Electrosteel Castings Limited (ELECTCAST.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '26 earnings conference call of Electrosteel Castings Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikash Verma from EY LLP. Thank you, and over to you, Mr. Verma.

Thank you, Michelle. Good evening, everyone. On behalf of Electrosteel Castings Limited, I welcome you all to the company's quarter 1 FY '26 earnings 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 Chief Executive Officer; and Mr. Gaurav Somani, General Manager, Finance. Please note, our CFO, Mr. Ashutosh Agarwal, is not available on this earnings call as he is unwell. Before we proceed with this call, I would like to draw your attention to the fact that today's discussion may contain forward-looking statements that are subject to various risks, uncertainties and other factors, which will be beyond management control. We kindly request that you bear in mind there may be uncertainties when interpreting such statements. We will now start the session with the opening remarks from the management team. Afterwards, we will open the floor for interactive Q&A session. I will now hand over the conference over to Mr. Madhav Kejriwal for his opening remarks. Thank you, and over to you, Mr. Madhav.

Thank you. A very good afternoon to everyone and thank you all for attending our earnings call. As anticipated, the quarter gone by was a challenging one. The slowdown continued that began in the second half of the last financial year. During this quarter, we've sold 1.63 lakh metric tons of pipes and fittings compared to 1.89 lakh metric tons in Q4 of FY '25 and 2 lakh metric tons of Q1 FY '25. Exports contributed to approximately 20% of our total pipe volumes. The decline in government spending on water infra-related infrastructure, in particular, contributed to the subdued demand. Additionally, we undertook our annual maintenance shutdown of 9 days at the West Bengal unit, which marginally impacted our production. Under JJM, the rural households have reported to have tap connect water connections at the beginning of the mission of 3.23 crores, which has grown to 15.67 crores as of July 2025, although new scrutiny has shown that the functioning household tap connections is at approximately 50% of the target, which is 19 crore households. There are headwinds at the moment, but we are optimistic about the future. The extension of the Jal Jeevan Mission as announced during the finance budget and the budgetary allocation of INR 67,000 crores for FY '25-'26 are positive indicators. We expect that the demand will start improving from the second half of this financial year. Additionally, the government is also prioritizing on river interlinking projects through the interlinking river program, which is aimed at redistributing water from surplus to deficit regions across India. This signifies huge long-term potential for our pipes in the coming years. India remains one of the fastest-growing global economies with an ever-increasing need for robust water infrastructure in both rural and urban areas. This will continue to drive the demand for pipes and fittings. In the meantime, we are using this period to optimize resources across all levels to minimize costs to enhance operational efficiency and for implementing IT solutions. We believe these challenges are temporary and do not alter the long-term growth prospects of the industry. We have proactively enhanced our capacities and are well-positioned to capitalize on the demand resurgence as it materializes. Coming to the performance of the first quarter of FY '25-'26, the company's consolidated total income stood at INR 1,586 crores, reflecting slowdown in the JJM and maintenance shutdown undertaken at our West Bengal unit. I would also like to take the opportunity to mention that we are reorganizing our CapEx plans in light of the current demand scenario and certain other new acquisitions. I would like to share some updates on the coal mine compensation matter as well. As for the coal mine compensation, I'm pleased to inform that the Office of the Nominated Authority from the Ministry of Coal, Government of India, has issued provisional compensation order dated 15th May 2025 in respect of compensation for cost of geological report, cost of consent, land, and Incline and Shaft infrastructure payable to prior allottees at Parbatpur Central Coal Mine in terms of Coal Mines Special Provisions Act 2015. As per the aforementioned provisional compensation order, the Ministry of Coal has estimated an amount of INR 500 crores approximate as compensation to the company. Coming to the recent acquisition, I'm very pleased to inform you of the acquisition of T.I.S. Service S.p.A, an Italian valve manufacturing company. It is a prominent international designer and manufacturer of valves and equipment used in water mains, sewage treatment plants and hydroelectrical power stations. Its comprehensive product portfolio includes butterfly valves, gate valves, air release valves, hydropower valves, hydraulic control valves and turbine as well. T.I.S. operations are strategically located across Europe and are engaged in production and commercial operations as well as R&D activities. Its major markets are Europe, Middle East, the U.S. and Africa. This acquisition marks a significant strategic move by ECL, which it has long aimed to enter into, which is the valve business, to bolster its footprint in the water infrastructure sector. Given that ductile iron pipes and valves are typically installed together in pipelines, the acquisition enables ECL to offer integrated solutions and a more comprehensive product package to its customers. The turnover of T.I.S. is around EUR 40 million and its EBITDA margin is up 13%. We look forward to ramping up the business and aim for revenue growth of at least 15% CAGR over the next 3 years and significantly improve the EBITDA margins. The global valve market is expected to grow at a CAGR of 4.6% and will go from $17.6 billion in 2023 to $26.4 billion in 2032. I would now like to hand over the floor to Mr. Sunil Katial, Whole-Time Director and CEO, for taking you through the financial highlights.

Thank you, Madhav ji. Good afternoon to all the investors present in Electrosteel Casting Q1 Financial Year '26 Earnings con call. I would like to brief you about the consolidated results in Q1 FY '26. Total income stood at INR 1,586 crores. That has been mainly impacted due to decline in government spending on water-related infrastructure and planned maintenance shutdown at Khardah as already explained. The EBITDA reported at INR 198 crores. EBITDA margin stood at 12.5%. PAT stood at INR 89 crores with the PAT margin being at 5.6%. And moving to stand-alone results for Q1, total income stood at INR 1,426 crores. EBITDA stood at INR 186 crores, EBITDA at 13.1%, PAT at INR 86 crores, PAT margin at 6%. Net debt has further reduced and now stands at INR 1,400 crores, including term debt of INR 346 crores only. Net debt equity ratio has improved to 0.24:1. Now I open the floor for question-and-answer session. Thank you very much.

[Operator Instructions] The first question is from the line of Vikash Singh from ICICI Securities.

Sir, my first question pertains to the government orders or the slowdown, which we -- most of the companies are talking about. Despite the allocation in the budget, what was the problem that the spending is not picking up as of now? So if you could throw some light on the JJM and related issues.

Sir, there is a approval mechanism that the government has put in place for allocation of funds. And since the budget is still pending to be decided, the extended outlay in toto up to 2028 is still not completely finalized. Thus, the allocation of funds is, at the moment, moving very slowly. The states have started spending money, but the center is holding on. I think in the coming 1 month or so, all these formalities will be completed, and then we will see fund flow even from the central level for JJM.

So another 1 or 2 months, and you think that this issue would get resolved?

Absolutely.

And sir, concurrently, there was a big story which was going up on the interconnection of river side. Any thought process on that? Anything has moved or this is still more on the paper?

No, there's a lot moving, especially between the UP, MP Ken-Betwa linkage. There is also one in Rajasthan, which is seeing some good activity levels. So I'm very optimistic on the fact that these 2 will definitely see the light of day. The other projects are all in planning stage, but I think this is a long-drawn process, sir. It's an 8 to 10-year, I would say, activity since you are talking about moving huge quantities of water across a very large landscape of geography. So the other projects will take another year or 2 to start showing up.

Noted, sir. Sir, second question pertains to our new acquisition, T.I.S. We have gone overseas for the valve thing. So usually, the experience have not been better for many of the steel companies who have tried to fetch some assets in the overseas. So just wanted to understand that thought process. And would be -- because the facilities -- manufacturing facilities is also abroad, wouldn't it have been more better that if we would have done this in India because our cost of production would have been much lower in India?

So sir, what is important to understand is that the type of valves that is being produced in T.I.S., what it specializes in, is a valve that is not made by anybody in India. In fact, T.I.S. and the other big manufacturers of the water valve industry are exporting from Europe into India. So this is not a product that is being made at all within the country, nor is it being made successfully by any manufacturer in the -- who is from the country at the moment. When we talk about the cost of production, the cost of production for that company today, even after that, they are looking at an EBITDA level of 13%, and that is in a very specialized area in terms of geography. Even when you talk about Europe, they are present strongly in specific markets of Europe, but not all of Europe. We, on the other hand, have a very strong presence all across Europe, and this is a very complementary product to our existing product basket. You can say this acquisition is done more to gain the knowledge. While I say that, it is also important to mention that definitely for the higher-value products and even the lower-value products that are being manufactured there, we are looking at starting localized production. We are looking at setting up an R&D facility here in India as well, which should not take more than 1.5 years to 2 years.

Noted, sir. Sir, just one thing in conjunction to this. You said 13% EBITDA margin. And at the same time, you're talking about some of the specialized products. Shouldn't be the margin should be on a higher side because if you're making something which is unique, you should command a better margin, right? So anything to do with the -- what's the basically deviation here? Because this thing with some other companies, the margins for a specialized product is always higher.

Well, if you look at the industry as a whole, you will see that they are actually hitting 2%, 3% higher margins than the other manufacturers within Europe itself. Once we start -- once we utilize the know-how and spread this across Middle East and India as well in terms of manufacturing and sales, even stronger than what it is already, you will find that this margin is going to move up significantly. So this is a margin despite high costs and despite being in Europe. So once this comes to India, you will find the value unlock happen and you will find much higher EBITDA levels of 18%, 20%.

So just a clarification, that 15% revenue CAGR is basically we are targeting India for that kind of growth, right?

Sir, we are targeting India. We are targeting the Middle Eastern markets where we are stronger than T.I.S.' presence and also the European markets where we are strongly -- more strongly present than T.I.S.

Okay. Sir, what is the current capacity utilization for T.I.S.?

Well, for one plant, it would be 100%. For the other plant, it would be around 45%.

Okay. So significant leg room is there?

Absolutely. And we will also create capacity here in India.

Noted, sir. Sir, lastly, if I can squeeze in one more question. This INR 500 crores compensation, which they have basically rewarded, had we received the money? And what's the time line if we haven't received the money?

Sir, we haven't received the money yet. It will be a little difficult to comment on the time line exactly, but we are hopeful that it will take probably 6 months to 8 months, maybe a year.

We'll take the next question from the line of Aashav Patel from Molecule Ventures PMS.

Sir, my first question is after consistently after many quarters of volume growth this quarter, we have seen a volume degrowth. As you rightly mentioned, it is linked to the slowdown in JJM. So can you please be more specifics and give us more insights on -- with regards to the slowdown, whether the new project tendering has been slowing down or the fund release has been slowing down? And when can we expect a quarter of volume improvement again?

Sir, both parts have slowed down. The payment to the contractors have slowed down, which in turn has reduced the order booking from their end and also the tendering process has been put on hold because of -- new tendering processes have been put on hold because new fund allocation is yet to happen. So that is the current scenario. I am very sure about the fact that come quarter 3, we will start seeing an increase in volume again. Quarter 2 will also be a slow one as quarter 1 has been.

And AMRUT 2 is also facing similar challenges?

Not really, sir, but AMRUT 2 is a relatively new initiative as compared to Jal Jeevan. So a lot of the work is still in its design phase and it's not yet picked up full pace, although there is still business coming from there, but it's not full pace.

Got it, sir. And sir, my second question would be the INR 500 crore the provisional compensation, which we have -- which the government has allotted to us. So we were expecting a number closer to INR 1,200 crore. Is that right?

Sir, this INR 500 crores does not include all aspects of the mine infrastructure. This is only taking into consideration land and one particular mine infrastructure, which is the biggest mine infrastructure that is the Incline and Shaft. There are other aspects to the infrastructure for which the valuation is in progress. Thus, this is a provisional order.

So we are still hopeful of receiving the entire investment around INR 1,200 crores, right?

It will be difficult to say whether we will get the entire investment. But yes, we are hopeful to get close to the entire...

Significantly higher...

Higher, I would say higher.

Got it. And sir, last question from my side. Many of our peers like Rashmi Metaliks, Welspun, Jai Balaji, everyone has started venturing into this new segment called OPVC pipes. So why are we falling behind and we don't have any such plans to add OPVC lines?

Sir, I wouldn't exactly call it falling behind. OPVC pipes is something that is an opportunity that is definitely something we're looking at, but there is nothing concrete. And we are keeping our ears close to the ground about the opportunity present, although we are not very hopeful that it will become a huge market as it's expected to become because we find that in the Western markets, which usually are a precursor to what happens here in India, OPVC hasn't picked up much, and it's been there for many years. Europe is practically not present. The only market where it's been successful is the U.S.

[Operator Instructions] The next question is from the line of Muskan from B&K Securities.

Sir, in the past, you have mentioned that we will balance domestic and exports based on the demand. When there is weak demand in domestic, knowing that there is near-term challenges, can we increase our focus to exports as margins would be better? And how is the export business opportunity? And is it easy to scale business in exports market in the last 3 quarters since the demand in domestic is weak? Why are we not able to scale it up in the terms of sales?

There is a bit of a delay between preparation and execution when it comes to being able to start increasing your exports to that level where there has been a slowdown. It's always easy to manipulate it by 5%, 7%. But when we're talking about wanting to move the needle by a double-digit percentage number, it requires some time. Saying that we have increased our focus towards volume markets now like Africa, and we are starting to explore the South American region as well, but it takes a little time. And also this business is such where you're working with slower-moving projects, especially in countries in Africa, it takes some time. This quarter, you will find that we have increased our export though as compared to quarter 1, hopefully.

So which means export percentage has gone up because the domestic mix has come down, right, sir?

Yes, please.

Okay, sir. And sir, like you spoke about re-strategizing of CapEx in your opening remarks. Does this mean you are putting the Odisha CapEx on hold for now and you're changing the product planned in Odisha?

You can say that due to the acquisition of T.I.S. and as I was mentioning earlier on the call, we want to localize so that what is being imported today into India can be manufactured and sold within India. There will be some restructuring and also there are some delays on the land acquisition for the project. So things are moving quite slow on that front. Saying that, we are going to be seeing how we can optimize on our capital allocation and move forward accordingly.

Sir, the coal [ block ] compensation is INR 500 crores. How much more are you expecting? And when are you expecting to receive these funds?

Ma'am, when is a question which is difficult to answer. We are -- I'm expecting it between 8 months to a year. How much it will increase? Again, that is something that we are constantly working on. We've only managed to get the valuation for the land, the geological report, and one big mine infrastructure. So it's difficult to give a number on that exactly. But definitely, it will be a bigger number than this.

Okay, sir, one last question. So margins in DI has come down sharply because of a lot of capacity addition by other players. So with this -- all this capacity addition, can we still do sustain INR 15 per kg EBITDA in the coming years?

Again, on rupees [Foreign Language] basis [Foreign Language] is not the right way. I always encourage looking at it on a percentage basis. I've said that a 15% to 18% EBITDA range is what we will be hitting. And I am still certain that if you look at it from a mid-term perspective of a year for the entire financial year, we will still hit that range.

The next question is from the line of Deepesh Sancheti from Manya Finance.

What is the effect of the U.S. tariff on the company? How much is the percentage of sales to the U.S.? You said that 20% is exports. How much is that there to the U.S.?

Sir, of the total sale, our U.S. sales is approximately 1%. So there will be negligible to no impact on our overall performance based on U.S. tariffs.

And regarding the compensation, which from JSW, the temporary order which has been -- which we have received compensation order, has JSW filed anything against it? Or what has been the response from JSW?

They have seek some clarifications, which we are in the process of giving. So there is no -- so far, there is no issue.

There is no issue. Sir, you mentioned that you expect 6 to 12 months for the money -- for the INR 500 crores to be received.

Yes.

When do you expect that the entire amount of INR 1,200 crores plus would be received?

That is a difficult one, sir. It would be difficult for me to give you an answer on that.

We will move on to the next question, which is from the line of Ankit Puri, an individual investor.

As the first question is with regards to the acquisition. What are the prospects of the cross-selling? And when do we start to see the results of the same on the balance sheet going forward? This year, next year?

I think within this year itself, you will start seeing some impact, substantial impact because of our overall size and the size of the acquisition. Probably sometime mid next year to the end of next financial year, you'll start seeing a major impact of the acquisition on our books.

All right. And what about the prospects for the cross-selling? Do we hope to increase our sales with regards to DI pipes as well with their clients?

Yes, please. Absolutely. This will encourage sales in the markets where T.I.S. is strong for our existing product line of both pipes and fittings.

Okay. Excellent. Secondly, what are the current inventory levels and number of days in consolidated and stand-alone basis as of today, if you talk about quarter 1 at the end?

So in terms of quarter 1, the inventory days is around 110 days, and it has gone up compared to Q4 previous year.

So 110 vis-a-vis what?

It was around 97, 98 days.

All right. Lastly, will you be still sticking with your overall guidance of 8 lakh, 8.5 lakh tonnes for this FY year? And as you mentioned with things expected to pick up in H2?

Due to the slowdown in the first 2 quarters, reaching that target will be difficult. We are looking at a flattish growth with regard to last year. So you can say 7, 7.5 lakh tonnes.

But will the additional in terms of the fitting acquisition as well as the T.I.S. acquisition, will they play a role in at least giving us better numbers compared to the last financial year?

I would say that we will have similar numbers as the last financial year because the entirety of the last financial -- we saw a slight slowdown in the last quarter, whereas in this quarter, this year, the first 2 quarters will be exceptionally slow. So things will pick up in the second half, but it will not be so much so that we will surpass last year's performance.

All right. So we're looking at a flattish basically in this FY year?

Yes, please.

[Operator Instructions] The next question is from the line of Rajat Setiya from iThought PMS.

My first question is about the -- what would be the industry level utilization in DI pipes at the moment?

Around 60%, 65%, please. This is just for quarter 1 and quarter 2.

Right. And where do you see this moving, let's say, once ordering begins in 2, 3, 5, 6 quarters?

Once the taps for the funds have opened up, sir, we'll again be in a situation where the demand will be outweighing the supply. We still haven't reached that stage where enough capacity has been added. So I think probably 90%, 95%, which is the norm for capacity utilization of every plant in ductile iron.

Okay. And you see this happening in next year, sometime in next year, right, financial year?

Starting H2, sir, maybe starting H2 or a couple of months into H2.

Okay. That soon?

Yes, absolutely. It's just a very temporary slowdown because of a lot of, I would say, hierarchal approvals that are required at the government level to allow for funds to be allocated. There is nothing else that is holding this back. So once that starts, we'll see a good growth potential over here.

And in terms of OPVC, how much of DI volumes would have been taken up by OPVC already? Any estimate that you would have?

I think at the worst-case scenario, it will be 2% to 3%, if at all.

Okay. And all in the smaller sizes, right?

Yes, yes.

In terms of volumes, I think smaller sizes would not be big as a percentage of the overall DI side, right?

No, sir, smaller sizes contribute to around 40% of the DI demand. But again, OPVC as HDPE had when it had come in, it will not be -- it cannot be a replacement for DI. It has its own set of applications and the overlap is very minor.

If you can elaborate a bit on the last part where you say overlap is very minor?

I mean the use case for a plastic pipe and a metal pipe is very different, sir. It depends a lot on things beyond just transporting the water, it goes into pressure overload from the soil condition, water condition, et cetera, et cetera. So there are multiple aspects that determine whether a plastic pipe goes into the ground or a metal pipe goes into the ground. And considering India's weather and other soil conditions, it's a very small, I would say, very, very small use case where you can use either a DI or a OPVC or HDPE. In most cases, it will be a clear-cut answer that for this application, we have to use DI and for this application, we can use an HDPE or an OPVC.

Understood, sir. And sir, one final question about the acquisition. What is the valuation that we are paying for the acquisition?

Around 7x to 8x EBITDA, EV/EBITDA, please.

So you said margins are 13%, so maybe $5 million is the margin. So we are paying almost [ $35 million, $40 million? ]

Yes, yes. [ $35.5 million ] to be exact actually.

Okay. And how much debt in the books of the acquired entity?

Around EUR 19 million, please.

[Operator Instructions] The next question is from the line of Deepesh Agarwal from ICICI Prudential AMC.

So a couple of questions. Firstly, around how was the demand scenario in terms of pipe irrigation and dam improvement projects this quarter? And how are you expecting it to be in the coming financial year as well?