 2 years back.
That is taking good shape on ground.
We had decided and we had spoken about it in the last meeting also that we are setting up 20,000 tons per annum of graphite anode -- high-grade graphite anode powder, which will be used for the lithium-ion battery manufacturing on the anode side.
And obviously, India today does not have any cell manufacturers.
So this product will actually go there.
Now, having a platform which has both hydro -- active hydroelectric power, active business in the energy storage space, which is in my personal opinion, I think, in the right -- in the next 5 years, that should see a lot of traction.
And also this new project, TACC, which although we are still on track, absolutely on putting up the 20,000-ton per year capacity, will obviously come in terms of the capacity utilization.
The way we had explained earlier also, it will not be something which we -- which is a plug-in and then out kind of a thing.
You'll have to work very closely with the battery manufacturers, both in India as well as abroad.
So our plans for putting up this project will have to match with timelines of the cell manufacturers.
And that's what we are trying to do.
And in the meanwhile, we are shuffling around with the technology.
So as a conscious decision, we took up this exercise around 6 months back internally, which was made public in this Board meeting, that the resulting structure will have 2 clearly defined companies.
One will be the HEG Graphite company, which will have the HEG Limited, which is 100,000 tons graphite plant and the captive 20-megawatt power – Tawa hydroelectric power units and enough cash in its balance sheet to fund dividend for this year and the leftovers from the expansion and some kind of safety capital as we might call it.
And the leftover company would be renamed to, let's say, HEG Greentech Limited, obviously subject to all the clearances, et cetera and it will take 15 to 18 months.
That company would have absolutely mirror shareholding of HEG Limited and that will have Bhilwara Energy's 49% stake of HEG, 100% stake of TACC and Bhilwara Energy's stake of RePlus Limited.
So clearly, 3 different businesses but all 3 related to the new age economy businesses and also to do with renewable energy and kind of -- with lithium-ion battery infrastructure.
HEG Limited May 29, 2024 In Bhilwara Energy, we already have a very safe kind of -- it's a battery company, the parent company -- the parent hydro companies.
So you have a safe cash flow inside Bhilwara Energy of between INR100 crores to INR150 crores worth of dividend, which will come in every year.
So subsequent to Stage 1 of this demerger process, the promoters who own 51% of Bhilwara Energy will merge their shareholding of Bhilwara Energy into the main company.
And in view of giving that 51% shares that the promoters would be giving for Bhilwara Energy, as per the true and fair valuation, which has been done by PwC and also supported by ICICI Securities.
The resultant company will have an increased shareholding later on where the promoter shareholding goes up from 56% to around 70%.
But that additional shareholding that is going up in the new company is purely because the promoters are putting in 49% of their equity that they today hold in Bhilwara energy.
So then we have 2 clearly separately listed verticals, mirror shareholdings of both the companies.
While HEG focuses on the graphite electrode business completely, this new energy business focuses on DC chargers to begin with.
And like Puneet said in the introduction, I mean technology is ever evolving in these new areas.
And we are looking at whatever kind of other projects possible, like battery recycling, et cetera, et cetera, as and when it comes under this particular framework.
So it gives us and also the shareholders 2 very clear distinct identities, both which are listed with existing cash flows to focus on different businesses, one is the graphite business and one is the new age economy business.
So I hope I've been able to kind of explain it properly in terms of what the resultant structure where we are aiming at.
And everything has been done absolutely at arm's length.
PwC has done the entire evaluation, in which they've taken their existing valuation of -- so all the valuations of all these independent companies has been done by PwC absolutely and which has been evaluated by ICICI Securities as well.
And Bhilwara Energy has been valued at around INR3,000 crores in total.
So HEG share of Bhilwara Energy becomes INR750 crores.
From total share of that 51% becomes -- yes and the TACC evaluation is exactly as per the last business plan that we had done in terms of the 20,000 tons and INR1,800 crores of capex coming up in the middle of 2025 operating at 30%, 50%, 75% and then 90% of capacity utilization in year 4.
And based on that and the 16% weighted average cost of capital for the new project, the valuation, the HEG today has invested around INR80 crores of money in TACC but we've already valued it at INR280 crores as part of the demerger plan.
So that is absolutely fair and square for all the minority shareholders as well as promoters.
And then the culture of both the companies, the manpower requirements of both the companies, the kind of -- ease of structures of both the companies, we can manage accordingly.
So that is the rationale behind the demerger.
And we hope that in the coming few years, it should gain.
And in the medium term also, it should give all the HEG shareholders a huge benefit to take advantage of both these businesses, the graphite and the new energy business.
So that's all from my side but I'll be happy to take whatever other questions anyone might have specifically.
HEG Limited May 29, 2024
Deep Mehta
Very clear.
Just 1 clarification.
There was some noise disturbance so -- just 1 clarification, Bhilwara Energy valuation is around INR3,000 crores.
Is my understanding correct?
Riju Jhunjhunwala
No, no. So that I stand corrected, the overall valuation of the hydro business is at INR3,000 crores, of which Bhilwara Energy holds 51%.
So the valuation of Bhilwara Energy's 51% in the hydro company stands at around INR1,500 crores.
Now HEG holds 49% of Bhilwara Energy and promoters hold 51% of Bhilwara Energy.
So that is around INR750 crores and INR750 crores each.
So for the purpose of valuation, Bhilwara Energy's total valuation for the demerger and the subsequent merger has been taken at around INR1,500 crores.
Moderator · Conference Operator
The next question is from the line of Saurabh Jain from Sunidhi Capital.
Saurabh Jain
Okay.
Just needed 1 information on the graphite electrodes business.
So based on capacity utilization numbers on the previous con calls, sir, I guess the volumes have broadly remained little under 70,000, maybe around 69,200 to 69,500 during the last 3 fiscals, that's FY '22 to FY '24.
Am I right?
Manish Gulati
Yes.
You're almost there, very close.
Saurabh Jain
Sir, my humble request to the management to start providing utilization or volume numbers in our quarterly presentations just like our competitors do, that would be really helpful.
Manish Gulati
We can do that.
It's not a problem.
Saurabh Jain
Okay.
Sir, my next question on the -- this demerger thing.
What would have been the FY '24 revenue, EBITDA and net profit of the existing businesses of HEG Greentech Limited, which includes Malana, RePlus and AD Hydro Power, if it is possible right now?
Riju Jhunjhunwala
So Malana, so BEL's overall value inside Bhilwara Energy as a company specific, there is only 20 megawatts of wind power, which is being operated.
So the overall revenue is only around INR17 crores, INR18 crores of the entire Bhilwara Energy.
The main value of Bhilwara Energy will come in the form of dividend that it will start receiving from this year onwards from Malana Power Company Limited, which in our estimation should be very safely depending on the selling rates of power every year, should be in the region of between INR100 crores to INR150 crores for Bhilwara Energy as a whole.
Half of it predominantly flow to HEG, half of which will flow to the promoters directly.
Now, for the purpose of valuation, we have taken a very rough estimate of around INR6 per unit of selling price for electricity for the next 20 years and the average generation or whatever the plants have been achieving for the last 10 years as the generation figures for that.
So in terms of the real valuation -- real value, if you ask me, the overall revenue is only between 5% to 6% of the entire company what is being done by -- from the new Greentech.
But in terms of future valuation, yes, of course.
I mean, TACC will start commercial production by middle of next year.
Then, depending on the kind of capacity ramp-up over there, that will start bringing significant revenues.
HEG Limited May 29, 2024 RePlus, we are very confident, which will then become a 100% subsidiary of Greentech business, that we are hoping that this year, we should -- in the year '24-'25 on a very conservative basis, we should be able to do revenues of between around INR250 crores to INR400 crores, which are a decent EBITDA kind of margins, which can only see growth in the next few years because of the kind of growth that we see in the sector.
So going forward, I mean, obviously, next 1 or 2 years, it's more about investments, more about everything in the new Greentech business.
But we have a very steady source of revenue in Bhilwara Energy, which will come in the form of dividends.
And RePlus itself will start generating cash flows very soon.
TACC will take another couple of years before it starts generating very significant revenues.
Saurabh Jain
Okay.
Sir, I missed out on RePlus EBITDA.
You had mentioned something.
Riju Jhunjhunwala
So RePlus, let me tell you -- I mean, RePlus is in the business of energy storage solutions.
We have a factory, which is a 1-gigawatt hour factory, which is put up in Pune, which is 100% up and running.
There, basically, you are importing the cells today from China and making these battery packs, both for the energy storage business and for the vehicle kind of business.
So that business is less on capex because these are mostly you're talking about assembly lines which are being setup.
So the capex involved in the total RePlus till now is roughly around INR70 crores to INR80 crores only.
But more of the money that goes into the particular project, let's say, if you get a large tender from the government tomorrow to give 200-megawatt hour of energy, a large portion of that will have to be supported by a strong balance sheet of the -- your delivery clauses, your performance guarantees, et cetera, et cetera, which Bhilwara Energy will be in a position to provide.
100% of Bhilwara Energy is under the new Greentech business.
And that also alienates the existing HEG Graphite business from providing any kind of guarantees or any kind of performance bank guarantees, late delivery clauses, et cetera, et cetera, for any of the new businesses.
And the growing, steady state, we expect RePlus to easily give an EBITDA margin of between 10% to 15%.
Again, this is all dependent on product to product.
Every day you will see a massive change in lithium-ion battery prices.
They've literally halved in the last 1 year.
Where they stabilize, what kind of rates we get the project bid at, it's -- this will all kind of play in the next 2 or 3 years.
But a 10% to 15% healthy EBITDA margin.
And this year, we are very confident of ending the year '24-'25, given the order book that we have, at between INR250 crores to INR400 crores.
And why I'm giving such a big kind of margin thing between INR250 crores and INR400 crores is because these are large government projects, which you know better than me -- I mean, we are hoping that it closes very fast but they can be delayed because of elections, because of whatever reasons by about a couple of months here or there.
So on a conservative basis, it's INR250 crores and on an aggressive basis, around INR400 crores is what our target is for this year.
And this company will be a 100% subsidiary of the new HEG Greentech company.
HEG Limited May 29, 2024
Saurabh Jain
That was really helpful.
Sir, my last question, what would be the capex number look like for FY '25 and '26 for graphite electrodes?
Ravi Jhunjhunwala
No, in graphite electrode, we have just...
Saurabh Jain
Sorry, anode.
Riju Jhunjhunwala
So for the anode, so at least the overall capex for the project that we are envisaging is between INR1,600 crores and INR1,800 crores depending on the final selection of technology, et cetera, how much power we need to take, how much -- we are still kind of contemplating between 48- kilometer 250 kVA line or whether we can make do with a 133 kVA line, that changes the entire dynamics.
But between INR1,600 crores to INR1,800 crores over the next 18 months is the capex plan that we have for TACC.
And around INR750 crores of this capex would be clearly funded by the cash to be left behind by the HEG Graphite company, which the HEG Graphite company was anyways committed to invest it in TACC.
And the balance will be from the dividends of Bhilwara Energy and a combination of some debt that we take on its balance sheet later once the demerger process is complete.
Moderator · Conference Operator
The next question is from the line of Pradeep Rawat from Yogya Capital.
Pradeep Rawat
So my first question is regarding our margin.
So last year, we had a margin in the range of 25% to 30%.
And now in this quarter, it's around 8%.
So any specific reason for that?
Ravi Jhunjhunwala
Gulshan?
Gulshan Kumar Sakhuja
Yes, yes.
This is on account of only that reduction in the selling price quarter-on-quarter basis.
Nothing more than that.
Pradeep Rawat
Yes.
And what's the reason driving the reduction in selling price?
Manish Gulati
There is no -- that is the degrowth of steel production between '22 and '23, which is, I mean, resulting in slowdown of demand and all the -- our peer group not being fully utilized.
So that is why -- I mean, all -- our competition takes its toll when all -- everybody needs that extra ton of order.
Pradeep Rawat
Yes.
And my next question is regarding our revenue split.
So can you provide a number like how much revenue do we generate from ultra high-power graphite electrodes?
Manish Gulati
See, if you -- in the portion of our business, it's roughly, I would say, 70% to 75% of UHP and balance of HP grade electrodes -- I mean, non-UHP electrodes.
Moderator · Conference Operator
The next question is from the line of Vandana Soni from SBI Mutual Fund.
Vandana Soni
Just wanted to understand the merger valuation.
You said hydro business is valued at INR3,000 crores.
So just wanted to confirm whether this include Malana Power plus AD Hydro Power both or just Malana Hydropower?
HEG Limited May 29, 2024 And second thing, I wanted to understand the valuation which we have given for TACC Limited.
Sir, you said INR80 crores has been invested till now and we have given INR280 crores as a part of demerger to HEG, which implies the total valuation for TACC is INR950 crores.
So is that correct?
Riju Jhunjhunwala
No, no. I think you have some confusion.
At the hydro structure, it is very clear.
So we have Malana Power Company Limited, which owns Malana Power Company, which is around 90 megawatts of hydropower and which owns almost 100% of AD Hydro, which is 200 megawatts.
So let's assume Malana power company has a 300-megawatt hydro company, in which Bhilwara Energy owned 51%, 49% is held by our Norwegian partners.
Now neither are we planning to buy the Norwegian partners out, neither they plan to buy us out and neither are we planning to demerging that company.
So the valuation of the entire hydro business is at around INR3,000 crores, out of which, Bhilwara Energy's valuation comes to be around INR1,500 crores.
Out of this INR1,500 crores, it is evenly split between the promoters and HEG, 49%, 51%, at around INR750 crores each.
TACC Limited is a 100% subsidiary of HEG Limited, in which HEG Limited has invested around INR80 crores today and that has been valued at INR280 crores.
That INR80 crores has been valued at INR280 crores.
TACC as a company has nothing to do with the Bhilwara Energy today or with RePlus or with any other company.
It's a 100% subsidiary of HEG.
And INR80 crores has been infused as equity, which has been valued at INR280 crores based on the numbers that we've always been discussing and a 16% weighted average cost of capital there.
So these are the 2 valuations.
Vandana Soni
So what will be the total valuation for TACC?
I understood the HEG part is valued at INR280 crores.
And post-demerger, HEG will hold 29.46% of this TACC.
So this implies INR950 crores of TACC valuation.
Is that correct?
Riju Jhunjhunwala
No, no. No, that's not correct.
Puneet Anand
Vandana, I'll take this thing.
So the demerged entity post the graphite business been demerged, it comprises of 3 main things, when one is 100% subsidiary TACC Limited, where the infusion is INR80 crores, we have 49% of BEL shares, which is today at a book value of INR300 and some investments, which will be roughly for INR700.
The total asset, which is in the demerged entity, is roughly INR1,100 crores.
The fair valuation of this INR1,100 crores is INR2,200 crores.
So 100% TACC, which today, we have infused INR80 crores, it has been valued at INR300 crores, INR292 crores to be very precise.
The BEL equity of 49%, which demerged HEG hold, it is valued at INR1,050 crores.
And the investments are being valued at INR776 crores.
When you are merging the BEL, so 49% of the equity of HEG Limited will be canceled and the promoters plus another listed company RSWM Limited, will be issued new shares.
The merger valuation is INR2,134 crores.
Out of that, INR1,045 crores is of HEG and remaining, it is for promoters.
So these are the numbers.
Riju Jhunjhunwala
So TACC value will be around INR292 crores, as Puneet said.
Puneet Anand
Correct.
HEG Limited May 29, 2024
Riju Jhunjhunwala
For INR80 crores of money that HEG has put in today.
It's a 100% subsidiary of HEG.
And the new Greentech company will own 100% of TACC.
It will not be 29%, it will 100% of TACC, the new Greentech company.
Puneet Anand
Once the merger is done, the 29.8% equity, being issued, is with the public shareholders, not with the HEG because the demerged entity is held by the public shareholders.
So HEG is not holding anything in HEG Greentech Limited.
Riju Jhunjhunwala
It's a mirror shareholding.
It's just a mirror shareholding of what it is today.
Moderator · Conference Operator
The next question is from the line of Bhavik Shah from MK Ventures.
Bhavik Shah
Just wanted to understand like the investment which currently HEG holds, out of which INR750 crores will be transferred to HEG Greentech.
Is that right?
Ravi Jhunjhunwala
Yes, correct.
Riju Jhunjhunwala
It will remain with the current company while the HEG Graphite company will become like a new company.
So in terms of the structure, the graphite -- HEG Graphite will be moved to a new co and all the existing businesses, including INR750 crores of cash will remain in the current HEG Limited, which will be renamed HEG Greentech Limited later on.
Bhavik Shah
Okay.
And sir, the borrowings will shift to the graphite company or will remain in this company?
Puneet Anand
So as for the borrowings which we have in HEG Limited is more for the working capital.
This will be part of the HEG Graphite Limited.
But we are also adding INR300 crores of cash kitty in that for the future.
And the -- any profits which is coming from April '24 onwards is also of HEG Graphite Limited.
Bhavik Shah
Okay.
Okay, sir.
Also, I just wanted to understand the revenue per ton and EBITDA per ton, which you are making right now.
What is that number?
Gulshan Kumar Sakhuja
We cannot speak specific about our numbers, EBITDA per ton but that can easily be calculated from the number that is available in that -- in the market -- in the public.
Bhavik Shah
Okay.
Can you just guide with our Q4 volumes, like what were volumes for the quarter?
Gulshan Kumar Sakhuja
Volume is 90% based on that, 80,000 capacity.
Bhavik Shah
Okay.
Okay.
And -- okay, sir.
Sir, any guidance for FY '25...
Ravi Jhunjhunwala
Just to clarify, as I just said in the beginning, on the basis of -- we cannot keep talking about 80,000 anymore.
I mean we are now fully equipped to produce 100,000 tons.
So as I said in my opening remarks, the capacity utilization this year based on 100,000 tons, we expect it to be in the region of 75%.
Bhavik Shah
Okay, sir.
So this number for '25 would a 75% would be like 80% to assume that, like we can target that?
HEG Limited May 29, 2024
Ravi Jhunjhunwala
Yes, in the region of 75%, more like 75%.
It could go to 80% if the market picks up a little bit.
But at this moment, I'll probably say 75%.
Bhavik Shah
Okay, sir.
And sir, in the Greentech business, which we have, sir, what kind of return ratios are we seeing in the anode business?
As we are saying we want to invest INR1,600 crores to INR1,800, what kind of return ratios do you expect to generate?
Riju Jhunjhunwala
So in the long run and let's say, 4th year onwards, then we are assuming like a steady state of revenue at 20,000 tons capacity, at 90,000 capacity utilization year 3 or year 4 onwards.
It should give us a steady state of between INR400 crores and INR425 crores of EBITDA.
That should be the kind of range -- that's the kind of number that has been taken for the purpose of valuations and also at the beginning of the conceptualization of the project itself few years back.
Bhavik Shah
If I like heard your opening remarks currently, in RePlus, we are expanding from 1-gigawatt to 5-gigawatt, right?
Riju Jhunjhunwala
That is a very long-term plan.
That's a long-term plan.
The area that we acquired is good enough to go from 1 gigawatt to around 3 gigawatts.
But when I say 1 gigawatt, this is of battery assembly.
I mean, let's make one thing very clear.
This is not 1 gigawatt of lithium-ion cell manufacturing because that's a whole different business altogether with like $1 billion plus per gigawatt hour of capex.
We are purely in the business of battery assemblies and battery pack manufacturing.
So we have manufacturing capacity of 1 gigawatt hour based on three shifts of operation today for different kinds of battery chemistries and making battery solutions out of it.
So our raw material for that is the lithium-ion battery cells. which we are importing currently from China.
And these are the same companies that tomorrow, hopefully, will become our clients once TACC is functional and making its graphite anode powder.
So the clients of -- so for the buyers of TACC would be the suppliers for RePlus if you want to put it that simply.
Bhavik Shah
Okay.
Sir, this INR250 crores to INR400 crores is like from our peak revenue potential.
This is only for FY '25, right?
Riju Jhunjhunwala
Yes, because this has unlimited revenue potential.
I mean, the way the whole ESS business is growing in India, almost every tender that you have seen from SECI, almost every tender that you are seeing from any private company today is for round-the-clock power.
And obviously, with the renewable energy exceeding its targets today in India, for the solar and for the wind power projects, the peak power can only be provided by a backup of energy storage solutions.
Now -- so in the long run, there's going to be a huge demand, not only in India -- I mean, we are already in the company and we already finished a project, if you've heard of the NEOM City in Saudi Arabia, which is being built.
It's not a very large project, it's a INR45 crores project for RePlus but we've already handed over that project -- to the NEOM City.
So that is also in the business of providing solutions to export customers, not just in India.
But over a 5-year period, this can really be -- grow into a very lean and thin and a very good -- kind of good, sustainable kind of a business in power.
HEG Limited May 29, 2024
Bhavik Shah
Current capacity of, say, 1 gigawatt, INR400 crores could be a maximum potential of revenue if -- but we can always expand.
Riju Jhunjhunwala
Yes.
Yes and no. I mean, I'm not saying INR400 crores is the maximum because a lot of these projects -- a lot of projects will be where you have to assemble the complete battery pack.
A lot of projects will be the projects in which the customer buys the cells and delivers it to you and you just have to provide them the solution overall.
So revenue is really not the key over here.
This same INR400 crores of revenue could be INR1,000 crores of revenue if all the sales were to be bought by us instead of being supplied by the clients.
This has to be seen more by an EBITDA basis but we are very, very confident that I think now this business is established, it's a year -- the factory has been running for around 6 months.
And we are seeing very encouraging results.
We just signed an MoU, which is in the public domain EKA buses, the Pinnacle's buses that they are coming up with.
We've already supplied 100 battery packs to them and we are in the process of supplying 2,000 more battery packs to that company.
So in the long run, we have good potential both from case study and moving the application for this particular business.
Bhavik Shah
All right.
And sir, if I squeeze in 1 last question.
Sir, this TACC will be -- plant will be operational from September 2026, right?
Riju Jhunjhunwala
No. The TACC plant will be in operation from around middle of, let's say, June or July 2025.
Bhavik Shah
Okay, 2025.
Riju Jhunjhunwala
But -- '25, yes, plant will start commercial production but I said to achieve, let's say, the first year of revenue would be around 30% of capacity utilizations because there's a lot of work that you need to do around with the battery companies along with the end user to kind of match the exact profile of that.
But by September 2026, we can easily see a 75% kind of a capacity utilization for the 20,000-ton plant.
Moderator · Conference Operator
The next question is from the line of Pradeep Rawat from Yogya Capital.
Pradeep Rawat
So we import battery cells from Chinese players and we will supply them lithium-ion anode to the cell manufacturer, right?
Riju Jhunjhunwala
I mean, yes and yes and no because today, India does not have any lithium-ion battery manufacturers but you have a lot of companies, Reliance, Ola, Exide, Amara Raja, Rajesh Exports, other companies, Genpact, which have signed a lot of MoUs with the government to put up large capacities for at least 50-gigawatt hour of battery manufacturing in India by the year 2026.
Now that 50,000 tons -- 50-gigawatt hour of battery manufacturing -- cell manufacturing would turn into a demand of 50,000 tons of graphite powder.
And in India, really, today, there are no real manufacturers of graphite powder.
Apart from us, there is a company called Epsilon, which you all must have heard of.
There is Himadri Chemicals.
Everyone is working on pilot-scale plants.
We also have our own 100 tons per year of pilot plant, which is already operational, where we are working with 24 to 25 different HEG Limited May 29, 2024 grades of raw material along with the customers to provide them with this solution.
But today, when we have to buy cells for RePlus, the only option is to either buy from China or if the customer wants a non-Chinese product, then it's probably 1.5x higher and you have to import from countries like Japan and South Korea, et cetera, because the cost of manufacturing of these cells in China is far lower than anywhere else.
So we are importing these cells and converting them into battery packs and racks.
And then a very important portion of that is the battery management system, the energy management system, everything, which is designed as per the particular client's application.
So that's what the business RePlus is in.
Pradeep Rawat
Yes.
So once our plant is operational, so we will be seeing a demand from Indian players also for our graphite anode powder?
Riju Jhunjhunwala
Correct.
So the rationale behind putting the plant, if you ask me in one line, the rationale and the core rational behind putting the plant is obviously in the long run to cater to the Indian suppliers.
But you know, I mean this demand and supply cannot be exactly matched time to time.
You don't know if their plant gets delayed by 2 years, if they start importing anode powder.
So we have already started working with all the larger -- these larger companies, whether they are based in China, whether they are based in Europe, whether they are based in Japan or Korea.
We've already started trials of our graphite anode powder that in the initial few years, even if we have to export the graphite anode powder, it should be a very profitable venture then also.
So the core philosophy behind the project is to cater to the domestic demand in the long run.
But in the short and medium run, if the domestic demand does not sum up as anticipated because of whatever delays in their plans of putting up the cell plants, our plants can easily cater to the exports market also to begin with.
So we are not changing our manufacturing plan as far as creating regional services.
Moderator · Conference Operator
The next question is from the line of Pranay Khandelwal from Alpha Invesco.
Pranay Khandelwal
I just wanted to understand and clarify one thing.
TACC, the graphite anode business, that stays with the HEG Greentech business, right?
Riju Jhunjhunwala
Right, right, right.
Pranay Khandelwal
Right.
And we have INR1,600 crores to INR1,800 crores kind of capex.
I just wanted to understand that you -- how will it be funded?
Riju Jhunjhunwala
So like we mentioned earlier, around 700 -- around INR80 crores of it has already been funded by HEG in terms of the land and the basic civil work that have started.
There's around INR750 crores, which will be left in the balance sheet of the HEG Greentech company, which will be used for funding this.
We will have a dividend in Bhilwara Energy of easily close to around INR200 crores or INR300 crores of distributable dividend in the next 18 months, which will be used for this.
And the HEG Limited May 29, 2024 balance INR400 crores to INR500 crores can easily be funded by debt.
I mean, we are being very conservative when we are talking about this because if we are investing INR1,500 crores of equity into this business, even if I were to consider 1:1 debt-equity ratio, one only needs to put in around INR800 crores of investments, for which the funds are already tied up, even to maintain a 50-50 debt-equity ratio.
One can easily take an INR750 crores debt and complete this project.
But as we go along, depending on the cash availability of Bhilwara Energy, what kind of requirements we have, whether it is 12 months, whether it in 18 months, specificities getting matched.
And I think we have the good mix of equity and debt.
And for the first phase, I think we'll try to go for maximizing whatever equity we can put into the business.
And for the subsequent steps of growing that particular business in the next 3 to 5 years, debt will always be a very welcome option over there.
But today funding 20,000 tons of INR1,600 crores should not be a problem at all with the INR750 crores of cash in the resulting Greentech balance sheet, INR80 crores that has already been invested by HEG and around INR250 crores to INR300 crores of money that Bhilwara Energy can support.
And the balance INR400 crores will be your debt portion.
So we'll be able to complete the project absolutely without any problem in terms of raising any more money for this particular business for Stage 1.
Later on, once -- any kind of options are open from kind of doing that business including getting any strategic partner, getting any kind of private equity, et cetera, for that particular business.
But that's at the later stage once it's established and the plant is up and running and we have a good future of concept of what I'm actually talking about right now.
Moderator · Conference Operator
The next question is from the line of Deep Mehta from Bank of India Mutual Fund.
Deep Mehta
Just 1 clarification.
After these -- all the transitions and once Bhilwara Energy becomes 100% part of HEG Greentech, we expect roughly INR200 crores to INR300 crores of dividend from - - cumulatively in the listed company, correct?
Riju Jhunjhunwala
Yes.
So this will be like, let's say, 3 years of dividend or 2.5 years of dividend because that is -- some, I mean, already there, we've already announced 1 round of dividend into Bhilwara Energy.
And the plan is to keep the money over there in the Bhilwara Energy Limited as part of the dividend to be invested as part of TACC Limited.
And this number can range -- this number will range anywhere between INR100 crores to INR150 crores a year depending on the selling prices of that particular year.
Deep Mehta
Okay.
So annualized dividend will be somewhere between INR100 crores to INR150 crores?
Riju Jhunjhunwala
Correct.
And, again, it is very difficult for me to...
Ravi Jhunjhunwala
Just to clarify, see, these were the 2 hydro projects that the group put in the last 15, 17 years.
And these were the first 2 projects in the country in the private sector and we took the risk of not signing a long-term PPA.
So at that time, there was a lot of debate in the banks and financial institutions and a couple of institutions backed out of their commitment of loan.
But we were HEG Limited May 29, 2024 convinced that by signing a PPA -- long-term PPA, we will only lose by signing a PPA because we were of the opinion that the open market selling price will always be higher than a fixed- price PPA.
And that fortunately turned right for us.
So consistently, this number that we are now talking about, the dividend number that we expect to get every year is based on the last 3, 4, 5 years of actuals.
And as Riju explained, this particular company is owned 51% by us and 49% by a Norwegian partner, which is the largest hydro company in Norway.
So we have seen the selling prices of power in the open market to be at least 50%, 60%, 70% higher than what would be -- what we would have got had we signed a long-term PPA.
So that was a very critical decision that we took.
That was a big risk that we took about 15 years ago.
And because we were convinced that in India, the power prices will keep going up and hydro is the most competitive power as we all know.
Unfortunately, both these projects got put up at a fairly reasonable price.
And so within 4, 5 years of commissioning of the project, we made enough money to repay all the debt.
So for the last about 6, 7 -- 10 years, probably, we have been a debt-free company.
And in hydro, as you know, there is very small cost of running the plant.
So interest is normally between 70% and 75% of the revenue -- I mean, of the cost in the first 5 to 10 years till you carry the debt.
So we didn't carry that debt for a very long time.
Within 4, 5 years of the operation, we were able to repay the entire debt, which would have been more or less in the region of INR1,200 crores, INR1,400 crores.
So this is a very reasonable number that we are talking about, a 51% dividend of about INR100 crores to INR200 crores, in between that.
So selling prices of power are very attractive.
And in Hydro, as you know, we can cater to, what you call, peak demand.
So in the last 6 months of the winter time, October to March, when the generation goes down to 15% to 20%, 50% of capacity but it gets compensated by very high price of selling number -- selling price because of the peak times.
So we generate all the power in 4, 5 hours where the peak prices apply.
So that figure of INR100 crores to INR150 crores being 51% of our dividend is very, very easy.
I mean, it's not an exaggerated number that we are talking about.
We've seen this in the last 4, 5 years.
Puneet Anand
Just to add here 1 more thing.
This BEL also through AD Hydro owns 170 kilometers of transmission line.
There, some relief is given by CERC and we may receive INR400 crores of transmission income in next 1 or 2 years.
That will also increase and contribute to the profits.
Moderator · Conference Operator
That was the last question in the queue.
As there are no further questions, I would now like to hand the conference over to Mr. Jhunjhunwala for closing remarks.
Over to you, sir.
Ravi Jhunjhunwala
So thank you, friends, for a very insightful discussion we have had today.
In the last 2, 3 weeks, ever since we announced the demerger in the public domain, there have been lots of speculation.
So it's good that we all spoke about it and we spoke about it very freely.
And I believe you would have got all the answers that you were looking for.
And if somebody didn't get a chance and we'd -- or somebody could not or we were not able to satisfy somebody on the numbers, we'll HEG Limited May 29, 2024 be very happy to have a one-on-one call with anyone, just to take care of all those speculations which were going on for the last 10, 15, 20 days.
So thank you very much and look forward to speaking to you again.
Moderator · Conference Operator
Thank you very much.
On behalf of SKP Securities Limited, that concludes this conference.
Thank you for joining us and you may now disconnect your lines.