Kirloskar Ferrous Industries Limited (500245) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kirloskar Ferrous Industries Limited Q3 FY '23 Results Call, hosted by Antique Stock Broking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pallav Agarwal from Antique Stock Broking. Thank you. Over to you, sir.

Yes. Thank you, Darwin, and a very warm welcome to all of you all to the third quarter FY '23 results call of Kirloskar Ferrous Industries. We are joined today by the senior management team consisting of Mr. R.V. Gumaste, Managing Director; and Mr. R.S. Srivatsan, the Executive Director of Finance and the CFO. So I would now like to hand over the call to Mr. Gumaste for his opening comments. Over to you, sir.

Yes. Thank you very much. Good evening to all who have joined this call, the quarter 3 results call of Kirloskar Ferrous Industries Limited. Let me start with the quantitative details. For the quarter, we had a very good run, both in Pig Iron and Foundry, though the external market conditions were a little subdued, a little pressure on the market demands in certain segments, but we could still maintain our growth. For the pig iron, we could produce 150,000 plus MT pig iron and which is a growth of 5.3% over the last year third quarter. And to casting, we also produced 35,501 compared to last year's 31,000-plus, a growth of about 14%. And on the pig iron sales, we could sell 1,39,000, which is a growth of 7.9% -- and on the casting the cost sales is 22,522, which is a growth of 13.2%. Compared to the last quarter, we will find some reduction in the sales of castings, which is -- one of the reason being the product mix difference. We had more auto sales rather than tractor. Tractor castings are typically heavy in nature and add more to the tonnage. So compared to that, you find some small drop in the sales coming out of the reduced demand from the tractor industries. On the sales front, we have sale of -- total sales of INR 1,075 crores against INR 933 crores, so growth of 15.2%. And out of this 631 tonnes coming from pig iron and 417 tonnes from castings, almost 25% growth in the case of castings over the last year. But compared to quarter 2, there is a small drop in it. Whereas the sales realization for pig iron has dropped from INR 50,000 to INR 45,000, and a drop of almost 10% as Casting sales realization has also dropped from INR 131,000 to INR 128,000, which is INR 3 per kg, which is about 2.32%. Reduced or lesser drop is because of the product mix we produced more of auto components compared to the tractor components. So typically, the pricing also better in that, more complicated, more -- much thinner casting. So we could improve on the realization. We have, during the quarter, given the price reduction to the casting customers, which was in line with the raw material reduction mechanism. So after that also, the drop in the casting price realization is down by 2.32%, INR 3 per kg against the [indiscernible] which is almost 20%. Coming to overall company level, we had implementing the [ RMSP ], which is slightly improved because of the reduced pressure of commodity pricing. We have done well on employee-related expenses as a percentage of sales. And overall, if you look at compared to the last quarter -- last year, third quarter, we have improved on the EBITDA. It stands at 17.1% now against last year's 14.7%. PBT stands at INR 138 crores -- INR 138.5 crores against last year's INR 110 crores, an improvement of 25% and PAT at INR 103 crores against INR 81 crores, which is an improvement of 26.5%. Return on capital continues to be good. Receivables under control. Number of days wise, almost similar to earlier quarters. Inventories under control. Sales to gross, the current assets under control. And overall debt at INR 838 crores, about INR 500 crores more than last year, which is basically because of the investments and also acquisition of Indian Seamless Metal Tubes, or ISMT, which is now part of our group. And you already have seen the results of ISMT, which are very encouraging. We have improved in all aspects of the business in terms of cost, sales realizations, sales turnover and we could achieve a turnaround in ISMT and could bring the company into profit compared to the earlier -- last year's scenario, major improvement in ISMT as well. ISMT is no more a burden, rather it is bringing in the good revenue and also profitability. And with these comments, I think it's better I would open it up for the question and answer so that I can answer more queries rather than continuing with more explanation. Just before I conclude, let me cover in short, the progress on our major projects. We are continuing with all the projects as per schedule. We are -- we have come to a commissioning stage for the Coke Oven & Power Plant Phase 2 at Koppal. And we have already started pushing the coke from the new batteries. And by the end of this year, all the batteries will be operational and our coke production capacity will go to 4 lakh metric tonnes per annum. We have started getting some production already, but it will become fully operational by end of March. And by that time, we will also commission the power plant, which generally takes more time to heat up and take the commissioning trials. And right now, we are in that process. Expect by end of the year, even the power plant will be operational. As regards as you have been earlier updated, we have already completed the upgrading of blast furnace 2, which has worked very well because we did not only upgrading, increasing the size to 300 metric cube and also installed the bell-less top on top of the blast furnace. With all these upgrades, blast furnace 2 has given intended results. That means we have started producing more than 20,000 tonnes of liquid metal from blast furnace 2 at reduced coke consumption levels. So the furnace 2 upgrade has gone on schedule as per expected lines of returns. And Solapur Line 2 or foundry 2 is ready for commercial production. In last month, we did the trial pouring. The trial pouring and trial production for submission of casting samples for upgradation of the products by the customers is going on. By the end of this year, the commercial production from Line 2 will start. And we look forward that Line 2 Solapur will contribute for the continued growth in casting production and of KFIL. And with regard to pulverized coal injection, both in NBF1 and 2 at Koppal, the project has been started, and we expect by quarter 3 or at least quarter 4, the pulverized coal injection and oxygen enrichment will be ready for use in both the blast furnaces. We also continue to pick up further improvement programs that Hiriyur. And currently, we are working out technological upgradation and the possibility of furnace upgradation including upgradation of these stoves to completely get the benefit of both scale and cost savings, what has been done in Koppal blast furnace 1 and 2 to be achieved in Hiriyur as well. And we will be in a position to give more details as we take up the project. And with respect to all the debottlenecking projects and facility improvement projects both in pig iron and foundry, they are going as per schedule. And this should help us in increasing the production from Line 1, Line 2 and Line 3 of foundry. All the 3 foundry lines currently are producing. Till date, they have produced the highest in the history of their life. So with this, I will now request to open the question answer so that any queries, I can address them. Thank you very much.

[Operator Instructions] The first question is from the line of Ashutosh Somani from JM Financial.

Congratulations on a good set of numbers. Sir, going into 4Q, what is the kind of demand that you're looking at from customers, both from the auto and from the tractor side, if you could give us some color there and what it does to our realization and margins for the fourth quarter starting January?

Yes. Thank you very much, Ashutosh. The demand continues to be quite strong, both for the pig iron as well as foundry. As you know, in between Government of India had the imposed export tax on pig iron to the extent of 15% value, which had put a complete stoppage to export of pig iron out of India. But now that has been withdrawn and the export of pig iron from India has once again started. That definitely we will work out the situation. And at the same time, demand supply is quite balanced. And I expect stable pricing on pig iron and the demand to continue. On the casting front, our wind export business as well as auto business, especially the commercial vehicles, are doing well. Customers use more and more products out of Kirloskar Ferrous Industries Limited, and we are stretching ourselves to ensure that we increase the output and sales. I expect that demand to continue. Hopefully, even our tractor demand should pick up from February and March for the season -- tractor season. So I definitely look forward to continued strong demand for our products.

And sir, what it does to our margins, if you could give us some sense on how the costs are escalating with the rising coal prices?

Right now, one is coking coal prices, which have shown a substantial increase over the last 4 weeks, 1 month, but I think it has become part of the game plan, and it has right now pressure and is getting costly. Let us -- I'm hopeful that we should be able to pass on the cost effect to the customer. But right now, I don't see immediate -- to get price increase opportunities, but we keep our fingers crossed. I think maybe we have a chance to pass it on. I would say that the margins right now are more balanced. I don't see any serious threat on the downside. And I also don't see any big opportunity on the upside.

The next question is from the line of Aashav Patel from Molecule Ventures BMS.

Sir, congratulations on an excellent set of numbers. My question is regarding the expected plant stoppages at Koppal and Hiriyur. So can you please give the expected time line of the same, as in which quarter we would be seeing volume loss -- losses on account of those expected shortages?

On shutdowns?

Yes, sir.

Yes. Yes. I think I should have covered this point. I think I missed that. So we are taking up a realigning shutdown for Hiriyur, which is middle of February to end of March. So around 40 days stoppage. And we have some pig iron's stock to take care, but we have blast furnace 1 and 2 producing a robust quantity. I think we will be able to take care of our customer requirements and not have a major issue with respect to customer supply position. But with respect to sales, it will be marginally down. I don't see a big effect coming to the bottom line, but a marginal effect to income. And we have also planned blast furnace 1 stoppage for close to 90 days in quarter 1 of coming year and that's a big one. And -- but that becomes a part of 2023/'24 plans, 2023/'24. So as of now, we plan to produce more pig iron, more output compared to this year. And we will -- we expect to achieve substantial growth in spite of 90 days stoppage. And that remains intact though there will be a small downward production in quarter 1. That completes all the shutdowns. And after that, we have only 3 blast furnaces to continue full operations till the end of the year.

Sure. So sir, despite these quarterly stoppages and plant shutdowns, will our annual target of 5 lakh MTPA and next year, 5.5 to 6 lakh MTPA remains intact. That is correct understanding?

I think we should be able to produce and sell close to -- or production of very close to 6 lakh tonne. So still we're working on more details, but very close to 6 lakh tonnes is what we plan to produce. That has been our plan, as you know it.

Sure, sure. And sir, next question is that in this quarter, the blended coking coal cost has reduced from $350 to $250. So roughly 30% lower cost, but realization led only by -- is down only by 10% from INR 50,000 to INR 45,000, as you rightly mentioned. So we saw EBITDA increase and operating margin increase. But now as you mentioned, coking coal is back to close to $370, and iron ore is also at annual high at around 6,000 metric tons. So pig iron prices have not increased on those lines, have only marginally increased from INR 45,000 to INR 48,000. So how do you see Q4 profitability vis-à-vis Q3 profitability?

Now typically, as you know, sudden impact won't come with today's coking coal price increase because we typically work with 3 months inventory in hand. So it also gives us an opportunity to gradually increase because the coking coal prices by that time, if they come down, we can average it out as well as it is possible to also reduce further. But what I see is that one side, these are the kind of market pressures. On the other side, we have been very strongly planning and exhibiting projects, which are essential. As I tell you that by the end of this quarter, we are commissioning Coke Oven Phase 2 & Power Plant. It's going to bring us some benefits. We'll feed the coke directly by belt conveyer to the furnaces. We'll have reduced fines. We'll have reduced consumption. We'll generate more power we consume as well as we'll export and sell power. So we are also looking forward to increased casting production and sales. So there is going to be a mixed basket. It's part of the next year AOP plan, annual operating plan. And we definitely look forward for better next year than this year.

Sure, sure. Got it, sir. And then, sir, one question regarding our mine. So forest -- as per the forest clearance website, it looks like we are on the verge of getting clearance at our Reddy Mine, but there is no status change of our Bharat Mine since 2020, so close to 2 years now. So can you explain what are the compliance issues, if any, faced by the Bharat Mine?

No. I think there are a number of steps in getting the clearance. For example, we are supposed to give some compensatory land for using the forest area. So then it has to be registered to forest department. But after that, the Forest Department has to declare it as reserve forest within the government. So these are the steps. They need some approvals. Senior government for the leadership approvals, they take time and that's how we are learning that. But every month, every quarter, there is a progress, but the number of steps are not finishing.

But can we expect Reddy Mine approval at least in FY '24?

Yes, but there's one year we have where my commitments have repeatedly failed. So you understand my position. It's not mostly in our hand and a lot in the government machinery and approval. So we are putting over efforts to do everything possible to progress, but we are still not able to start the mines. We are quite hopeful that we will finish the remaining steps and mines will be operational. There is no major issue or hurdle, but there are still some more steps. I'm hopeful government is also trying to help us. But within government also, there are a lot of departments, and they have procedures, and it is taking more time. So hopefully, it will get completed. Both the mines will become operational shortly.

Sure, sir. Got it. My last question, I will come back then again in the queue. After the commissioning of Phase 2 power plant, which we expect in this quarter itself, is there enough captive power demand at our Koppal plant to use it at the optimal level? Or it will be used towards optimal utilization only after once we shift our furnace to steel grade?

You are perfectly right. We have some more power consumption opportunity, some more requirements, which right now we are taking from the grid, which is not fully 20-megawatt or 17 megawatt. Some power will be surplus for some time next 2, 3 years mostly or maybe 1 or 2 years, which we will export to the grid and sell it or consume in our plants in Maharashtra. So it is not very optimal. So we get less benefit from that. As the steel plant comes, then once again, we'll start consuming full generation and will be continuing to consume the grid power. So this little bit up and down will happen over the next 2, 3 years. You are right, everything won't be consumed when we commission.

The next question is from the line of Preet Jain from.

My question has been answered, sir.

Okay, Preet.

The next question is from the line of V. Raman, an individual investor.

Excellent numbers. And regarding the price reduction you are giving to the customers, it is on the basis of 3 months average or 6 months average, how is that? And what are the items, major items which you give price reduction? I'd like to know that. And as I can see that the lower the turnover, the profitability is more and what's the reason? And what are the reasons for this current year, this one -- this quarter is good. But I would like to know what is there backward integration going regarding the power, it will be where -- there's no point in giving to the government and getting money, it's a very difficult process. And whatever the expansion you are making, at least for the next 2 years, at least after that, it should be fully be used by us actually. And what is the total megawatt you have got there? And regarding the -- this ISMT, what are your plans? It is going on as per schedule as per the internal, I mean projections, it is going on well? I would like to know that.

Yes. With respect to power, as I mentioned already, but we won't be giving it to the government. We have the necessary permission to sell the power at IEX. So we don't depend -- we get advance payments for whatever the power we sell. Still, it won't be as efficient as consuming ourselves. That is the only difference. And we also have the plan of making steel in [indiscernible] after that we can fully consume ourself. With respect to ISMT, we have been doing very well. We have turned around the company very quickly. We have improved the sales realizations. We have improved the production, productivity and sales. We have achieved the cost reductions, and we are ahead of our own projection.

By which time you will be coming out -- or ISMT will come -- within another -- I guess 2 years, it will take, I mean, conservative basis? It will come out of the...

For what?

ISMT.

Yes, ISMT -- coming up with -- see -- okay. Similar productivity and profitability like can you say if are looking for that, or the major challenge is the power and fuel cost. We are still at 15%, and we have to come to a level 5%, 6%. And I think that will take about 2 to 3 years. And we are going green there. We will have more and more solar to support the power requirement of ISMT. We will be doing lot of MSG audits conservations to cut down the power consumption. So both will take about 2, 3 years, and then we can expect ISMT to be as competitive as any other competitors in line with the ISMT.

The cost reduction what you're giving to the customer, sir, you have not answered that point. See, what are the major items to give that?

Yes. Yes. Yes. See, in case of the price which -- we call it the price escalation clause. It's not exactly same with all the customers. If there are more elements considered for the price increase, then more elements will be considered for price reduction. If there are less elements considered for price increase, same there will be less number for the -- but typically, all the important elements are considered for the price escalation. It's like pig iron and steel scrap, alloy, power fuel, sand, like that the many customers we have about 15, 16 elements which go into price increase/decrease mechanism.

What will be the current year's capital gross will be increasing likelihood? And what will be the next 2 years, can you just give me that any FY conservatively?

No, I think -- there will be the acquisition investment, basically last year, it was -- ISMT the year before that was [indiscernible] . So leaving those, I think last 2 years, we have been investing at the rate of about INR 400 crores. And with the ISMT coming in, and also increased and expanded the business, I expect projects to increase and our cash flows will support us for a stronger expansion. We are yet to come with more specifics. As we move ahead in the next quarter, I will be in a better position to tell you which projects we are going to take up. And I don't expect that the projects will come down. So we still have a lot of ideas and we want to continue with our growth story, and we will have a good quality projects, which have very short payback periods to come into KFIL's program, and we will update you as and when we are ready to update them. Thank you very much, Mr. [indiscernible]

The next question is from the line of Sagar Parekh from One Up Financial Consultants.

Congratulations for good set of numbers. Just first question was on the CapEx only actually. So you partly answered it, but just wanted to get some sense. So next year's CapEx would be more than INR 400 crores is what you are saying?

Yes, yes. You are right. You are right.

And this is -- INR 400 crores would be including -- this is only KFIL stand-alone or it's including ISMT as well because ISMT, I believe the solar plant itself will be taking up a lot of CapEx, right?

Yes. Solar, we have already ordered and that is an important project. In addition to that, we will have CapEx both in KFIL and in ISMT separately until we merge.

So both -- so INR 400 crores would be KFIL stand-alone, if I understand correctly?

No, INR 400 crores per year has been the CapEx for the last 2 years, means this year and last year. But I expect CapEx to go up. I don't have full ready because we are still working on the annual operating plan and long-range plan. Once I'm ready, I will definitely maybe next quarter call, I should be in a much better position to tell you how much we are likely to invest coming 2 years. But my assessment is that it would be higher than INR 400 crores because we have very good projects such as low payback rate projects and which help us in progressing well on our journey of growth.

Sure. Understood. So basically then, if I have to look at your debt number, will it start like probably coming down so that the cash flows of the business will be calibrated -- like the CapEx will be calibrated based on the cash flows or you think that overall debt should be short from here?

No. All our borrowings have been very short term in nature, 2 years, 3 years, not exceeding 4 years because all our cash flows indicate very strong cash flow to pay them back very quickly. But if we come across like acquisition opportunity of ISMT, -- if we come across good projects, for example, the power -- solar power plant project and they appear very attractive -- very, very attractive as far as consumption. What is a disadvantage having high cost of power in Maharashtra becomes an advantage if we are setting up our own solar power plant. So we are looking at these opportunities and we have low leverage. We will continue to be low leveraged. I think our cash flows will continue to support us in remaining the -- low leveraged.