Kalyani Forge Limited (513509) Earnings Call Transcript & Summary

Good morning, everyone. Ladies and gentlemen, I welcome you all to Kalyani Forge's Q1 Financial Year 2026-2027 Investor Conference Call. I am Yash Patil, Investor Relations Manager. [Operator Instructions] We hope you have received our Q1 financials and press release that we send out, which are also available on our website. Please note that our remarks today includes forward-looking statements regarding our strategic initiatives and business performance. Actual results may vary materially from this projection due to various risks and uncertainties. Kalyani Forge undertakes no obligation to publicly update this statement to reflect future events or circumstances. With that, I will hand over the call to our Managing Director, Mr. Viraj Kalyani, for further business insights. Please sir.

Thank you, Yash. Good morning, everyone, and welcome once again to our quarterly investor call. We are happy to see many of the familiar faces as well as a lot of new investor interest in today's call. So without any further delay, let's get started. We'll just share our quarterly presentation. Yash, is it visible?

Yes. Now it's seen, yes.

Okay. Yes. Now is it visible?

Yes.

Okay. So this is our investor presentation for Q1 FY '27. This is the usual safe harbor statement, which Yash already spoke about. And just as an introduction, again, Yash Patil has joined us recently as an Investor Relations Manager. And with his joining, we have created the Investor Relations department in Kalyani Forge for the first time. So it's our endeavor to deepen our relations with existing and prospective investors for the long-term growth of all stakeholders. So I welcome Yash to our team, and I'm happy to introduce him to all of you.

Thank you.

So this is the main highlights for Q1. As many of you would have seen in the press release, this has been a pretty strong quarter, and we are very happy with the results. Q1 FY '27 PAT is INR 4.48 crores, up over 218% year-on-year from INR 1.41 crores last year. Earnings per share is INR 12.31. ROCE, which is return on capital employed, crosses 20% for the first time. This has improved to 22%, up from 18% in the previous quarter, Q4. EBITDA margin is 16.2%. This is another result that we are particularly happy about as EBITDA margin is our -- one of our main KPIs for our transformation journey. It is up 640 basis points year-on-year from 9.3% last year. PBT margin is 9.2%, again, up 600 basis points. And PAT margin, 6.7%, up 450 basis points. So a large part of the PAT or bottom line growth is coming from the EBITDA margin expansion. Total income or total revenue is INR 67.07 crores, up from INR 64.53 crores same quarter last year and INR 59.24 crores in Q4. So that's a revenue growth of 3.9% year-on-year and 13.2% quarter-on-quarter. PBT, INR 6.15 crores, is up over 203% year-on-year. New order wins are in sample validation phase, particularly some of the engine and wheel hub components from marquee global customers that we spoke about last quarter. These are progressing on a disciplined, low CapEx expansion path, which I will talk about in the coming slides. And cash conversion cycle has improved to 148 days from 168 days in the previous quarter. Vriddhi Council cost savings of INR 19.1 crore realized to date against a INR 15 crore annual target. So these are all our major goals and initiatives that are progressing quite well. These are our product offerings. Many of you are already familiar with it. Our 3 main products: engine, driveline and axle, our 3 main product groups. Among these, the engine or connecting rod still commands about 60% to 70% of total revenues, but all the 3 product groups have been growing, especially the axle group has grown substantially this quarter. And in terms of a future business strategy, all our products are quite well hedged for a fuel-agnostic future. So what I mean by that is most of our engine business is in the heavy commercial vehicles or trucks and in the industrial off-road segments. The driveline and axle businesses are in passenger cars and some in the light commercial vehicles. And both these driveline and axle are fuel-agnostic products. So the only place where we see a lot of risk on electrification of vehicles is for the engine business in passenger cars where we are quite -- we have very low exposure. So that's how our business mix is quite well set up, especially after the recent transformation of phasing out old legacy business and focusing on the core high-volume growth business. So our growth formula is strong execution plus business development plus CapEx equals growth. And this is something we will talk about in the coming slides. This has been our model of growth. And it is after almost 1.5 years or 2 years of using this formula, I can say confidently that this is the simple and right approach for us. So here's our financial performance. As you can see, total revenue, INR 67.08 crores, has been the highest in the last 5 quarters or more, driven by market demand as well as market share gains across the passenger cars, trucks and industrial segments. This has also come against the backdrop of our improving operational efficiencies, scaling up and ramping up on the new businesses. And we hope to continue this trajectory over the coming quarters. PAT is at INR 4.48 crores, which is also one of the highest in several quarters. I would like to remind our audience that last quarter, Q4 had an abnormally high PAT of INR 5.88 crores, which was due to the deferred tax gain, which was offset from the previous quarter. So Q1 FY '27 PAT is a normalized path and reflecting the true trend of growing profitability. EBITDA, as you can see, is the highest in the last 5 quarters and probably at an all-time high level at INR 10.89 crores. And similarly, EBITDA margin, 16.2%, is at an all-time high, and we are happy to see the that we are building on the 15% EBITDA mark from the last 3 quarters -- or last 2 quarters. Now coming to some key ratios. We have had a consistent improvement in capital efficiency, with ROCE rising from 14% last year to 22% over the last 5 quarters. Deleveraging trend continues and this is a ratio that we are now tracking. Debt-to-EBITDA has improved from 3.53 to 2.51, which is now below our target level. And this is a very healthy sign for long-term sustainability of the business. Cash conversion cycle has improved to 148 days in Q1, the best level in 5 quarters, reflecting tighter working capital management. Profit margins remain on an improving trajectory versus FY '26 lows, supported by better operating leverage and cost discipline. So our continued focus on margin stability and working capital efficiency remains a key priority going into FY '27. This is a little more detail on our EBITDA margin expansion story, which has been playing out for the last 3 quarters. We've had an all-time high EBITDA margin of 16.2%, as what we are experiencing now is the operating leverage compounding with shop floor efficiency improvements. This includes Vriddhi Council projects bearing fruit, which is our strategic initiatives, plant engineering initiative, unlocking efficiencies, improved material and power cost discipline and operational stabilization through machine recon and die-run prioritization. So what I mean by the operating leverage compounding is that the improvements that we did in Q2 last year or Q3 last year, those continue to reap benefits every month and every quarter. And the additional improvements that we do beyond that, those keep adding up. So this has a very nice compounding effect, which helps our EBITDA margin expansion. We've also had price increases kicked in, where we have negotiated better pricing from certain old businesses and customers. We have also exited from low-margin businesses over the last several quarters. And now we are tracking EBITDA and ROCE to focus on profitability and capital efficiency together. Now I'll take you through our sales and business numbers across various segmentation categories. So the first one is sales by product group. Engine sales have increased from INR 29 crores in Q1 FY '26 to INR 40 crores in Q1 FY '27, roughly 38% year-on-year growth. Axle has grown 22% year-on-year, and driveline has grown 11% year-on-year. Core businesses have grown, with a focus on OEMs growing demand as well as market share gains for Kalyani Forge. And the domestic PV business has experienced increased demand, which is seen in our ramp-up programs. In terms of an overall sales mix, it's quite similar to the previous quarter across product groups. So engine, driveline, axle and other are at pretty much similar levels with a slight increase in the engine segment from 57% to 60%, and a reduction in the other group from 15% to 12%. This is completely in line with our strategy where we are increasing our OEM and Tier 1 customer business, and we are deprioritizing some of the low-volume legacy business of Tier 2 customers, which falls in the other category. Also, a lot of noncore products fall in the other category where they are very niche and don't have much of a growth potential. So those kind of businesses are being reduced. This is the sales trends by geography and segments and their market segments. So strong growth across segments backed by increasing market demand and market share gains. Passenger cars, 35% year-on-year growth, with strong OEM growth and new business ramp-up. Trucks is 48% year-on-year growth, which is the fastest-growing segment. Industrial segment, 67% year-on-year growth, with a smaller base, but strongest percentage growth. And agro business is down 31% due to consolidation of core businesses, some legacy low-margin businesses being phased out. Other category also involves similarly legacy nonfit business that is reduced. Export sales mix has revised to 16% in Q1 FY '27 compared to 11% in Q4. This has happened with new high-volume business replacing some of the legacy nonfit business. And therefore, our exports now has better growth potential and better profit margins. Coming to business development, which is our pipeline for revenue growth. Now since this quarter and this financial year, FY '27, we have started tracking a new metric, which is revenue from new business as a percentage of total business. And this is something we will be reporting on going forward because this is the final proof of the pudding of whatever new order wins that we are getting are those getting converted into new business. By new business, we mean those which are launched in the last 3 years. And the importance of this metric is that having a substantial share of our total revenue coming from new business ensures that they have a much longer life cycle and much longer revenue potential. Old businesses, due to their life cycle, can get phased out or stopped by the customers, and those need to be replaced with the new platforms on new product businesses. So at 22%, we are at an all-time high in the last 5 quarters or possibly even more. And in an absolute level, it's at around INR 13 crores of the quarter's revenue. Wheel hub samples are in progress, which constitute approximately INR 20 crores of annual revenue. And we are also having a new wheel hub line installation in progress, where we are utilizing existing CNC machines from the recently phased out businesses. And this is what I was alluding to earlier about our discipline in CapEx and ensuring we have capacity growth, better capacity utilization while being prudent on completely new CapEx investments. Overall, for business development, we have a high-runner portfolio focus, which is on top 20 high-value customers, and we keep working on generating new businesses from these from our top customers. Our vehicle share of wallet has been increasing, with an offering of engine plus driveline plus axle components. And I'm happy to share once again that Kalyani Forge is the only forging company to offer all 3 engine, driveline and axle components to OEMs due to a combination of hot and warm forging technologies that we have built over decades. This is our business mix optimization progress update. So basically, where we've brought in the right business and removed nonfit business to ensure scalability and long-term growth. So as you can see, OEM revenues have increased to INR 40.7 crores in Q1 FY '27, 31% year-on-year growth, 9% quarter-on-quarter growth. And I'm happy to share that this is a fourth consecutive quarter of OEM revenue growth, which means we are completely aligned on our strategy and the entire company, all the various departments, all the -- everyone's efforts are focused on increasing OEM business and satisfaction. Approximately INR 40 crores of nonfit business is phased out in FY '26. We have started Phase 4 of business mix optimization. We started last quarter. And so this is the -- now the sort of final phase of this business mix resetting. Rationalization actions are deliberate, measured and aimed at improving scalability, better capacity allocation and long-term margin stability. So what we're doing in Phase 4 is CapEx budgets aligned to core customers, capacity allocation prioritized for high-volume businesses and engineering effort also focused on the same core businesses, which will keep continuing to grow. Finally, a little update on CapEx. We are on track with our CapEx program, but we have made our goals more precise in the last quarter. And there are 2 main goals of CapEx: capacity increase and OEE increase, overall equipment efficiency increase. So in the last quarter, we have also started focusing on cash flows. And therefore, we are making sure our CapEx decisions are extremely well filtered and they really deliver fast payback periods and return on investments. 60% CapEx allocation to future growth areas, driveline and axle and ramp up in new businesses, as you can see in these 2 charts. Our CapEx purpose and strategy: bias for future growth and high ROCE areas, upgrade asset base for predictable growth and increased OEE or remove bottlenecks. In Q4, you may see a significant jump over Q3. And those of you who have joined for the first time, there was a 10 crores of dies and tooling reclassified from inventory to fixed assets. So that's why there's a significant jump from Q3 to Q4 in fixed assets as well as corresponding in CapEx, but that's more from a reclassification of accounting. Apart from that, overall, our CapEx plan for FY '27 is INR 30 crores, and that's what we are progressing on. So that's all for me for the Q1 update. The remaining slides are for all of you to go through at your own time, if you have not seen our presentations earlier, and just to get to know a little bit more about the company. So thank you once again, and I'm happy to take questions and feedback from all of you.

Thank you. Thank you so much, sir. Ladies and gentlemen, we would like to begin our question-and-answer session. [Operator Instructions] Yes Mr. [ Ajit Seki ]?

Am I audible?

Yes, you are audible.

Yes, sir, I'm new to the company and recently started to track your company. Sir, as we have mentioned in the presentation, there are some new orders which are in validation phase. So my question is for wheel hub components. So how big can this wheel hub component for business for us going forward?

Sorry, how? Can you repeat?

How big can be this business -- wheel hub component business?

How big can it be?

Yes.

Yes. So the wheel hubs are basically components that go in the passenger cars, one on each wheel. If it's a 2-wheel drive, it's 2 per vehicle. If it's a 4-wheel drive, it's 4 per vehicle. So this is tied to passenger vehicle growth. So it's a very large market. And particularly, we are supplying Gen 3 wheel hubs, which are the latest and best technology in the market. In India, Gen 3 hubs are just recently gaining popularity. So a lot of new car models will be using Gen 3 hubs and replacing the earlier Gen 2 or Gen 1 wheel hubs. So I may not give you an exact number right now, but you can project it to passenger car segment growth.

Okay. Understood. And sir, can you explain in detail what is the Vriddhi Council cost-saving initiative which we have taken?

Yes. So with Vriddhi Council is our in-house name for a group of project leaders who are running strategic initiatives. And each of these strategic initiatives are related to certain cost savings, for example, material costs, power costs, manpower costs, price increases, engineering, VAV, that's value -- additional value engineering, both on the forging and machining side, dies and tools and bolster productivity improvements and so on. So a lot of different topics for cost savings or increasing productivity and production. That's what the Vriddhi Council is. These project leaders, they have cross-functional teams from across the company, taking different experts on that particular topic, and they work together and report to the Steering Committee, which involves -- which is chaired by myself as well as some of our senior team members. We act as sponsors for this Vriddhi Council and support them. We give them more priority for any resources, and that's how it works. And we meet once a month.

And you have mentioned that you are expecting INR 50 crore annual savings. So this will be realized in this FY '27 fully or it will be spread out over the years?

Yes, if we -- purely mathematically, it would spread out over the years as it will -- it's a continuous saving once it kicks in. Our endeavor is to get as much of the INR 50 crores within this financial year as possible.

And we are currently sustaining our EBITDA margin for last 3 quarters around 15%. So do we expect to sustain this EBITDA margin going forward? And with this cost initiative kicks in, so do we expect to improve our EBITDA margin going forward? And can you give some guidance on the revenue growth for next 2 to 3 years, if possible?

Okay. So there's 2 parts. One is on the EBITDA margin. Yes, we will sustain this level of 15% or more. 16.2% is a good margin expansion. And yes, the Vriddhi Council projects are particularly directed towards further expansion of EBITDA margin. We are targeting internally 20% as an EBITDA margin over the coming quarters, and this is in line with our industry benchmarks. On revenue growth, while we don't give revenue guidance, I would say that this is -- this year, we are focusing on scaling up this quarter at INR 67 crores, has been one of our highest revenue quarters, and we are expecting to continue at this level in the next several quarters. This is also a result of our strategic realignment of businesses, phasing out the non-scalable businesses and focusing on the high-volume growth areas.

Sir, last question. When we can expect to reach this 20% EBITDA margin that you're expecting?

I can't give an exact time period, but we are looking at several -- within a few quarters.

Next question is from [ Mr. Vanesh ] in the chat box. We have 3 questions from him. First, I would -- later. What are the fixed asset turnover we should expect, given we have net assets of INR 90 crores and another INR 10 crore of CWIP as of March 31, 2026? How do you see sales CAGR over next 5 years?

Fixed asset turnover, currently, we are at around 2.6 or 2.5. The industry benchmark is below 2, so between 1.5 and 2. So we are looking at -- as we do a little more CapEx, we are looking at stabilizing between 2 and 2.5. Over the long term, we will bring this to a ratio of 2. In terms of sales, CAGR over the next 5 years. Again, we don't give revenue guidance, but we -- I would say at least 20% CAGR is something we aim at, and this is based on our entire growth strategy playing out.

Okay. The second question -- okay, second question is from Mr. Vanesh. Debtors have been on increased. Cash converted days have moved up significantly. How are you planning to deleverage the working capital cycle?

So our cash conversion cycle has actually reduced to 148 days compared to 170 last year -- last quarter. And this is -- a big part of our effort has been on reducing inventory, which is nonmoving or non-indirect materials inventory and focusing on direct materials, which are required for sales. Similarly, on debtors and receivables, that is an area that we are focusing a lot more in Q1 and Q2, where we are taking a lot more structured approach to collections, to improving payment terms as well as using bill discounting facilities to get faster cash flows. So there are various such efforts going on. And on the procurement side as well, we are -- we have reset our procurement budgets, more budgets for direct material, reduced budgets for indirect materials and services and a lot of cost control.

Okay. We have next question from...

There was a third question -- so, yes, our -- on some of our long-term debt, we have been repaying already, and that's how our debt-to-EBITDA ratio has improved, apart from the EBITDA itself improving. We do have plans to raise equity in the future. There are multiple options that we are evaluating, and the promoters themselves will be putting in equity along with other participants. So we would use some of the equity to repay debt, but that is -- it's too soon to state any numbers at this point.

Mr. Vanesh, we will come back to your question -- last question once [ Mr. Saket Kapur ] has answered -- as Saket Kapur has provided the question.

[Foreign Language] Hope I'm audible.

Yes.

First of all, I congratulate the team on displaying a very strong set of operational and financial results. More cleaner set as you have yourself explained, the [ ananomy ] that we had in the previous quarter. So I think, sir, my understanding, operationally, these are the best numbers in the recent past. And we hope that we are able to live onto the expectation with the market being on the better side.

Yes.

Sir, the small point, which I would like to make, especially on the -- with the council parts. Sir, I hope I'm audible. Clearly, sir, there's some noise.

Yes, there's some background noise.