Dakshin Foundry Private Limited (513519) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pitti Engineering's Conference Call to discuss the acquisition of Dakshin Foundry Private Limited. [Operator Instructions]. Please note that this conference is being recorded. Before we begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For a list of such considerations, please refer to the earnings presentation. I would now like to hand the conference over to Mr. Akshay Pitti. Thank you, and over to you, sir.

Thank you, and welcome to everyone for the conference call to discuss the acquisition of Dakshin Foundries Private Limited. Pitti Engineering Limited has acquired 100% share capital of Dakshin Foundry Private Limited at an equity valuation of INR 153.12 crores. The cost of acquisition comprises the business value and working capital of Dakshin Foundry as on June 30, 2024. Dakshin Foundry is a debt-free company and has a positive cash and bank balance of INR 42.71 crores as on 30th June 2024. We have funded this transaction by utilizing part of the general corporate purpose portion of the QIP funds amounting to INR 76.63 crores and the remaining INR 76.49 crores being funded from our existing cash and bank balances. Dakshin Foundry is engaged in the manufacturer of high-quality gray iron and ductile iron casting, value-added services like machining and pattern making. Dakshin Foundry manufacturing facilities are located in Hoskote, Bangalore. Dakshin Foundry has an installed capacity of 4,200 tonnes per annum. It is renowned and award-winning foundry known in the market for the development of casting with critical geometry, exacting surface finish requirements and stringent quality requirements. The main end use of the products are in railway, metro and power generation sectors. Its customers include the likes of Medha, Voith, Siemens Mobility, SKS, Bombardier, Alstom amongst others. It has a distinction of being one of the few foundries to have [ Die BUM ] approval. In FY '24, the sales volume in the company was 2,939 tonnes at a blended revenue of 241,000 per tonne. It reported revenue from operations of INR 70.89 crores, the company also reported an EBITDA of INR 18.63 crores, which is INR 63,300 per tonne. Other income for the period, mostly comprising of interest on loans and deposits was INR 4 crores. PBT stood at INR 21.20 crores and PAT was INR 16 crores. The transaction is EPS and value accretive. The acquisition will enhance our technical capabilities and bring economies of scale in our supply chain. We will also add to the portfolio of our machine components business. I would now like to open the floor for the Q&A session.

[Operator Instructions]. The first question is from the line of Pratik from AART Ventures.

Just wanted to understand as to what is the realized EBITDA per tonne?

EBITDA is 63,000 per tonne.

63,000 per tonne?

Yes.

Okay. And the capacity is 4,200 tonnes?

Yes.

And what is the utilization -- capacity utilization level?

See, currently, they are at about 75% capacity utilization, optimum utilization is 80%.

75% is the current and optimum is 80%. And you mentioned some of the clients for which Dakshin was working. Can you just repeat the same?

So majority of the sales are to Medha Servo, which is the company manufacturing the Train 18 Vande Bharat trains. Apart from that, they have exports to Siemens Mobility in Germany and Spain. They also supply to Voith for their locomotive division, SKS, Alstom and Bombardier. 80% to 90% of their sales would be from the railway segment and energy segment. 10% is to other segments such as compressors of highway vehicles, amongst others.

The next question is from the line of Sunny [ Vishay ] from Axis Securities.

Congratulations, Mr Akshay, on the acquisition, another straightforward. I just wanted to understand what are the expectations for the remaining year? Do we start consolidating from this quarter itself in the start of this quarter? And what is the expected revenue for the year?

Yes. So for this transaction, we will start consolidation from this quarter onwards. Quarter 1, we will not be consolidating obviously, since the transaction is [ forensic ]. The expectations from this company going forward be flattish, you would be expecting INR 75-odd crores of topline for the company and similar EBITDA as last year.

[Operator Instructions] The next question is from the line of Ramchandra Nayak, an individual investor.

Akshay, congratulations on your acquisition. I think it's a really aggressive and bold move. I have a few questions, and I hope you can bear with me on some of my questions. My first question is, you said this is in the castings business. You already have an existing casting business that you were planning to merge into Pitti Engineering? How similar is this to your existing business?

So this is very similar to Pitti Castings, except for the size of the castings that they manufacture. In Pitti Castings, we can manufacture castings up to 4 tonnes, but the optimum utilization of the equipment that we have is from 2000 kg to 1.5 tons. In this foundry, the optimum range of product is from 40 kg to 300 kg. So this will fit very well into the product profile of the consolidated enterprise.

Okay. That's great to know. So if one were to consolidate all your businesses now together and for financial year '25, what would you expect your overall revenue to be?

See, let's break this up into individual segments. At the Bagadia Chaitra level, we are expecting revenues of about INR 280-odd crores for the current year based on the current market. Induction foundry in this new acquisition for the full year, we should be looking at about INR 75 crores, like I mentioned before. What part of it gets consolidated will be based on the accounting standard. We have to consolidate in our financials on a pro rata basis on the ownership from the date that we have taken over the ownership. Pitti Castings should add about INR 130 crores to the topline post merger? And stand-alone, we should be in the vicinity of about 1,700 orders.

Can I assume that you would be crossing about INR 2,000 crores for financial year '25?

Based on the current outlook, yes, I think that would be safe to assume.

Fantastic. Just one more question, Akshay and thank you so much for being patient with me. Overall, when you look at all of this, you said this is margin accretive. So where do you expect the margin to be by again, around financial year '25.

See, these -- Dakshin foundry, if you see their client profile and the kind of complicated products that they do, we should be looking at them continuing to clock about INR 60,000 to INR 65,000 EBITDA per tonne. What is exciting about this acquisition is, like I mentioned, they have better technical capabilities than ours in the development process. And if we are able to leverage those capabilities in the Pitti Castings business, it should be, I mean, very, very margin accretive for us going forward.

Okay. Last question. Your current acquisition, the Dakshin one that you have just acquired, what is the potential for you to expand its existing capacity? Because I heard you say they're already at 75% of utilization. You could go up to 80%, which basically tells me that you're really a softer block in terms of your work. Ideally with the growing economy, what kind of expansion can you really get, let's say, within the next 1 or 2 years from your current acquisition.

So see, in the facility that Dakshin is based in, there any expansion would be very difficult. They are kind of saturated. We can probably look at the peak utilization of about 3,600 tonnes of sales from that facility. What is interesting for us is that Pitti Castings is currently at about 55% capacity utilization. And we do have spare capacity there to grow into. So what we will be looking at going forward starting maybe 6 to 8 months from now, is relocating products into the right location based on the geometry and criticality and accordingly, realigning the sales from the individual locations.

Excellent. Many congratulations and wishing you many more success.

The next question is from the line of Dharmil Shah from Dalmus Capital Management.

My first question would be, I mean, how different this business is than our existing Pitti Castings because if I compare their operating margins, those are, I mean, quite different. If I just look at Pitti Castings, those would be somewhere around higher single-digit but in case of Dakshin that's in the range of 20% around. So I just wanted to understand what is the difference between. Is it the product mix? Or is it something else?

Multiple factors to this. In terms of a process, they have the same process. It's a furan no-bake process. What differential Dakshin and Pitti Castings is that in Pitti Castings, we won't do the machining. The machine is done in Pitti Engineering and therefore, the margin on machining is recorded in Pitti Engineering books, while Dakshin does machining in their own facility as well. Secondly, if you take a product profile, they are predominantly into, like I said, railway and energy, 10% of its business do come from other segments like off-highway. Pitti Castings is actually quite diversified. Apart from railway, we have major contribution to off-highway vehicles, pumps, et cetera. The other segments are slightly less in terms of margin, railway obviously contributes to a better margin profile. And thirdly, they do smaller castings which are even more critical than what we currently do. And lastly, they are at about 75% capacity utilization. So the overhead absorption is much better at their end. We are currently in Pitti Casting about 55% utilization. So as the overhead absorption in Pitti Castings would improve, we [ slowed ] the margin profile.

Got it. Got it. And are there any plans to relocate this facility near to somewhere around Bagadia Chaitra's plant or you will be operating from the same plant where it is now.

So we have no plans to relocate this as of now to any other location. This foundry is a very challenging industry in terms of environmental clearances. And since the facility already has all those approvals in place, it would be currently not wise to disturb any of those approvals.

And if we combine Pitti Castings capacity and Dakshin Foundry, that could be somewhere around 26,000 tonnes, is this guess right or?

Yes, that's absolutely right. So about 20,000 tonnes would be our capacity on a consolidated basis Pitti Castings and Dakshin. And if you see pro forma, we did about 8,000 tonnes last year in Pitti Castings and Dakshin did about 3,000 tonnes.

Got it. And how much does this -- I mean, catered to our casting demand for our [ motor ] business?

So see, they already supply directly to the end consumer. Luckily, most of the customers are common like Alstom, Bombardier, Medha. So it will help us further cement our relationship in the machining and lamination side of the business with this acquisition.

We'll take the next question from the line of Chintan Modi from Haitong Securities.

Akshay, congratulations, and thank you for the opportunity. I just wanted to understand like if you look at FY '24 margins for Dakshin has been very high compared to FY '23. What has changed in that 1 year, if you could help to understand.

In terms of EBITDA, I don't think they are very dissimilar on a per tonne basis. If you just go back, what is different is definitely the other income, they have significant bank and cash deposits. So those have no kind of increased their PAT margins. But on EBITDA, I think they are pretty much similar to FY '23.

EBITDA per tonne is similar is what you are saying?

Yes.

Okay. And can you share like how old this facility would be?

So this company was established in 2004. I think if my memory serves me right, they went into operation in 2005, so it could be a 19-year-old facility.

Okay. And do you expect any additional cost to be incurred to upgrade the facility?

As of now, there is no further CapEx planned in Dakshin Foundry location, barring the operational CapEx at INR 40 lakhs, INR 50 lakhs, which they are already doing on an ongoing basis. It's a very, very well-maintained foundry, and it's equipment is absolutely cutting edge. We have consistently reinvested and upgraded their equipment and processes throughout the tenure of the factory.

[Operator Instructions] The next question is from the line of Madhav Agarwal from SG Investments.

Just wanted to confirm, when you were giving the revenue guidance for all the entities. So Bagadia was INR 280 crores, Dakshin was INR 75 crores, Pitti Castings was INR 130 crores. And can you confirm for Pitti Engineering?

Sorry, my bad. I think I need to make a correction here. Pitti Castings would be INR 50 crores addition to the topline. What I was trying to say I think [indiscernible] is INR 130 crore out of INR 180 crores of the revenues to Pitti Engineering. So when we consolidate only INR 50 crores will get added to the topline. If I can go back to it, Bagadia would be INR 280 crores net addition, Dakshin would be INR 75 crores net addition. Pitti Castings would be INR 50 crores net addition and Pitti Engineering based on current outlook is about INR 1,700 crores.

And so the second question I wanted to ask, will Dakshin also enjoy the pass-on model of raw material prices?

Oh, yes, of course. That's the industry standard in our customer -- all the customers have better to standard.

And for the 80% to 90% sales, you said are coming from the railway and one of the segments you mentioned?

Energy segment. So they make certain castings for gas turbine and steam turbine gearboxes and their housing and some on the turbocharger parts.

The next question is from the line of Abhijit Mitra from Aionios Alpha.

So just to sort of understand the margin profile a bit more. I mean you've guided for the revenues. Can you sort of take us through the expected margins of these individual businesses in the medium term and in the long term.