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

Yes. Okay. So just to follow up on that. Along the same line, we bought wind power capacity in ISMT, quite cheap so -- when compared to the solar capacity. So can you shed some light on that, too?

No. See, there's a very important aspect we can get second-hand wind, but we can't fill the total megawatt capacity with that because they have low technology, invested 15, 20 years back, and they generate -- their efficiency of generation is low. So there is a lot of calculation behind that. we have to compare solar power generation with respect to new wind capacity. We can't compare it to old because if you fill up with old, utilization level comes down. So if you compare today also solar with wind, wind efficiencies have gone up with the capacity improvement per fan. Now you can think of 2.5 megawatt -- 2.8 megawatts, even 3.5 and 5 megawatts. So the efficiency levels have gone beyond 40%. They can generate double up the solar. If you look from all these aspects, I have mentioned earlier also, our long-term plan is to invest and cover 74% of the power with solar and 15% with the wind, and that is the best and beyond that, whatever 10%, 12%, 15% will be from the grid. And we have to see how to cover that. But our initial focus is for 85% coverage with renewable energy. Substantial steel production will go to green steel production and that is the focus. At the same type, of course, it brings down our power cost very substantially.

The next question is from the line of [ Keshav Parik from Pi Square Investment ].

My question is regarding ISMT bottlenecking, which was taken over by last quarter, about INR 100 crore project. And to Baramati, we were expecting to complete by June '24, may I know the progress about that?

Yes. I think we have progressed quite well on debottlenecking. And our teams have confidence today at Baramati that July onwards, they should be a position, subject to orders, production and sale of up to 12,500 metric tonne in a month.

That's from increase from 10,500, right, per month?

10,500, you are right, sir. Let me add, though, some of the debottlenecking projects are in progress, and I expect it to complete by the end of June end quarters.

And what about the outcome estimates for ISMT and average volumes?

No. See, there are 2 aspects. One is the order booking, the product mix and then, of course, production and sales. We are very keen that this year, we increased the volume sales between Baramati and we will -- because we went last year, you can say, almost flat, 1,57,000 tube sales. And we are very keen that this year, we at least achieve a 10% to 15% growth on the top line in terms of the volume. We have booked some good oil and gas orders. We have some more orders to be booked before the end of the year. And we are looking at the tubes sales growth this year along with steel sales growth in ISMT.

And what's the position of our order book currently right now?

No. I think still -- a lot of gap filling still going on. Oil and gas, we have done some announcements, and we have booked some good orders. Further, the tenders are coming, and we are confident to book some more to cover it. But if you look at today, the bearing market has improved. The power plants also -- projects are yet to come up. General engineering yet to come up. These 2 sectors, general engineering and power sectors, which are project in nature, are yet to take off. And we expect that after the elections we must see some revival in that also, which should support us overall to really look for volume growth in ISMT.

And again, on Kirloskar orders, we have seen that most of the orders are about to complete. And any outlook for new orders coming in?

No, Kirloskar Ferrous, I said that these are only -- we work with our customers auto, tractors, earth-moving equipment. These are not project in nature. They are ongoing businesses. We have a number of castings under development, and we have a number of components which are ordered for development and CDL productionization in quarter 3 of this year, quarter 4 of this year and next year is lined up. I would say that the order book position is quite robust to continue loading the foundry because we are now -- as you know, from 1,50,000 capacity or 1,60,000 capacity, we are moving towards more than 2 lakh capacity. Today, we can say that our capacity to produce and sell is definitely 2 lakh tonne and which we plan to take it to 2,50,000 tonnes. And of course, it won't happen in 1 year. We expect that within next 3 years, we should double the sales and we go towards 2,50,000. And order book positions and the development of casting with our customers and also possibly adding few more customers is in progress to support this program.

Right. The last 1 from my side is, what about implementing PSI, which was about to reduce our cost and save about 60 tonne of coking coal we had in last quarter?

I did mention in the earlier question that Phase 1 or pulverized coal injection without oxygen enrichment has been implemented, and we are getting the expected benefit. On an average, we have been able to use about 60 to 70 kg. And we are working on commissioning the oxygen plant, and we expect from 1st October or October onwards, we will increase the average pulverized coal injection to about, you can say, 100 kg per tonne of hot metal, up to 150 for steel grade and maybe 80 kg for foundry grade. On an average, we should get up to 200 -- about 110, 120 kg per tonne of hot metal, which would be a very optimum level to get the best possible benefit of pulverized coal injection.

And any specific reason why we see a delay in oxygen enrichment? Like we were about to start by June, July and now you're saying 1st of October?

I think -- no, we went into ordering, but the delivery periods are longer for oxygen plant that is where we got stuck. The large compressor deliveries are like 16 to 18 months and then it goes into -- I think I can today say we had -- we didn't plan well in advance to bring oxygen plant project ahead of the PCI project. Other alternative is to buy oxygen. Many people do that, but I am finding buying the oxygen overall cost economics is very marginal benefit. So we are going ahead with our own oxygen plant which powered by our power plant. So another 4 months, we have to wait before we get that one.

[Operator Instructions] The next question is from the line of Sahil Rohit Sanghvi from Monarch Networth Capital.

Congratulations for giving a good result even in this difficult times. Sir, very quickly, 2 questions. Sir, we were trying to set up a 2-part foundry, sir. If you can just tell us what is the time line, when do we commission that and the CapEx kind of spend on that right now or this year?

Two things we have done. We are -- we had a little bit setback on costing volumes. As you know, it typically demotivates our enthusiasm on investing more and moving fast on investments in foundry. So it's a bit natural, and we then slow on 2-part foundry. So trying to first utilize the capacity. And we could work out how to cut down the investment cost. We have come with a good proposal where in Phase 1, we will invest less. Not INR 140 crores, but invest just about INR 75 crores. And we are now going ahead with that investment, and we expect that in 15 months, we should be ready with the new foundry. Till that time, we will continue to manufacture 2-part castings in the earlier foundry. And there, we are trying to take it to about 100 to 150 metric tonnes per month, which is also a good capacity, just to support the customers till that time.

Right, sir. And this INR 75 crores will essentially mean 12,000 tonnes per annum capacity or would it be less?

It would be slightly less. I don't have exact number, but it will take care of the ramping of volume required. Instead of Phase 1, Phase 2, we have just made it Phase 1, Phase 2, Phase 3 and cut down the initial investment, but subsequently, we add it and ensure that, that capacity and that investment doesn't come in the way for capacity utilization. So we have time for ramp-up, and we just target the investment. So that we are going ahead, that is more compatible from earlier plan.

Got it, sir. And my second question would be the CapEx that you will be spending, if you can give me that number for FY '25, both for KFIL and ISMT, roughly any kind of targets you have?

I think this year also going -- everything going well. As you have seen, we had done about INR 500 crores to INR 600 crores of CapEx for 2 years. But last year, overall environment being a little bit less motivating. We cut down to INR 263 crores. And we want to go back and see that we invest maybe about around INR 500 crores to INR 600 crores between ISMT and KFIL once again before we really start our major investment on steel.

Right, sir. And this will be broadly spent for the power plant at ISMT, the 2-part foundry and what else would this be, INR 500 crores, INR 600 crores?

Yes, yes. You are right. One is, of course, the solar power plant. Solar and wind green power is one and this 2-part foundry in Solapur, [ Ahmednagar ]. And also, we are talking about the upgrade in Hiriyur. We have done some reworking, and we think now that we can do that upgrade in about INR 100 crores. That's another major investment. And there will be some investments on the machine shop. And also, please note, we will continue to expand capacity in Oliver. We are yet to start, but once we start in July, we are looking at the opportunity how to add and what to add in the core shop so that Oliver foundry also delivers 60,000 tonnes per annum. So we are working on that also. Those are going to be the major CapEx numbers coming years. We also made some solar investment for Solapur foundry as well. It's Maharashtra. Cost is very high for power.

Right, sir. Right, sir. Because you said you will be upgrading at Hiriyur, would that mean the mine shutdown the furnace for say 25, 30 days?

No, actually, we will take maybe about 9 months to stop the foundry. We won't stop it immediately. I think it would be -- stoppage will be in the next year. And whenever we do, it will be a long shutdown because we will upgrade the furnace to 300 [indiscernible], and also get the cost efficiencies in terms of core consumption, pulverized coal injection in line with Koppal.

The next question is from the line of Bharat Sheth from Quest Investment.

Sir, when we are talking of doubling the casting volume, say, in the next 3 years so can you give some color, it's going to largely from which -- and how is it going to change the mix of our casting business from current level? And how much would be that [Audio Gap]

[Audio Gap] still importing castings, and we want to replace the imported castings by made in India. We hope that we will achieve that. For example, one of the auto players is importing 200,000 lots per year, and they are keen on developing in India. We want to develop it. And also, we have another customer in the South, who is importing 40,000 -- 30,000 to 40,000 lots every year, which we want to replace. And these have definitely in life for at least next 7 to 10 years. In addition to that, there is also a large number of castings that is developed not only for replacing the imports, but also developing and exporting the castings. Many of the OEM customers in India joining hands with the international to not only start manufacturing in India for India, also manufacturing in India for the world. We have seen a couple of JVs happening in the last 2, 3 years, but I expect another 3, 4 JVs coming up with our OEMs, who need more castings to take care of India requirement as well as abroad requirement.

And profitability in export vis-a-vis replacement? And how do we -- from current level of profitability do we expect?

No, I think Oliver recently developed the castings -- our auto castings. They are reasonably profitable. And I think even in export maybe we can get slightly better because they are replacing European cost or American cost, and we are very competitive compared to them. And I expect the exports can give us among today's business -- higher than today's business, maybe 10%, 15% better margins than what we are doing today in the Indian market.

And sir, on machining side, can you give some color? We have stated in our presentation that to ramp up machining. So what is current level? And how do we see over the next 2, 3 years, every year, if you can give kind of color on the machining?

We are increasing the machining values, but they have been very small improvement, and we are looking towards the breakthrough in that. Most of our machines happen to be in the tractor sector, whether it is [indiscernible] or even the blocks where tractor blocks, and we were not in too much of machining in auto blocks. We started now with 1 of the customers giving semi-finish machine 70,000 blocks and heads. I think that was kind of about INR 1 crore per month machining value. And we are looking towards expanding with all the new auto, earth-moving equipment castings, we are offering with machines. And though it is taking time, we are quite confident that we'll keep adding to the machining value in Kirloskar.

Sir, and last question on this green power, what we are talking of, meeting around ISMT tube, steel manufacturing as well as some parts in tube looking around 85% to 90% of power -- the total power consumption, so how do we see every year addition and what will be the CapEx in overall for the -- our company.

I think -- thank you very much. See we are looking towards doing it very quickly. But 2, 3 things are taking more time. One is we managing the land acquisition and typically on the time line. Other one is the towers and slinging, whether it is 5 kilometers, 6 kilometers, the big challenges. And if we are looking for 210 megawatts of solar, I would say I will space them 1, 1 year because we wanted to see if we can overlap, but it's not happening. I think, yes, it is going to be at the rate of 70 megawatts per year or if we commission this year 70 megawatts in the month of May and July, we can expect the next 1 in next May, July and next 1 thereafter. I think the -- today for 70 megawatts, I would take the number at around INR 200 crores.

The next question comes from the line of Pratik Kothari from Unique PMS.

Sir, your comment on the drop in profitability that we saw in the tube segment this quarter?

Can you ask -- can you repeat the question? I couldn't get to your question, sir.

Maybe regarding the tube segment, the seamless tube, we saw a drop in profitability there at ISMT, your comment on that.

One is -- in general, general engineering sector and to some extent even the tube sector, one was commodity price correction and also, there was some impact of dumping. And in some sectors of tube business, we could find the pressures on the margins, but also pressure on achieving the volumes. So also, I think, I don't have the exact numbers, but there have been some write-offs related to Structo, our subsidiary, but how much has gone in exception item, what has -- for example, receivables from Structo, we had to write off very substantial write-offs. In this last year closure, we had to account to clean up the accounts, what was not possible to recover, we have -- everything has been accounted for.

Right. Sir, can you quantify this number?

I think -- overall, I think it was -- I think 2 accounts, mainly. One was to Structo, Sweden, closure and another was the land-related receivable. I think both put together about INR 60 crores to INR 70 crores is the total value of write-offs.

And this was taken in quarter 4?

In the quarter 4, sir, yes.

Right. Okay. And sir, if we -- I mean -- so we acquired ISMT, I believe, 2 years back. We have done a lot of work in terms of stabilizing it operationally, and there were a lot of low-hanging fruits, which you're targeting to kind of overcome when it comes to cost. But when we look at the presentation, which you have shared on ISMT annual numbers, I mean the margin improvement from 8%, 9% to 14% seems to have come largely from raw material benefits, from gross margin expansion. But -- and I believe power costs will come from next year given solar will come in there. But even when it comes to employee costs, other expenses, it still seems to be similar to what it was a year back. If you can throw some light what are we doing there? What are the scope of improvement when it comes to this other fixed cost or employee costs or other expenses?

I think it's very important that we put ISMT in the growth path. I think the growth is the instrument for bringing down the cost, not that we want to put either the expenses or the employee-related expenses, rather they will keep growing little bit. But with the same human resources, if we can be able to produce and sell more steel and more tube, I think that is the plan. We are going ahead with the green power and green energy and cut down our power and fuel costs. We are also looking at further improvement in the efficiency, debottlenecking the processes and make the flow of material better. With all this, we are very keen that within a couple of years -- at least in a couple of years, if not better and early, take the tube production and sales to 2 lakh metric tonne. And also within next couple of years, take the steel sales to 2 lakh tonne and subsequently to be taken to 2,30,000, 2,40,000 steel and maybe 2,50,000, tube. I think that would enable us to mitigate the cost. For example, what was the employee cost at the level of 11%, 12% or 10%, we have been able to now bring it down to a level of 6%. I still see opportunity and we can take that cost to be maybe 4% to 5% in line with KFIL. I think we will be working towards that. And in addition to that, I think beyond the power and fuel cost reduction, there are hidden costs in terms of improvement of [ EAV ], reduction of nonconforming products. I think we have a few points possibilities in other areas and we see a great opportunity. We have not finished our work in the ISMT in both steel and tubes. It's still work in progress. I think a lot of opportunities for us to make these plants world-class, make these plants efficient in every respect. I think it will take to 3 years, that is the progress period for us. It won't stop.

Fair enough. And sir, my last question is on steel. I mean, we're thinking of putting up a large capacity going forward. And across industry, if we listen to various companies, all of them are very, very bullish on -- or putting up large steel capacities in India [indiscernible] not put up a capacity for the last 10 years are coming out and putting up some new capacity. So just your thoughts, anything which has changed? I mean what are we seeing or how are we confident that even we are going ahead and putting up some large CapEx?

No. We would like to keep in mind, we have not been a great big steel people. So maybe earlier promoters were, but at Kirloskar, we have not been steel people. We are conservative. What we are just saying that ISMT has been in the steel business. They have produced and sold more than 1 lakh tonne in the past. And we are saying that they lost the share of business, they lost the market, and we are trying to just restore that. Whatever we produce and roll in Jejuri, we want to supply to Ahmednagar to tube making and remaining 2,30,000, 2,40,000 sell in the market, go from 80,000 to 2,40,000 in the next 3, 4 years. At the same time, we expand the tube production capacity to about 2,50,000 in Baramati so that they consume 3 lakh tonne of unrolled material, unrolled steel, its blooms. And that bloom, we make it in -- cost effectively in Koppal. It makes sense. And we don't have to sell too much. We have to expand and consume more steel in tube making, of which we feel that it's -- we have not yet started doing premium coupling in a big way. We are not still prepared to produce and sell big quantities in OCTG segments. And those are the opportunities we will pursue it. I think we are not really going very big way into the steel market. We are moderately expanding in the tube market, in the alloy steel market. We already have 26 customers, all of them consume steel, and we would like to work with them. I'm sure if they like our castings, our customers will like our steel as well. And that is the opportunity. And we are not doing anything overboard, just within the boundaries.

Ladies and gentlemen, we will take that as a last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you very much all the participants for joining today. I thought that today, being the election day in Mumbai, whether we will have participants, whether there will be questions or not, I thought, but overwhelming response towards KFIL and ISMT. I thank you for your interest and look forward to meet you again after 1 quarter. It's always a pleasure talking to you, and I hope that we will meet next quarter with some better results and better colors. Thank you very much for your comment. Over to Pallav.

On behalf of Antique Stockbroking Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.