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

Ladies and gentlemen, good day and welcome to Kirloskar Ferrous Q1 and FY '26 Earnings Conference Call. [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, Manish, and good afternoon, everyone. Welcome to the First Quarter FY '26 Earnings Call of Kirloskar Ferrous. We have the senior management of the company represented by Mr. R.V. Gumaste, the 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 remarks. Over to you, sir.

Good evening and welcome to the Kirloskar Ferrous Q1 quarterly call. The quarter 1 of financial year '25-'26 has gone, I would say, reasonably well in spite of the headwinds. We continue to have commodity price pressures especially in pig iron and steel whereas casting we are able to experience increased demand position with tractor industry doing well. So all our foundries are loaded to full capacity to deliver to our valuable customers. On the seamless tube sector, I think the demand position continues to be good with our various product offerings. For the quarter 1, looking at the sales for the quarter 1. So we closed the quarter 1 with INR 1,685 crores of sales against last year quarter 1 of INR 1,554 crores, a growth of 8.5% with EBITDA at INR 214 crores against last year's INR 187 crores, a growth of 14% and PBT at INR 130 crores against last year's INR 104 crores and PAT at INR 96 crores against INR 76 crores last year. With respect to polymetric, I would say that we are more or less similar volumes with respect to pig iron together with Koppal and Hiriyur so just a difference of about 1%. We have a growth in the casting of 6% and whereas tube, both Ahmednagar and Baramati put together, growth of 32%. This is against last year's subdued quarter 1. So I would say that the growth subsequently is picking up and we expect better numbers in the coming quarters. Whereas the production of steel was down because of the maintenance shutdown whereas sales continues to be with the inventories what we carried. So pig iron sales down by 2% whereas casting sales is up 4% and steel and tube sales with respect to last quarter is substantially improved. We see 42% growth over last year first quarter whereas steel is an improvement of just 4%. As I mentioned, the casting sales improvement is 6% whereas pig iron sales improvement overall is 5%. Whereas in money terms, we have lost because of the commodity prices especially in pig iron and also in steel and tube. Sales realizations, we hope that especially pig iron will stabilize at these levels because it has come to very, very low margin levels. Whereas tube we are yet to start the high value sales starting with oil and gas orders yet to start deliveries. Overall, I would say that the start of the quarter 1 has been good and we look forward to improve further based on the improved performance in quarter 1. Going forward, we are experiencing very strong demand for the castings and tube mills especially have started performing. We are ramping up the volumes both in terms of production as well as sales. Also, we have been able to enhance the output in steel. We are yet to see a pickup improvement in steel, but we look forward to improved sales in the coming quarters. Thank you very much for joining once again and I look forward to your questions so that those could be addressed. Thank you very much.

[Operator Instructions] The first question is from the line of Aman from Augmenta Asset Managers LLP.

Sir, first of all, can you let us know what kind of power cost are we incurring as a percentage of sales for the tubes division? Because previously we used to highlight that the power cost was very high. And secondly, what kind of benefits can we expect post commissioning of the mini blast furnace at the Koppal for the tube division?

Yes. First of all, at the company level, last year first quarter the power cost was 8.9% and this year at the overall company level, the power cost is 6.1%. This is power and fuel put together. So we have substantial improvement mainly because of fully commissioning the 70-megawatt power plant which is in operation now and we are in the process of erection and commissioning of the windmills. The additional benefit will come after the commissioning of this. So I hope I answered.

Yes. Sir, again a follow-up on this thing. So for the tubes division, what is stopping the margins? What is hindering the margins to grow from here, maybe a single-digit EBIT margin that we are reporting? So what can lead to growth in the margins? And secondly, we were listening to some of the companies in the tubes division, they were highlighting the increased Chinese dumping. So could you please highlight on that, too?

No. I think there has been continuous dumping of the Chinese seamless tubes. We have been taking up with the government, but I think actions are awaited and we hope that those actions will be taken. But there is a rampant dumping of tubes in different forms and there is nothing to stop right now at least till date. So we have to compete in spite of that situation and definitely items like line pipes, we have lost the margins substantially because of the price war and Chinese dumping.

Okay. So sir, you didn't highlight that thing. What kind of benefit can we expect post commissioning of the blast furnace at Koppal for the tubes division?

I think I understand that we have the plan to convert one of the mini blast furnace pig iron into steel and thereby feed the Baramati plant with steel manufactured in Koppal. And we expect a substantial value addition improvement with that of the order of about INR 12 per kg. And we have already gone ahead and taken the MOEF clearance and pollution clearance and we are starting the project work shortly and it will take 2 to 2.5 years to operationalize the steel tube manufacturing in Koppal. That is our next plan of mitigating the higher cost of manufacturing the steel at Djibouti.

The CapEx for the same is around INR 700-odd crores, right?

Around INR 700 crores to INR 800 crores is the expected CapEx on that.

And sir, for the tubes division, what kind of margin benefit can we expect? Are all the things that we are required to do, be it on the power cost side, be it on the integration with the existing structure? So what kind of margins can be expected or everything is done from our end, it's just that the industry headwinds are there, that's why we are not able to report the margin?

No. I think the steel manufacturing cost if it is taken care well, we expect that tube division will continue to operate at 15%, 16% EBITDA. But if we take the iron ore mining to tube manufacturing, the EBITDA level -- overall consolidated EBITDA margins will be much better than 15%, 16%.

Okay. But this benefit is not coming -- for the next 2 years it's not coming?

Yes, it won't be. But in the meantime 2, 3 important steps. One is our progress on solar and wind is 1 cost mitigation program. It's not just going green, but it's also cost reduction program. And in addition to that, you have seen we have enhanced the outputs to some extent with the debottlenecking. But we are looking for as quickly as possible to bring the steel tube run rate to higher level like together at least we should make 2 lakh tons of tube sales, which will also help us in reducing the cost and it should at least help us to take to 14% EBITDA level for the tube business in spite of the higher cost of steel.

If we reach the 2 lakh ton volume target, we can expect some high double-digit EBITDA margins over there. Is that right?

Correct. Correct.

And sir, lastly, yesterday in the AGM, I don't recall whether you or Chairman sir highlighted that the company is in talks with some European buyers for the steel division. So could you highlight much more on that like what is happening and what are we thinking over there?

Not exactly on the steel side. I don't remember European customers. Basically our castings are the deemed export to European customers because the castings which get machined or castings which get converted to engine are going to Europe and it is about 25% deemed export and I think it must be a reference to that.

The next question is from the line of Nirmam from Unique PMS.

Sir, over the past decade we've undertaken a lot of cost optimization projects, a lot of backward integration. So in your experience, how much of the benefit do we retain and how much of the benefit has to be passed on to the market over a period of time?

No. I think all the projects which we have taken, they have given the benefits in line with the plan. And where we have compelled to pass on to the customers is in the area of pig iron and steel whereas we continue to retain the margins in case of casting and tubes.

Okay, sir. And on the power and fuel cost side, how do you think about that?

Power and fuel: see, basically there are 2, 3 definitely intentions in bringing down the power and fuel cost. One is maintaining cost competitiveness, which means that partly we could be passing on. Second is to reduce our manufacturing cost, which means that we should be improving our margins and going green. So luckily for us, all these green energy projects meet all the 3 requirements and naturally we'll be passing on something, but our effort is to improve the profitability of our company as well.

Okay, sir. That's helpful. And sir, just continuing on the tubes segment. So the competitor mentioned about slowing down -- slow CapEx in the oil and gas sector also. So according to you, how is the demand side of things and if you could provide a broad outlook for the segment?

We are a moderate sized player in the market today. We are still talking about 200,000 tubes. So rather I would say that we are looking towards how to enhance this capacity to 3 lakh or 3.50 lakh metric ton per annum and we see great opportunity for to expand the capacity and we see market opportunity for KFL to expand. And not only just oil and gas, but every area of application; we have been doing well in the power sector, we are doing competitively in the line requirement. So we will continue to look at the opportunity and bring our capacity to a reasonable level like other competitors. We are committed for investments to expand in the tube sectors.

And sir, you mentioned you can reach 14% EBITDA margins once you can do 2 lakh tons of sales. So is there a timeline or how do you see it?

No. For example, we are looking at achieving 200,000 this financial year itself. The profitability, as you know, so it gets affected with many things like dumping. But even at this level, I think it is possible. We have to commission couple of power projects. But otherwise, I think the tube division should give us that level of EBITDA.

[Operator Instructions] The next question is from the line of Aashav Patel from Molecule Ventures PMS.

My first question is that over last 3 quarters, we have seen robust improvement in terms of tractor casting volumes. Now the tractor casting industry has been posting all-time highest quarterly sales volume, but we continue to struggle at the same quarterly volume run rate around 33,000 for last more than 2 years now despite having the incremental capacity, which is available to us. So what exactly are we lacking, sir? Why are we not able to increase our casting volume? What is the challenge we are facing and do you [ ensure ] the 1.7 lakh target can still be achieved for this financial year?

Thank you very much for the good question. I think there were a couple of issues where we were struggling with. One was the product mix related though improvement was seen in the market, but still we were unable to. But I think the real improvement in the tractor industry started with middle of May. April was not that great, May also. So we didn't get the full benefit of improved market condition in quarter 1. I'm quite optimistic that the volumes will pick up. The first level, we are looking at something like 40-plus kind of sales volume. Quarter 2 should support us. I think we have also started getting the benefit of Oliver foundry started selling about 1,000 tons per month and we are looking forward to taking it to further higher level. We are looking forward to doing 1.70 lakh tons maybe including Oliver foundry volume.

Got it, sir. And sir, with regards to the current profitability in the tube segment, what EBITDA margin range would that be? You mentioned that we strive to go towards 14%, but what would it be?

Real struggle in maintaining or retaining EBITDA levels is in pig iron and steel and I think those are the 2 sectors which have been struggling over the last 2 to 3 years. Continuously the product prices have been dropping. Sales realizations have been going down. And even in this quarter with respect to last year quarter 1; pig iron realization has come down by 8%, casting realization has come down by 1%, Baramati tube division realization has come down by 13% and overall tube division realization has come down by 9% and Djibouti steel realization has come down by 6%. See, the profitability what we have been maintaining has been in spite of these deflationary pressures. For example, the pig iron over the last 2 years has come down by 38%. So in spite of this, we have been able to maintain or manage the profitability and margins only because of various cost reduction projects we have taken and we continue to work on those projects. We have confidence with respect to long-term sustainability of these businesses. We are going more and better well integrated starting from mining to going up to tube. We are also bringing up steel making. I'm sure that these projects will further strengthen. Competitive environment in the market will remain in certain challenging times. 3 years iron and steel related industry has continuously gone down. It doesn't mean that it won't come up. It should come up and that's what I have seen over the last 3 decades. What goes down also comes up.

Got it. And sir, within tube segment, I also track the other peers of ours in seamless tube division. So for them, OCTG is more than a 50% contribution in the sales mix and the margin and profitability in OCTG segment is significantly higher than rest of the segment. So why don't we focus on scaling up this OCTG segment sales mix for our ISMT facility?

We will be doing that.

Currently, sir, what percentage of contribution is coming from OCTG segment, a rough figure?

A rough figure could be around 20%.

And in this space, even the dumping competition won't be there, right, because the companies would prefer domestic vendors?

There is competition, but it is coming competition amongst 3 of us and we have to compete with each other. And we have to have capacity to offer to domestic supplies as well as exports.

Sorry to interrupt, sir, but I may request you to rejoin the question queue for follow-up questions. The next question is from the line of Dignat Haria from GreenEdge Wealth.

Two questions. Sir, one in your tube, you just referred in your opening remarks that the factories are doing well and we are still to start the high value added. So when you say high value-added tubes, is it the same as what Aashav was referring, which is the oil country tubular? Is that the one you were referring to?

Yes, correct. That is the one because the line pipes are not high value, but premium couplings for example are the high value. Those orders are yet to start.

Okay, sir. Sir, and this whole tractor thing, you said that it is only mid of May that actually there is some decent traction in the market. So you see this lasting for a quarter or this is a slightly longer trend and we can really have a good shot at 1.70 lakh tons this time?

I wish it is sustained for long. The conditions are conducive for sustained pickup because this year also -- last year you know the bumper rains and bumper crops. This year again, overall there is good spread and expect the tractor industry progress to continue for longer period. I think that's what is my expectation.

Okay. Sir, and see God willing if we reach that 1.70 lakh tons like what would be just because of the industry doing well and how much would be because we introduced maybe some new products, some new customers or something like that? If you can just give us some idea on that.

No, I think currently if you look at, we are continuously adding new customers. In the last quarter also we have added 2 customers. We have started developing the parts for them. And we are developing lot of many new castings for existing customers. And we are expanding our presence with Oliver in the north as well. And the current level of development is definitely in line with we going to about 200,000 tons per annum or 16,000 tons to 17,000 tons per month sales. And that level I think very shortly we should be reaching those levels very shortly to start a run rate of 2 lakh metric ton per annum casting sales volume. Though we will not realize that number for this year, but it will lay the very strong foundation for reaching those volume for the next year.

Right, right. Sir, wish you really all the best for that. And sir, last question is a technical question that when does our NSE listing happen? Because for a company of our size and caliber, we should be listed on NSE. So just wanted to know an update on that.

Can I leave that question to Mr. Srivatsan who is on the call? Srivatsan?

Yes, sir. I am on the call. We are making the application to the NSE and we will pursue it and see that it comes up.

Sir, but any timeline because we have been waiting a long time, this Oliver merger happened and before that, ISMT. So any time line that you have for making that application?

No, we were actually waiting for the completion of the merger total activities. Almost it has come to an end now. So yesterday, we announced even the merger of Adicca and Oliver proposal. Before that, we would like to move the NSE also. Application is being prepared and we'll be filing it. Okay? Can we say that in this quarter we filed the application, Srivatsan?

Sir, there are couple of things which we need to do that internally. But we are working that, early we complete it.

Yes. I think transactions are more in NSE. That's why the interest is there.

A lot of funds will buy only if it is there on NSE and all. So that’s why.