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

Ladies and gentlemen, good day, and welcome to the Kirloskar Ferrous Industries Limited Q2 FY '26 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pallav Agarwal from Antique Stockbroking Limited. Thank you, and over to you, sir.

Yes. Thank you, Anuska, and good afternoon, everyone. A warm welcome to the Kirloskar Ferrous Second Quarter FY '26 Results Conference Call. 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 and CFO. So now -- I would like to now hand over the call to Mr. Gumaste for his opening remarks. Over to you, sir.

Thank you very much. Thank you very much, everyone, for joining the call. And I'll just start with a few details -- performance details, and then we can take up the question and answer. Production and sales of all our products was good during the quarter. We sold 131,508 metric tons of pig iron and operated all the three blast furnaces. And the sales quantity was 2% more than the last year quarter 2. Casting sales for the quarter is 36,673 metric tons, slightly less than last year quarter 2. And demand for the casting from tractor sector continues to be strong, even auto continues quite good. And in case of tube sales, we could sell 49,588 tons against 39,866 tons, which is almost 24% more than last year. And for the H1 this year, we have a sale of almost 98,049 tons against 73,921 tons last year, a growth of 33%. Steel remains flat. The sales this quarter is 19,616 tons against 18,793 tons, a growth of 4%. In value terms, we have sales value drop of pig iron by 9%, mainly because of drop in the pig iron prices. Pig iron prices have come down from INR 41,670 per metric ton to INR 37,098 per metric ton, which is a drop of 11%. In casting, the sales during the quarter is INR 456 crores against INR 458 crores, a drop of 0.3%. And sales realization, there is a small growth INR 124.466 per kg against INR 123.653 per kg. Whereas the tube realization is down 7%, whereas tube sales has gone up from INR 478 crores to INR 565 crores which is 18% growth against the volume growth of 24% because of the sales realization drop by 7% from INR 112,440 to INR 104,690 a drop of 7%. Whereas the steel sales realization is also down from INR 76,362 to INR 71,055, whereas the steel sales value has dropped from INR 144 crores to INR 139 crores, drop of close to 3%. The margin pressure, especially in pig iron continues because of the no major drop in the iron ore prices and coal prices marginally dropped, whereas the pig iron prices have come down very, very substantially. As a result of this, overall the EBITDA has -- in spite of all this, our EBITDA has grown from INR 195 crores last year to INR 214 crores this year. Overall, for the 6 months, H1 EBITDA last year INR 383 crores has improved to INR 427 crores. PBT for the period, quarter 2 of this year is INR 126 crores against last year's INR 115 crores, a growth of 9.4%, whereas for the 6 months last year, PBT was INR 219 crores, which has improved to INR 256 crores, which is 16.8% higher than last year. Otherwise, for the coming period as on date, the demand for casting continues to be good, and we have been able to also win some of the tenders in tube because of which we will continue to have loading up the mills full. Pig iron demand continues to be reasonably good, whereas the price realization on pig iron is under pressure. Similar is the pressure on steel. Overall, in spite of margin pressure, both in iron and steel, we have been able to manage the profitability and continue to grow on sales volumes in spite of the product prices coming down, able to get some growth on the top line and the bottom line of the company. For the quarter, our total sales is INR 1,736 crores against last year's INR 1,683 crores. The growth would have been better provided the product prices were sustained, whereas the product prices continue to drop hope that it is bottomed out and we should see some improvement in the market pricing of both iron and steel product. The projects which we have announced time to time, continue to -- we continue to pursue them, whether it is solar and wind energy projects or project for bringing steelmaking and copper. We continue to pursue them, and we look forward to progress on the projects in coming quarters. So it should support us to continue with the growth aspirations of KFIL. With this brief remarks, I would now request to start the question and answer. Thank you very much.

[Operator Instructions] We take the first question from the line of Digant Haria from GreenEdge Wealth.

I have three questions, sir. Sir, firstly, on this pig iron, is it that the demand is good, but the pricing is still down. So what is leading to this kind of situation? Like generally, this pricing falls so much only when the demand is weak. But right now, even with demand, the pricing is here. So -- and then at this prices, are we making profit from the competition who is dumping in the market? Are they making operating loss? Any insights here? That's my first question, sir.

Yes. I think there is oversupply of pig iron right now in the market, though casting production is growing and though steel production is growing, I think supply of pig iron is oversupply. And also, there is no shortage of steel scrap. Due to this, there is definitely more competition to sell pig iron, and we have been able to sell pig iron. But I'm sure that there is loss making by many of us in production and sales of pig iron.

Sir, and for us -- like for us, would the spreads have gone negative or they're still positive?

No, effort to keep them positive is always there. But right now, I can tell you that it is definitely -- we don't cover our costs.

Right, sir. Right, sir. Okay. Okay, sir. Sir, second question on the castings division. We had a target of, say, 170,000 tons this year. So in the first half, we have done roughly 70,000. So we have to do almost 1 lakh tons in the next 6 months. Is it possible? Like is the demand environment so good that we can do that? Or maybe we'll end up, let's say...

There is one more thing. I don't have exact number, but we have already started our Oliver foundry, and we have done a production and sale of close to 5,000 tons over there. And we expect that going forward, we will be doing around 15,000 to 16,000 tons at Oliver. And with that, we expect that -- and we are also in the process of merging Oliver with KFIL. I think we will be together, would be very close to that number of 170,000 tons.

Okay. Okay. Got it. Got it, sir. Sir, and lastly, just on this NSE listing last time also, we said that it is very close that event could happen any time. Any updates there would be helpful.

Can you repeat the third question, please? Can you repeat?

Sir, it is on listing our shares on the National Stock Exchange.

I will leave this to Mr. Srivatsan, I think who is online can update on progress on NSE listing.

Anytime later in the call is okay, sir.

We will update you.

We take the next question from the line of Balasubramanian from Arihant Capital.

So my first question, the casting segment shown resilience with stable realization despite the broader commodity downturn. And what extent is this driven by favorable product mix towards high-value castings, for example, auto or tractors versus pure pricing power? And what is the gross margin per metric ton difference between tractor castings and general engineering castings. This is my first question, sir.

First of all, thank you very much, and we continue to work with our valuable customers. We are developing new products. Product mix is changing. We are doing more and more high value-added castings. Hence, we have been able to retain the sales realization in spite of commodity pricing going down. And going forward also, I expect more and more high value-added castings being developed and supplied to our customers, including more machining coming up, and that should strengthen our casting business.

Okay sir. Sir, on that tube side, earlier the guidance EBITDA margins can reach to 14% to 16% kind of margin once this 2 lakh ton per scale up from current single digits? And can you quantify what kind of margin contributions in terms of operating leverage, product mix to like OGTG or high-value tubes, backward integrations and is there any resolution of Chinese dumping? So what are the most critical levers to achieve those kind of margins despite declining under rate realizations?

No, I think we continue to do well not only castings, even in the tube sector in spite of whatever is happening in the market dumping or competition, whatever it is. We are well placed both on casting as well as the tube. And as I mentioned, we are pursuing more value-added castings as well as more value addition through machining of the casting. So I think the margins are quite decent whether it can improve, all efforts are there. One of the way to do is we if we can bring up the sales volume to that level. So currently, we are operating at 13,000 to 14,000 metric ton sales per month, and we are adding -- our effort is to add another 2,000 metric tons from Oliver Engineering. Together, we can go to 15,000 to 16,000 metric tons that can take us to 2 lakh tons very shortly. And that should definitely help us in improving the margins. And it is difficult for the combined operations to exactly give you margin, but we are definitely above the 15% EBITDA margins in casting business and quite healthy, and we are catching up with the volume sales in castings.

Okay, sir. Sir, I just want to understand about the current strategy. Initially, we plan to ramp up to 7 lakh to -- 7 lakh tons per annum, then we deliberately reduced it to 5 lakh tons per annum sort of steel integration. And I think it seems a strategic shift from commoditized segment to value added side? And what is the expected EBITDA per tonne difference between this integrated steel tubes compared to stand-alone pig iron and whether it is justified for volume reduction?

See one thing we continue to produce fully even today. We will have close to 7 lakh to 8 lakh tons of pig iron production. Out of this, we are already planning, we will start the steel project. Down the line after 2 years, we expect 3.5 lakh tonne of pig iron getting into steel making. But we also have the plans that we also upgrade the scheduled steel project so that in spite of one furnace going for steel, we will continue to have 5 lakh tons of pig iron production, though sales may come down to 4 lakh tons subsequently because of internal consumption as well as conversion to steel. So this strategic shift is from 6 lakh tons or 5.5 lakh tons of pig iron sales, we may go towards 4 lakh tons of external sales and balance getting into the steel production. And once we continue to change over to the steel successfully, we can definitely examine the possibility of more highly validated products like steel instead of pig iron, I agree with you. But in the immediate future, we will continue to have production and sale of pig iron. Only we look forward to cut down the costs, operationalize the mines. And hopefully, commodity price again should pick up a little bit to support the margins.

We take the next question from the line of Pankaj Parab from Molecule Ventures.

My first question is on the casting side. So looking at our end user industry, tractor industry has grown 30% Y-o-Y in terms of volume. And still we have our casting business in -- up and running with industry tailwind, but still our volume picture is more or less same compared to Y-o-Y. So when can we expect the ramp-up -- meaningful ramp-up in the casting volumes? What is holding us, sir?

No, I just mentioned that current run rate, we are at almost, you can say 15,000 --I am sorry 15,000 metric ton per month level. Though there were headwinds, but currently, we have reached this level, but the figures which we are announcing on KFIL doesn't include the Oliver, but shortly, it will all be integrated. And I look forward that we will go towards 16,000 very shortly and which should facilitate 2 lakh tons of casting production and sales next year. And we should be able to go this year very close to 170,000, what is the number we are chasing to achieve in this year.

Understood, sir. Understood. And next question is on the tube side of segment. So we have a very good volume traction on the tube side. And recently, we got order also from the OCTG, but the concern is the realization part. I understand main realization is linked to the steel prices, but still can we hope for some realization bump? Or what are the factors affecting other than the steel prices like Chinese dumping and all the stuff?

No, I would say that the commodity pressure continues from pig iron to steel, steel to tube as well, whereas we have always -- we have been putting efforts and I would say that to a great extent, successful in retaining our margins. So the percentage value terms, it could be under pressure. But we are quite hopeful that we will continue to enhance the volumes and also maintain the realization. Though there are many issues, including dumping, we are representing to government. But yes, in between, we suffer. For the first 6 months, we have already gone to a volume of almost 98,000 metric ton and look forward to seeing 200,000 volume very close to that in this year. And hopefully, another 10% attempt to go up in the next year before we add bigger size seamless tube manufacturing facility. So we are geared up to expand on the tube business and margins, we are quite confident that it's commodity cycle ups and downs are there, but we have long-term commitment, and we believe that the margins will be restored in tubes coming days as well in spite of commodity cycle.

And sir, last question on the pig iron side. For the last 2, 3 quarters, we have been hopeful that this quarter would be last for the realization. I mean some of the players are making losses, including us. But can you give us sir color on some realization group...

No, I think all of you know, I know the pig was start of the Ukraine war, the pig prices went to INR 68,000 per ton, and it has almost come to half of that. And it's definitely a role play of the demand supply. Supplies are more than the demand right now. Only the positive thing is there is a movement and the pig iron, we have been able to sell full, but the price realization margin pressures are reality. And we'll continue to work on our efficiency improvement. We will continue to work on productivity improvement. I'm sure that we will be very efficient on cost, and I'm sure that some positive movement on price of pig iron will again take us to decent profitability levels in pig iron. So I continue to be optimistic, though under pressure. So I'm sure things do change when we are on the down cycle, we don't see up cycle at all. When we are on up cycle, we definitely forget the down cycle. So it's human nature. We continue to believe -- I think we will -- as I mentioned, we continue to pursue all our projects and not stopped any of them. And things will change, and we will be once again ready and time to get the best benefit out of whatever the cycle in the future.

We take the next question from the line of Manish Goyal from Thinqwise Wealth Managers.

I have a few questions. Sir, first on the power cost. This quarter, again, sequentially, we have seen a significant increase. In absolute number, it is up by almost INR 45 crores. In Q1, we had seen a decline. So sir, if you can just provide clarity as to how much is this variability due to solar power plant getting operationalized in Q4 and getting benefit in Q1? And then are we seeing lower power -- solar power generation due to monsoons? Like if you can give us clarity on that, why power cost has increased significantly, number one. And number two, related to this, sir -- like sir, the solar power addition, capacity addition, whatever we are doing, how is it being allocated within the segments like within tubes, within pig iron or if you can also help us with that. That was the first set of questions, sir.

Yes. The solar power generation continues. There is no break on to that. Second thing is seasonal effect, more rains, more clouds, less power generation, that effect is always there. We cannot ask the rain god to stop. He will play his role. But in spite of that, the annual average power generation continues. Third element in this is the government power tariff and the changes. In spite of that, the benefit on solar continues. And the energy cost is also a role play of production and productivity. I just mentioned tube production and steel production have also gone up and tube production, especially is a big positive delta X there almost 23% growth in the tube production. Because of that, there will be more power consumption. But our plans on power cost saving continues. We are -- we had doubts on the government policies, but some clarity has come. Once again, we will be continuing with our project of this year windmill. By end of this year, we are looking forward to commission close to 20 megawatts of wind, wind generate much more than solar, and that should get commissioned and we are investing close to INR 200 crores on the windmill and also there was some break on the solar power plant. We will continue to invest maybe another 25 to 30 megawatts on wind -- sorry solar, which, of course, it will be realized in next year and not this year.

Okay, sir. So sir, my follow-up question was on like how -- where does it get allocated in the segmental business?

Yes. See, generally, we allocate, I think it is in proportion to the consumption. The maximum consumption is in steel making and then next is the tube making. We are allocating in the ratio of consumption. So the benefit comes in a proper ratio across steel and tube.

Okay. And sir, on the pig iron business, sir, in last couple of years, we have implemented capital efficiency improvement projects like last one was pulverized coal injection. And probably we have even started our first iron ore mine. So like I just want to get a sense that with all these projects and also we had earlier comments wastage recovery. So all put together, even after these projects, we are probably not seeing profits at the PBIT level in pig iron business -- also a related question would be how much improvement per kg we would have seen because of these projects in last 2 years?

No, I think we continue to pursue these projects and done quite well. And PCI was not at all there. oxygen enrichment was not there. We have started -- we are using up to 125 kg of PCI per tonne of hot metal. And we also continue to do oxygen enrichment to use power generated in the [indiscernible]. But the margin pressures are phenomenally high. In last 2 years, 3 years, the INR 10,000 margin has come down to say, INR 3,000. I'm talking on contribution level, gross level. And this has put a lot of pressure in terms of covering the cost. One is month-to-month another is whole year scenario. I'm not saying that we make a loss in the whole year scenario. We should still make some profits. And we are also further looking at how to increase the pulverized coal injection levels and oxygen enrichment levels and cut down the coke consumption, improve the productivity. And we are also taking a couple of small measures to reduce the coke consumption, iron ore cost impact. So we will continue to work on that and cut down our costs and see that we remain in at least small profits in pig iron. And in the meantime, also take up the efficiency improvement in Hiriyur and also progress on steelmaking in copper so that quantity of pig iron being sold comes down, and we don't have to sell more quantity of pig iron in low realization areas where we make the loss, and we sell more in high realization area so that we make profit what we sell wherever we sell. So we will continue to focus and work on that, and I'm sure that, that should mitigate the challenges to a great extent.

So sir, like right now, like the PCI and oxygen enrichment, are these plants working at full capacity or we are yet to achieve the full benefits from this project, sir.

No, I think there is still scope. I mentioned the figure INR 125 crore gross PCI in MBF 1 and 2. That can go up to INR 160 crore, INR 170 crore, but we need a little bit more capacity in the oxygen plant. We are working to add capacity. It takes 8 to 9 months to add capacity in the oxygen plant. So that's one opportunity there. We are also looking at some small one or two projects which can bring down the coke consumption. So our MBF 1 and 2 in Koppal are efficient, whereas Hiriyur doesn't have PCI and the operation is inefficient. That is another set of improvement to be achieved, which is more than around INR 125 crores of investment to upgrade. So we'll look for an opportunity time to execute that, not in this scenario of pig and realization being very, very low.

Sure, sir. And in casting, sir, you mentioned that we achieved 5,000 tons production in Oliver. So this 70,000 tons of -- the casting sales of 70,000 tons in first half, does it include this Oliver production or it doesn't include, sir?

It doesn't include.

Okay. So with Oliver, the number -- the 70,000 tons -- this number would be 75,000 tons.

70,000 tons in H2, if we achieve 75,000 tons we get 140,000 -- maybe around 140,000 from Koppal and Solapur. Oliver maybe 15,000, 16,000 would be additional.

Okay. Okay. Okay, sir. And sir, at Solapur, we had started production for one of our clients, and we had mentioned that we probably expect to reach to 5,000 blocks. So sir, when do we expect to reach that? And in tonnage terms, how much would it be? We are doing only blocks or we'll be doing both heads and blocks? And what would be like per set volume, sir?

No, it's only blocks and 5,000 blocks means I think around 400 tons.

We take the next question from the line of Deepak from Sundaram Mutual Fund.