Electrosteel Castings Limited (500128) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 Earnings Conference Call of Electrosteel Castings Limited. [Operator Instructions] I now hand the conference over to Mr. Hiral Keniya from EY LLP. Thank you, and over to you, sir.

Thank you, Steve. Good afternoon, everyone. On behalf of Electrosteel Castings Limited, I welcome you all to the company's Q1 FY '27 Earnings Conference Call. To discuss the performance of the company, we have with us from the management team, Mr. Madhav Kejriwal, Whole-Time Director; Mr. Sunil Katial, Whole-Time Director and CEO; Mr. Rajesh Daga, CFO; and Mr. Gaurav Somani, General Manager, Finance. Before we proceed with this call, I would like to draw your attention to the fact that today's discussion may contain some forward-looking statements that are subject to various risks, uncertainties and other factors, which would be beyond management's control. We kindly request to bear in mind that there might be some uncertainties while interpreting such statements. We will now start the session with opening remarks from the management team. Afterwards, we will open the floor for an interactive Q&A session. I will now hand over the conference call to Madhav, sir, for his opening remarks. Thank you, and over to you, sir.

Thank you, Hiral. A very good evening, everyone, and thank you for joining us for Electrosteel Castings Q1 FY '27 Earnings Conference Call. I would like to thank all the stakeholders for their continued trust and support in us. Over the past few quarters, the ductile iron pipe industry has operated in a challenging environment due to slower project execution, delayed fund disbursements and liquidity constraints at the state and municipal levels. While the external demand environment remained challenging, we stayed focused on what was within our control. During this year, we implemented a broad-based structural cost optimization program across our operations, strengthening operating efficiencies and creating a more competitive cost base that will support profitability and operating leverage as volumes recover. We are encouraged by the approval of Jal Jeevan Mission 2.0, with the enhanced outlay of INR 8.69 lakh crores, including the government -- the Central Government support of INR 3.59 lakh crores increased from the erstwhile INR 2.08 lakh crores. Alongside the continued focus on AMRUT 2.0, irrigation and the river linking projects, this provides a strong long-term visibility for the water infrastructure investment. The irrigation sector continues to present significant opportunities, with several states increasingly adopting piped irrigation systems to improve water efficiency and reduce transmission losses. In case of river linking projects, we are hopeful to see demand coming in from the Ken-Betwa Project involving a total project cost of INR 44,000 crores, and the Parbati-Kalisindh-Chambal Link project between Madhya Pradesh and Rajasthan, which is also expected to commence shortly with project value being around INR 90,000 crores. There are many other such schemes upcoming, which are expected to benefit the ductile iron pipe industry in the long term. One such is the Urban Challenge Fund with a total investment of INR 4 lakh crores to address the rapid urbanization of our country. Further momentum is expected from the recently approved Modernization of Command Area Development and Water Management, or in short, MCAD, scheme, with an initial outlay of INR 1,300 crores for the modernization of irrigation water distribution systems through underground pressurized pipeline networks. Higher budgetary allocations and faster fund releases are expected to improve execution momentum, particularly in the second half of FY '27. Our subsidiaries in the overseas markets such as U.K., Europe and the U.S.A., have also been doing much better than our expectations, which is evident from our consolidated performance. We continue to deepen our presence in these countries alongside increasing the market in Africa and Southeast Asia. We are also strengthening our position across the water infrastructure value chain through the acquisition of T.I.S. Services S.p.A. Italy. This has expanded our product portfolio and enabled us to offer integrated water transmission solutions and also helps us further strengthen our global presence. During the quarter, T.I.S. delivered EUR 10 million in revenue, representing a sequential growth of 18.4% over the previous quarter with EBITDA margins improving to the mid-teens. The business continues to perform in line with our expectations. We also expect our valve manufacturing facility in India to commence operations by the end of this financial year, supporting future growth and improving profitability. As we mentioned in the last call, our target is to double revenue from valve segment in the next 4 years, and we are on track to achieve the same. Taking a cue off the water infra space, as a part of our diversification strategy, we are entering the industrial paints and protective coatings business, leveraging our existing expertise in the paint manufacturing used in our -- on our pipes, we will initially focus on high-value industrial and protective coatings and scale this business through phased investments. We aim to establish a meaningful presence in this segment and target annual revenues of around INR 800 crores to INR 1,000 crores in the next 5 years. To support this growth, we plan to incur CapEx in a phased manner of around INR 250 crores to INR 300 crores. Despite the challenging operating environment, our balance sheet remains strong, providing the financial flexibility to pursue growth opportunities, while also maintaining a prudent capital structure. With that, I would like to now hand over the call to Mr. Rajesh Daga, CFO, who has recently taken over from Mr. Ashutosh Agarwal. Mr. Daga has been with us at Electrosteel since 1989. Throughout his tenure, he has held key positions across diverse functions, including finance, accounts, purchase and sales. He will take you through the operational and financial performance of the quarter in greater detail. Thank you.

Thank you, Madhav. Good afternoon, everyone, and thank you for joining us. It is a privilege to address you for the first time as the CFO of the company. Let me begin by introducing myself. I'm Rajesh Daga, a qualified chartered accountant. I joined Electrosteel Castings in 1989, immediately after qualifying as a CA, and it has been my privilege to be associated with the company over 3 decades. Over the years, I have had the opportunity to serve the organization in a variety of roles across different functions, making this a truly enriching and rewarding journey. Before taking over as a CFO, I headed the company's domestic marketing function for the past 25 years, which gave me a valuable insight into our business, customer and industry. Before I proceed further, I would like to acknowledge the outstanding contribution of my predecessor, Mr. Ashutosh Agarwal, whose financial leadership, discipline and strategic guidance have played a significant role in strengthening the company's financial position and governance standard. With this, I would now like you to take you all through the performance of Q1 of FY '26, '27. Sales volume of DI pipes and fittings and CI pipes during the first quarter stood at 1.20 lakh tonnes, down by 27% year-to-year. The decline in volumes is owing to slow down primarily in the domestic market. This quarter, volumes in export market, too, was impacted due to Middle East tensions. At consolidated level, gross debt and net debt as on 30th June 2026 stood at INR 1,658 crores and INR 876 crores, respectively. During the last financial year, the net debt had reduced by nearly INR 1,100 crores, and we are focusing on optimization, utilization of the funds. I will now take you through the consolidated results of Q1 of FY '26-'27. Total income stood at INR 1,465 crores. Sales volume was lower on year-on-year, primarily due to reduced sales volumes. EBITDA stood at INR 139 crores with an EBITDA margin of 9.5%. PAT stood at INR 48.4 crores. Moving to the stand-alone results for Q1 FY '26, '27. Total income stood at INR 1,119 crores, lower on year-on-year by 21%, mainly due to lower sales volumes. EBITDA, including other income, stood at INR 70.60 crores with EBITDA margin of 6.3%. PAT stood at INR 5.9 crores. With past -- while past few quarters remain challenging due to softer domestic demand, we believe with the government positive steps towards water infrastructure space, the long-term outlook for DI pipe sector continues to remain strong. Central government has allocated INR 67,670 crores towards JJM in the union budget for FY '27. Out of this, approximately INR 10,344 crores has already been sanctioned to various states during the current financial year till date, compared to a meager INR 1,560 crores released under JJM in previous financial year. Going forward, we remain focused on operational efficiency, strengthening the balance sheet, maintaining financial discipline and remaining well positioned to benefit from a recovery in the domestic market. With this, I would now like to open the floor for the question-and-answer session. Thank you.

[Operator Instructions] The first question comes from the line of Pritish Urumkar with ICICI Securities.

Am I audible?

Yes.

Yes. Sir, my first question is regarding the Jal Jeevan Mission 2.0. So recently, around INR 6,000 crores have been sanctioned. So how much of it is translating into orders for us?

So sir, sanctioned amount is around INR 10,000 crores, INR 6,000 crores is what is released. So the rest of the INR 4,000 crores will also release soon enough. We are seeing an increase in the sentiment in the market with customers approaching for order booking more and more. These are going largely till now towards money spent by states already to the customers. So it's difficult to establish exactly what quantity has gone into order book directly to us. But in the next month or 2, we will -- we are finding that speed of order booking is going to pick up substantially.

Okay. My second question is about the imports on -- sorry, the Saudi government has put duties on DI pipe imports. So is there any impact on us?

Sir, the total sales of Electrosteel to Saudi Arabia was to a total of -- it's about 2% to 3% of our sales. So that is a quantity that can be diverted to other markets pretty easily. It's not going to be such a problem. And if you see the details, Electrosteel has had an antidumping of 17% and other manufacturers of India have had a dumping of 30%. So in fact, we don't see that a major chunk of our export to Saudi will go down because of this. And the small quantity that will also will be very easily diverted to other GCC countries in Africa.

Can you put it into figures like how much [ volume ] would be impacted?

Sir, I -- there is no fixed figure of sale year-on-year to Saudi Arabia. As I mentioned, it was approximately 2% to 3% of our total sales. This quantity, I'm assuming, will be down to 1.5%. So the 1% to 1.5% that we will lose out, that, we can very easily divert to other markets.

The next question comes from the line of [ Anand Darshan ] with 360 ONE Capital Market.

Sir, I just want to know what is our estimated DI pipes volumes for this year, sir?

So sir, we had erstwhile indicated the volume of, I think, 650,000 to 700,000 tonnes. But due to the slower initial release of JJM, we are expecting to reach a quantity of around 670,500 tonnes -- sorry, 575,000 tonnes.

[indiscernible] for the year, sir?

Yes, please.

Right. Sir, and what is the export volumes we had in FY '26? And what are we expecting in '27, sir? And which region are we focusing on there?

So all of -- so, so far, we've done around 21,000 tonnes export. We are hoping that...

At the current quarter, sir?

For the current quarter, yes. And we are expecting that at the end of the year, we will be exporting around between 22% to 25% of our total volumes.

Sure. Okay. And which region are we focusing there?

So Europe, the U.K. have been our strong markets ever since we started exporting. Around 60% of our -- 60% to 70% of our exports are focused on the Western markets. The remaining 40% is to the Middle East, Africa, and we have recently also started expanding into the Southeast Asian markets.

Sure. Right. Sir, can you give me the breakup of pig iron volumes for the quarter when you were operating at 50% utilization at that. So still we report an [indiscernible] EBITDA. So what led to this improvement, sir?

So as mentioned in the opening speech, owing to the situation of demand, do note there's a famous saying when the going gets hard, the hard get going. We decided that we need to roll up our sleeves and figure out how to make ends meet. And the team has taken up great initiatives to cut costs to moderate inventory. So this is a cumulative effort of the entire Electrosteel team to keep the head above the water. And how I see this helping us in the future is that we are going to come out of this situation even stronger to maximize on the opportunity ahead of us for the next 2 to 3 years.

Right. And can you give me the breakup of pig iron volumes for the quarter, sir?

If I'm not mistaken, sir, pig iron was approximately 45,000 tonnes.

45,000 tonnes. Okay, sir. Sir, my last question regarding that valve business. So we are planning to shift that production to India. So with lean manufacturing costs system in India, what growth are we expecting from FY '28, sir?

Sir, I wouldn't call it shifting of manufacturing to India. There are certain high-value products that are being made in Italy as on date, which will continue to be made there. We will shift a certain percentage and then double down on the total production volumes. So I would say, going forward, we are looking at the Asian subcontinent to contribute to around 40%, 45% of the total business. And the Western countries will still contribute to 50%, 55% to maybe even 60%. This is the outlook that we have over the next 3 to 4 years, please.

The next question comes from the line of [ Mishkat Khalid ].

Your presentation is very impactful. Thanks for the [indiscernible] presentation. My question is on the planned industrial paints expansion. We are almost increasing our capacity 4x. So what is the status? And could you tell some timeline on it?

So sir, initial investment will be to the tune of INR 100 crores, wherein we will add capacity by 17,000 kiloliters. We already have a small facility on which we will have to do a brownfield expansion in West Bengal. So that allows us a quicker return on investment, and it will also allow us to better learn the nitty-gritties of the business. We are very certain about the demand of the products that we are tackling. We are looking at getting into, as mentioned, largely protective coatings for industrial purposes and also structural railways, et cetera. So that's the current plan. The long-term vision is to take it up to around INR 1,000 crores in revenue with an outlay of close to INR 300 crores. Capital outlay of INR 300 crores.

Yes. Got it. Sir could you tell some timeline on it as to like how many years that could take?

Between 4 to 5 years, please.

Okay. And like, phase-wise, like, say, first 2, 3 years, what could be the first tranche which comes online?

So sir, you can say that the first 2 years will be a little slower. So maybe we go up to around INR 250 crores to INR 300 crores in the first 2 years, post which we will see this number practically doubling every year. So it will go from INR 300 crores to between INR 500 crores to INR 600 crores, and then INR 600 crores to between INR 800 crores and INR 1,000 crores. So that's why the 4- to 5-year timeline. The first couple of years would be a little slow, sir. Order the equipment, it comes, you start moving all the other things [indiscernible].

Yes. I'm just trying to understand, like, when would be the first capacity expansion, which would -- sorry, like first commercial production from the capacity expansion?

So commercial production post -- I think quarter 1 next FY, we can start seeing the impact of the diversification in the books, albeit small, but you'll start seeing it.

So as soon as next Q1?

Q1 next year. Yes, please.

The next question comes from the line of [ Sajan V. ] with Green Portfolio.

Yes. Am I audible?

Yes, please.

Yes. [indiscernible] My first question is regarding the DI pipe realization. Sir, what was the per tonne realization in Q1 FY '27? And if you can tell me about the Q-o-Q and Y-o-Y trends also?

So FY Q4 was -- these are net realizations of around INR 50,500 for Q4. And in Q1 is around INR 55,000. On revenue, this will be around -- you can say around INR 62,000 per tonne.

So the patterns regarding the DI pipe realizations are firming. They are bottoming. Can you say they are bottoming?

I'm sorry, I couldn't hear you very clearly. The pattern?

The trend, what you anticipate regarding the DI pipes prices?

Sir, of course, as you might have seen the last 1, 1.5 years has been extremely muted, especially the last particular financial year was probably rock bottom for the industry since it's been there since '94, I think, at least from my understanding, it's the worst year ductile iron has seen in India. So most definitely, this is rock bottom.

Yes. Okay. Understood, sir. The second question is regarding the order book. So basically, I just want to know what is the current executable order book we have and which states are the most active in tendering under JJM 2.0.

So we have a total order book of around 3 lakh tonnes, which works out to around 5 months. And yes. So JJM, this order book, JJM would be around close to [ 3% ].

And which states are the most active? And that which states are showing good traction?

Sir, state-wise, Orissa, Andhra Pradesh are the ones which are doing well. Kerala and Tamil Nadu are also there. UP and Rajasthan, now with the JJM 2.0. will also pick up reasonably well.

Okay. And sir, we expect that H2 FY '27, the fund release will be better, much better. So what gives us confidence?

I'm sorry?

Yes, sir. The current participant has disconnected. We'll move on to the next question. It's from the line of Dhruv Joglekar with MNCL.

Am I audible?

Yes, please.

Yes. So a couple of clarifications actually on the volume side. So this year, I mean, this financial year in FY '26, we had a volume of roughly 5.5 million tonnes. And we are expecting the next year also to be in the similar lines. Earlier, the guidance was about 7 million tonnes. Now I think in the initial comments, we made to 5.5 million tonnes. In spite of the fact that the JJM spend is going up from INR 1,500 crores to almost INR 70,000 crores. So let's assume 50% of it is actually consumed out of the INR 70,000 crores, even then it is a significant rise. So what is actually -- I mean am I missing something on this? I just wanted to understand that.

So sir, the reason for the slightly muted numbers is because the first half is substantially slower. The growth will really come in, in H2. Last year, it was kind of the reverse where H1 still had some leftover demand from JJM, which the states were mostly carrying. Then closer to the beginning of H2, they also ran out of steam. That is one of the reasons. And I think going forward, we are expecting that it takes a little time to restart and get back on to the production levels at peak. It takes around a month or 2 for that to happen as well. So that will give us a bit of a delay. Just to give you reference, in Q1 last financial year, we made around 1.8 lakh tonnes against which this year, we've got to around 1 lakh, 1 lakh 10,000 tonnes. So this is causing a bit of delay.

Okay. So is it fair to say that if the INR 70,000 crores gets consumed in this year, then Q4 and Q1 of -- coming Q4 and the coming Q1 will be significant up boost?

Absolutely.

Yes, Dhruv, does that answer your question?

Yes.

The next question comes from the line of Charchit Maloo with Genuity Capital.

So just a few quick questions. Firstly, on the T.I.S. Services, so what kind of revenue and PAT was there in Q1 F '27?

Sorry, what kind of revenue?

EBITDA and PAT was there from the R&D facility that you acquired?

So the revenue from T.I.S. was close to EUR 10 million. And the EBITDA margin was around 13% for the first quarter.

And the PAT level, sir?

PAT was around 7%.

Sorry?

Just give us a quick sense.

PAT would be close to around 7%.

Yes.

7%. And going forward in FY '27, FY '28, how much are we expecting?

So by the end of this financial year, we are expecting the -- as mentioned, it was going to be 20% above last year's average of around INR 38 million. So we should be -- hopefully we'll reach a number of INR 42 million to INR 45 million in revenue, with an EBITDA margin of similarly the 14%, 15% level with the PAT of 8% or so.

Good, sir. And sir, [indiscernible] so any plans for the debt repayment going forward?

Any plans for?

Debt repayment going forward in FY '27?

So we have -- our term debt right now stands at around INR 340 crores, which will eventually go down to around INR 230 crores with the scheduled repayments that we have. And as we mentioned initially in the call, last year, we had seen substantial debt reduction of around INR 1,100 crores. So the debt reduction is a continuous process, which is happening. Working capital debt will depend a lot on the working capital movements.

The business volume.

On the business volume.

The next question comes from the line of Arun Chulani with First Water Capital.

So listening to the other DI players, they were not that excited even going forward. They have said they're either pausing or they're looking to export, but they weren't very [ down ] with the actual state or the government actually pressing play given the situation on, let's say, energy inflation and having to counter that. What are your thoughts there? Is it just binary a wait and see? Or are you actually seeing on the ground traction by states or the government?

I'll give you 2 reasons that back up the thoughts that we have. First and foremost, within the first quarter itself, we've seen 5x the capital outlay from the center as opposed to what was there in, say, the last 10 days of the previous entire financial year. Being very frank, the election of 2029 is going to be very critical for the center, and they will have to finish this before that. So I'm fairly certain that the targets that they have to complete this project, I think, in FY '28, they will have -- they will put all efforts to make it happen, and this will be a priority exercise for them.

But nothing as yet. I mean you said the last 10 days, there was 5x the capital. But what do you mean by that? You mean 5x the orders or 5x the payments? Because part of the issue was they weren't paying, but are you seeing that they're paying now?

I'll just -- I'll clarify what I meant. What I meant was the amount of money they have spent in the entirety of last year, and that too, they spend that only in the last 10 days of the last year. They have already spent 5 or 6x of it this financial year. So -- and we are just in the third, fourth month. So I can see the wheels churning faster and faster and faster.

The next question comes from the line of Kunal Gandhi with Yashwi Securities.

Yes. So my question is pertaining to the INR 10,000 crore orders already sanctioned by the government. Out of that, which would be our participatory states and what would be our chunk of the pie? And for the remaining INR 5,000-odd crores, what is the revenue visibility that we see for us in FY '27 to close on an annual run rate?

So we can say that approximately from Jal Jeevan, we will be getting close to probably 12%, 13% of this outlay.

And this is for the existing orders?

For Jal Jeevan Mission, when you say existing order, can you elaborate a little on that, please?

On the INR 10,000 crores already sanctioned, we would be having a 12% to 13% market share there. And on the incremental orders that are yet to be sanctioned, there also we can see a similar rate, right?