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

Ladies and gentlemen, good day, and welcome to Kirloskar Ferrous Industries Limited Earnings Conference Call hosted by Antique Stock Broking. [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, and over to you, sir.

Yes. Thank you, [ Zeeku ]. Good evening, everyone, and welcome to the fourth quarter results call of Kirloskar Ferrous. We have the senior management today represented by Mr. R.V. Gumaste, the Managing Director; and the Executive Director, Finance and CFO, Mr. Srivatsan. So I'll now hand over the call to Mr. Gumaste for his opening remarks. Sir, over to you.

Thank you, Pallav. I'm R.V. Gumaste, Managing Director Kirloskar Ferrous Industries Limited. It's my pleasure to welcome all of you, ladies and gentlemen, to quarter 4 and year-end quarterly call of Kirloskar Ferrous Industries Limited. I'm sure, today we have published our results, all of you must have gone through our quarterly results. I won't repeat them. I'm sure you have opportunity to go through them. Let me just take you through a few highlighting points. During the year '22-'23, we could manage to produce 527,000-plus liquid metal, and this was against 533,900 tonnes last year, which is, you can say, a drop of 1% in the hot metal output. But during this year, we completed in quarter 1, upgradation of blast furnace 2. So there was a stoppage up to July and also from 17th of February 2023, we took the shutdown of blast furnace in Hiriyur for which actually lining. So in spite of these 2 stoppages, which were required for the refractory lining and technology upgrade and blast furnace 2, we could still manage to produce 527,000 against 533,000 that completed this upgradation work. With this, we have upgraded blast furnace 2 as well as blast furnace 1. However, we plan to take stoppage of blast furnace 1 to do some maintenance work and changing of the Bell shifting to Bell-less top or BLT for blast furnace 1 during the June, July, August to complete the left out work on blast furnace 1. In spite of these stoppages, this year compared to last year's 527,000, we all going well, we plan to produce another 10% more from the same blast furnaces. I'm looking forward to go towards 580,000 tons of hot metric production during '23-'24, which will give us some volumetric growth of close to 10% on the pig iron production and thereby the pig iron sales. During this year, we also produced castings, 138,000 metric tonnes against 123,000 metric tonnes of castings, which is a growth of 12.2%. With respect to pig iron sales quantities, we sold during '22-'23, 480,472 metric tonnes against 495,555 metric tonnes last year. So sales-wise, it is down 3%. So we consumed more pig iron in our own foundry, whereby the production, not so much of increase in the inventories. Casting sales increased some 114,342 to 130,345 metric tonnes which is a growth of 14%. During the year, there were definite commodity price increases as well as the sales realization improvement both in pig iron and foundries. Our sales of pig iron went from INR 2,200 crores to INR 2,374 crores, an increase of 8%, which is mainly because of the pig iron sales realization improvement from INR 44,400 to INR 49,400, an increase of 11.2%. In spite of drop of volumetric sale by 3%, we could achieve top line growth of 8% because of the inflation. On the casting front, we -- our sales was INR 1,672 crores against INR 1,290 crores, which is a growth of 30% and which also came because of the increased sales of the castings as well as because of the increased [ volumetric ]. So the sales volume increase was 12.2%, whereas the growth in the sales volume of casting by 30%. Overall company level with pig iron and castings, our sales INR 4,150 crores against INR 3,615 crores, growth of 15% for the year. The pig iron realization went from INR 44,000 to INR 49,400 and casting sales realization from INR 112,000 to INR 128,000 a smart increase of almost 12%. For the coming year also, we look forward to increase the sale of casting because of the increased demand from -- for the castings from the automotive sector as well as from the earthmoving equipment and off-highway requirements. And as all of you know, we have commissioned more then in line or the foundry 2 in Solapur, and we expect to productionize during this year and get some volumetric growth from Solapur Line 2 and some debottlenecking activities resulting to increase production and sales from Line 1 to 3, thereby we should be able to make a progress of another 15% volumetric growth in casting production and casting sales. And in addition to this on the overall trend including our progress at ISMT we expect increased production of steel and increased sale of stainless steels contributing to the increased sale and -- production and sales at ISMT as well deemed to be consolidated income and profitability of KFIL. With respect to debt, the increase -- rather I would say that compared to last year, INR 1,193 crores, we remain at INR 887 crores, but this was also because of certain short-term borrowings to take care of obligation of public offer of ISMT those have been put in place. And we have also completed, received the loan given to ISMT INR 194 crores back to us, which has helped us to bring down the borrowings to the reasonable level, around INR 800 crores. With respect to projects. We have completed the Coke Oven Phase 2 project. And we have also almost completed the Power Plant connected with the Coke Oven Phase 2, though we are yet to generate full power, which really happened for next 1 month time. So with that, will be completing the Coke Oven Phase 2 and the Power Plant Phase 2. With this, we have the Coke Oven capacity of 400,000 tonnes per annum and Power Plant connected with the Coke Oven [ 340 ] megawatts. Line 2 in Solapur, we are almost completed with the Phase 1, which holds a capacity of 20,000 metric tonnes. And we are starting the process, including the environmental clearance and implementation of Phase 2 to make Line 2 in Solapur also 40,000 metric tonnes, and we would be shortly taking up the Phase 2 and completing it over 1 year time with an investment of about INR 70 crores to INR 80 crores. Our 2-part foundry in Solapur to produce large castings, which are beyond 300 kg going up to 2 tonnes will be implemented within next 1 year with an investment of about INR 130 crores. And this will increase the capability of KFIL to go for the large castings, which are the demand from our group company as well as our customers who are off-highway equipments and Indian manufacturers. We are also taking up certain debottlenecking projects and projects to mitigate the Coke consumption and to increase output from blast furnacing in Hiriyur, which includes certain projects like stove, pre-heater, truck tipplers, stove upgrades, water storage capability, pulverized coal injection, BLT and upgrading the refractory of the blast furnace in Hiriyur with a debottlenecking projects all put together investment of about INR 100 crores over the next 1 year to take the Hiriyur figure and plant productivity up and cost reduction relative to quantitative and in line with the 2 blast furnaces at Koppal. With this, we remain committed to the growth projects, and we expect them to progress in line with what we have planned. And only one of the projects, which is still WIP, is the iron ore mines, which though they have progressed, still not operational. In the meantime, we are going ahead and filing the necessary applications. We have already filed to get environmental clearances to go ahead with the steel project at Koppal and also certain additional projects to -- in line with our road map of growth projects. With this, I close my opening remarks and would request if there are any questions which I can address. Thank you very much.

[Operator Instructions] Our first question is from the line of Digant Haria from GreenEdge Wealth.

Sir, my questions are on the casting division that if I just add up all the foundry capacities that you mentioned, and if we also take into account the 30,000 tonnes of the Oliver acquisition, which will come. So we'll have 230,000 tonnes kind of casting capacity. And we are right now at 138,000 tonnes of manufacturing. Sir, what gives us this confidence that like we will be able to reach those 2 lakh-plus kind of a number in the next few years?

I think 2 important aspects. The customer acquisition today, we have OEM customers of 26. And we have always been falling short in capacity to take care of their full requirement. Leave alone putting the additional efforts to increase the share of business, develop more castings. We have not been able to deliver the same requirements of our customers and that can bring down the customer satisfaction with respect to not able to deliver the full capabilities, it's still requirement. And the interest in KFIL with respect to developing more casting continues. And we have been doing well in new product development and quality performance, delivery performance and the expansion of the business with the valued customer is their logical conclusion, and we would like to take it forward. I think there is increased demand and current available customers' requirement of the order of 300,000, whereas we are still at 150,000 run rate, about 12,000 tonnes per month. We have made our own plans to increase the output and sales 15% year-on-year and then take the journey to 230,000 tonnes within next 2 to 3 years.

Okay. Great, that's very good to hear that. Sir, so second question is that a lot of these global players are looking at foundry partners in India. So is it like -- is that -- are a lot more foundries coming up or are things for you becoming easier or more difficult in terms of competition in this space?

See, there are various opportunities in this field. Smaller companies [ flaskless molding lines ] is one big area. Similarly, large castings, the [ engineering ] castings, [indiscernible] castings, that could be another field. So which I did see annual production within India is 12 million metric tonnes of castings. And we are operating in a very small area, wherein we are talking about some 3 million metric tonnes of our capacity, the area of, you can say, high-pressure molding box-based molding line, high productive molding lines, critical casting manufacturing sector, which is about [ INR 2 billion ] market in India, including the exports. We are occupying 300,000 is what we are looking at, which would be like 15% to 20% of that market. I think there's plenty of opportunities which will desire and if we really want to expand there is lot of opportunities.

Right, sir. Sir, so basically right execution of the foundry and the quality of casting will be the determining factor. You're saying opportunity is not a problem, that is the...

Opportunity is not a problem. And also while integrating the cost structure so that we have a right power, right metal and processes are very, very important. But the cost structure also we have built up with the hot metal availability and the background with the power being available either to green solar power or waste heat recovery power. So they all support in making our business competitive, good for the customers as well as profitable for us.

Sir, the last question would be in the -- on the machining side in castings, are we thinking of increasing the proportion from, say, 20% which we are right now? And would we do more advanced kind of machining or we would continue with the machining that we already do?

We are committed to deliver machine casting to our customers where our customers want machine castings, that is definitely our priority. But in many cases, customers if they have their own machine shops, we give them the raw castings or if they have partnered with somebody, we partner with them to deliver the castings to the extent they need machine, we are there. But we also have the in-house capability to deliver fully machined castings. And we will be working towards giving our customers as many machine castings as possible because machines are closer to us is always an advantage to cut down the rejection and deliver the [indiscernible] casting to our customers.

Our next question is from the line of Shalini Vasanta from DSP Mutual Funds.

Sir, this is Vivek Ramakrishnan. Last year, you financed your CapEx comfortably through your internal accruals on a consolidated basis and seeing both the ISMT and Kirloskar Ferrous. How do you see the debt levels moving this year? Would you require additional debt? Or given -- you mentioned INR 200 crores of CapEx in 2 separate projects, but what will be the total CapEx on a consolidated basis?

See, the coming period, one of the important projects which will come is the making the green power with solar power under ISMT. We have already gone ahead and ordered, and we are implementing 70-megawatt solar power plant, which has close to INR 300 crores of investment, but that is the beginning. We also need another 100 megawatts of solar to cover substantial distance of power through solar green renewable energy in ISMT and also it brings down our power cost very substantially adding to the value addition under ISMT steel making and tube making. And those may require -- they will require some amount of borrowing. But we will have substantial investment coming out of our own internal accruals, but part will come through the funding through debt. And usual, we look forward to cable back in about 3 to 4 years' time and not really very long-term debt.

Excellent, sir. And these power projects will come through the current year or next 1, 2 years' sir?

The first one is coming this year itself. The next one will come in the next year.

Okay, sir. This year, the CapEx would be around INR 700 crores, would that be an approximate ballpark number consolidated?

No. The CapEx under ISMT for solar this year would be INR 300 crores. We expect another INR 400 crores in next year.

No, sir, on a consolidated basis, across ISMT and Kirloskar Ferrous' projects?

Around INR 500 crores between the 2 companies.

Our next question is from the line of Sunil Kothari from Unique PMS.

Congratulations for a really remarkable performance in terms of improving productivity, reducing cost. I think you are one of the best examples for Indian-capable manufacturing, engineering manufacturing, really heartly congratulations, sir.

Thank you very much.

Sir, my question is on ISMT. The -- your basic -- your strategy is always to reduce all the costs in terms of whether it's a raw material consumption, employee cost, power costs, other costs. So over the next 2, 3 years, what you want to do or you want -- you wish to do at ISMT? If you can little qualitatively elaborate?

Yes. I think the line of thinking is very clear. I think they are in the area of cost, means cost of power and productivity, which means that debottleneck and increase the productivity and production of steel as well as [ tubes ] and not really setting up any new steel plant immediately or not setting up any new steel plants, but debottleneck. So -- and capacity utilization, deliver what customers want. And we expect that we can take it to, say, 300,000 -- 3 lakh tonnes of steel and 2, 2.5 lakh tonnes of tubes. I think we will take ISMT to at least INR 4,000 crore turnover. And typically, we expect these businesses to deliver with the cost optimized 15%, 16% of EBITDA; 10% to 12% of PBT. That's what we look to make them healthy.

All right, sir. Sir, my next question...

And the main area would be to mitigate and reduce the power cost, which is like power and fuel today 15% to 16% in ISMT, and we look forward to bringing it down to 4% to 5% level.

Sir, were you able to reduce the wastage and cost selection, those things are as per plan going on after ISMT we acquired?

See, I would rather say that what we focused last year is how do we make availability of maintenance spare parts, availability of consumables and do certain basic health improvement activities quickly, whether it's sheets, structures includes roads and a lot of things so that what had suffered over the last 2 decades is restored back and client becomes good, healthy [ preventable ] this is priority number one. The maintenance staff gets the spare parts to maintain and then stability of operations and then productivity improvement will -- quality improvement will rollout automatically, but we were correcting the basics to get the plants healthy.

Sir, my last question is on this -- I understand we are very bullish on casting. It seems that the infrastructure development hopefully is happening and should happen. So because of that, this ARPU equipment off via road vehicles, construction equipment, how fast we want to enhance our capability and capacity to -- for those casting requirement? What is the current size, and how we are progressing?

No, we are working with all the customers connected with the infrastructure basically 3, 4 major customers in the field, and they have a lot of interest in KFIL and we have a lot of interest with these customers. And we have to see what is the kind of foundries we have, which is presently 4 and hopefully, we add one more to make it 5. But whatever fits through to width is our portfolio, and we are working very closely with these customers. And if we have to develop another foundry to deliver their increased volume requirements, we are very keen, very interested to ensure that [indiscernible] equipment of highway customers are fully and properly serviced and we take that opportunities at KFIL. Yes, we are working very closely with that customers.

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

Congratulations on a stable set of numbers, despite the challenging macro environment, especially the coking coal volatility and volume loss due to planned stoppages. So sir, my first question is regarding Oliver Engineering. We have been selected as L1 for Oliver. So I understand you can't share all the details, but just wanted to get a brief on their -- you mentioned the capacities on today's news interview of 28,000 metric tonnes, but how about machining capacity -- what machining capacity they have, what are the expertise which they are having, are there any expansion approvals with the company? What would be the replacement cost of the assets? Can you please throw more light on the same?

With regards to the machine, there is no capacities.

Okay. No machining capacity.

No machining capacity there. As regards to -- what is the capacity, what we will do and what we will make or how much we will produce, once the acquisition processes over, I will speak to you.

Sure. Sure.

Thank you. Thank you.

And sir, regarding pig iron segment. So you mentioned on the interview today that margins are expected to stay in the similar range -- consolidated in the current range, but as we can see, the coking coal is down over last 3 months close to 35% from $400 to $250. So shouldn't this lead to margin improvement over Q1 and Q2?

I think it's very important to note that the pig iron prices were never in line with the $400 coking coal and we never bought $400 coking coal. Our highest bookings were in the range of $300 blended $290 kind of thing, and it was challenging to manage even those coking coal prices to make pig iron and deliver. So we could manage the blend and avoid $400 buying. Now the prices have come down to $250, but there is always inventory for at least 3 months including what is in the plant and port, what is on the ship and what is contracted. All these are commitments we can't go back. So 2, 3 months is normal inventory outcome. And as the prices have come down, we have started our movement for procurement, but it will take some time. So to pig iron prices to pick up when the prices go up, pig iron prices to come down when the prices go down. But I would say that we never really touch post $400. But today, if you talk of blended $250, it takes some time to really adjust to the prices, a couple of -- at least 3 months on the time. So when downward correction of coal prices happen, it's always a little bit up in cycle and going up in the beneficial cycle.

Sure. So sir, assuming that realization stays the same for the next 1 quarter, Q2 can really be beneficial considering that we carry 3 months of inventory of coking coal with us. Q2 can be significantly different in terms of margin profile compared to Q1? Is it correct understanding if the realization stays the same, obviously?

No, I think what is important in this is -- why did the peak pricing of the coals, then it will allow us to have some positive margin, stable margins. That's what we try to do. Every time you can't catch the bottom. But after -- have we done widen up the peak prices of coking coals. How do we really get our margins and how do we mitigate the cost pressures working with pig iron pricing, working with the coal procurement strategies. I would say that we did reasonably well last year because we went through the cost pressures. But I think this year as well, there are certain challenges -- but we are looking forward to improve the sentiments from the iron and steel segment, which is not really very attractive as on today. But we look forward that once the coal price little bit come down, which we are seeing now. But after a couple of months, we will get the benefit.

Sure, sir. So what would be our blended coking coal? Can you please the rough figure for Q1 FY '24 versus Q4 last quarter?

No, I think the -- I would say that end of Q4, beginning of the Q1 this year, we are talking about blended price of very close to $300. So after 2 months or so, we can come to blended $250. So $30, $40 difference can come after a couple of months, and then only we get our margins restored.

Got it. And sir, regarding coming to the Casting segment. So as we have announced capacity enhancement from 1.5 to 1.7 in Phase 1 by investing close to INR 200 crores, but earlier, our plan was to invest INR 200 crores for expansion of 50,000 metric tonnes, is that correct understanding from 1.5 to 2 lakh?

Yes, you are right. The first 3 foundries, the installed capacity is 150,000, and we said we will invest in 2 phases, about INR 250 crores, and add another 40,000 tonnes for our capacity and take it to full capacity to about 200,000 metric tonnes.

Sir, how much will be the total investment?

See about INR 170 crores, INR 180 crores, we have already tend in Phase 1 another INR 70 crores we will invest in Phase 2 to make Solapur Line to 40,000 capacity.

Got it, sir. And sir, you mentioned on previous con-calls that foreign demand in the casting segment, we were evaluating increasing the capacity from 2 lakh to 3 lakh by setting up 2 new lines investing INR 250 crores each. So even after the Oliver Engineering announcement, if we win the bid, would you be still keen to go ahead with organic expansion?

I would say that including the Oliver expansion, we will still look forward to total capacity creation of 300,000 tonnes.

This would be in the next 2 years, right?

Including greenfield, brownfield and acquisition, all put together 300,000. And that is our roadmap for the next 2, 3 years. After that, we'll have to develop our strategy fresh. But right now, we are looking towards capacity of 300,000 total.

Got it, sir. And sir, regarding...

Sorry to interrupt, Mr. Patel, may we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn. [Operator Instructions] Our next question is from the line of Sahil Sanghvi from Monarch Networth Capital.

My first question is regarding the large casting foundry. So when do we expect this capacity to be set up? And what kind of revenue potential do -- can we expect here?

Sahil, as you know this 2-part foundry, large casting foundry is not a standard bauxite foundry. It's less number of castings, different variety of castings to be made with a flexible process. We have been taking a bit longer than standard time in stabilizing and planning this foundry. We have not yet really broken this ground still, we are still in the process of planning stage and also finalization of the equipments and process of the foundry and which we want to complete in -- at the most couple of months and thereafter, it will take 1 year for the foundries to come up. And the second part of the question is we are planning to take up the capacity of about 1,200 tonnes with a revenue potential of INR 300 crores of top line.

Sorry, just to get it to correct, you said 100 tonnes right? How much you said?

No. 1,000 tonnes per month 12,000 metric tonnes per annum of 2-part large castings.

And revenue potential of INR 300 crores?

Yes. Yes.