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

Ladies and gentlemen, good day, and welcome to the Kirloskar Ferrous Industries Limited Q1 FY '27 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this call is being recorded. I now hand the conference over to Mr. Pallav Agarwal from Antique Stockbroking. Thank you, and over to you, sir.

Yes. Thank you, Shruti, and good afternoon, everyone. A very warm welcome to the Kirloskar Ferrous Industries First Quarter FY '27 Earnings Call. We have the senior management team of the company, represented by Mr. R.V. Gumaste, the Managing Director; and Mr. R. S. Srivatsan, the Executive Director, Finance and CFO. I would now like to hand over the call to Mr. Gumaste for his opening remarks. Over to you, sir.

Yes. Thank you, Pallav. Let me, first of all, welcome all the analysts and investors to this call, quarter 1 Kirloskar Ferrous Industries call. And I would like to start with a few highlights, before we start with the question and answers. All of you have already seen the results published by the company. And just to bring on the production and sales quantities, with respect to pig iron, we produced 1,65,120 metric tonne of pig iron against last year's 1,57,112 metric tonne, an increase of 5%. And in case of castings, against last year first quarter 36,929 tonne, we produced 43,800 tonnes, an increase of 19%, whereas the tube total production last year was 56,558 metric tonnes. Against that, we have come down to 51,968 metric tonnes, which is a drop of 8%. Coming to the sales quantities, we sold 1,28,737 metric tonne in quarter 1 external sales against 1,32,392 tonnes in the quarter. So it's a drop of 3%, which indicates that internal consumption was higher because last year Q1, we had stoppage of Jejuri plant for a few days. So the consumption in this year first quarter is more than last year's first quarter. And casting sales is 41,345 metric tonnes against 34,941 metric tonnes, which is an increase of 18% compared to last year's first quarter. Tube sales totaled 41,512 tonnes against last year's 48,461 metric tonnes, which is a drop of almost 14%. During the quarter, we improved sales realization on pig iron and we could hold the sales realization on castings, whereas the tube product mix, so we could not hold on to the sales realization. We had to sell more of line pipes in the absence of high realizing export orders as well as realizing oil and gas tubes. We continue to work on our all the projects. There's no change in our project plans. And currently, we are right now executing all the important projects, completion of solar and solar 35-megawatt solar plant already in the stage of commissioning and 12 windmills of 2.1 megawatt each. And we expect all this will get commissioned in the quarters to June to September. Completion of 2-part foundry in Solapur with a capacity of 15,000 metric tonne per annum for producing the large castings. Expansion of Rajpura in 2 phases. Phase 1 is expanding the present capacity to between 40,000 to 50,000 metric tonne per annum. The existing capacity is about 25,000 metric tonne per annum and which means about 2,200 metric tonne per month, and we have started producing and selling that quantity. The capacity at Rajpura is totally sold out. So in the next 8 months, we will expand the capacity to 2x of that, at least go up to 40,000 to 45,000 metric tonnes per annum and subsequently in Phase 2, take it to 6,000 tonnes per month or 70,000 metric tonnes per annum. With this, we will have a producible capacity 1,10,000 at Koppal close to 90,000 in Solapur and Rajpura with Phase 2 implementation, 70,000 metric tonnes. So we will have a realizable capacity across all the 6 foundries put together will have a capacity of 270,000 metric tonne per annum. We are also working for upgradation of Hiriyur pig iron plant to take it to 300 metric tube and with the capacity to produce pig iron up to 360,000 metric tonne also bring the efficiency in terms of reduced coal consumption with pulverized coal injection and list of all the features what we have incorporated in MBF blast furnace 1 and 2 at Koppal. We are also progressing well on oxygen plant and the pulverized coal injection in Koppal blast furnace 192, and we expect by February, March, we complete those projects. We've also taken up the rolling capacity enhancement at Jejuri go to 25,000 metric tonne of rolling against 15,000 metric tonne rolling today. So the capacity will go to 3 lakh metric tonne rolling out of which 240,000 tonnes will be saleable product, external sales of alloy steel products. We have also started the project for premium couplings to be made in Baramati. And we expect to order this project in next few weeks' time. In addition to this, we are also progressing on the 3 large projects, which is steel plant at Koppal and expander mill to produce large capacity seamless tubes at Baramati and beneficiation and pellet plant and operationalization of iron ore mines at Koppal. All these 3 projects are at different stages of execution and some of them, especially the large ones are at the start of the project. So we continue to be focused and continue to focus on the growth so that we double the capacity in castings as well as in steel sales and tube going up to 350,000 to 400,000 metric tonne per annum. As all of you know, because of the geopolitical conditions, there has been disturbance, especially in the export of steel tubes as well as power and fuel costs. For example, the LPG consumption in Solapur, the cost has got doubled compared to the efficient purchasing before the war. We hope that the fuel costs will come down or adjust a little bit, but we have impact of higher power and fuel cost, especially in Maharashtra and Solapur as well as other steel and tube plants in Maharashtra. We have been able to pass on the cost increase to customers in case of castings. In case of alloy steels, so still under discussions. We expect that we will pass on that cost increase to customers. In terms of tubes, we are looking forward to close the tenders and get into manufacturing of large volumes. We are optimistic that we will catch up with the loss of production sales in the first quarter in the remaining 3 quarters. With these few words, I would like to open the lines for question and answers. Thank you very much.

[Operator Instructions] The first question is from the line Nirmal from Unique PMS.

Sir, my first question is on the other expenses. So we've seen a jump in other expenses by about INR 100 crores year-on-year and about INR 50 crores sequentially. So if you can explain what led to this increase?

I think there are 2 components to that. The increase is INR 58 crores. And out of INR 100 crores, INR 58 crores is in power and fuel. And out of this, I would put it as 2 parts, around INR 28 crores to INR 29 crores is because of the rate increase. And those INR 28 crores is because of the quantity increase. One important aspect is the casting production and sales in Rajpura has increased and the power and fuel consumption comes for that. And also, it's important to note that last year, we had a long shutdown of Jejuri plant. And this time, we are running normal full month. So the difference is, I would say that half of it is around INR 30 crores is because of the rate. We are quite confident we will pass on this cost to customers in case of castings and in case of steel with delay, I think we should be able to pass it on to customers. Tube market has to pick up to get that difference in the cost. I think other than this fuel rate increase, also there is a change in the regulatory for the power consumption. One important aspect is we are not allowed to do the power trading. We used to get about INR 10 crores per annum of benefit by power trading. Whatever is the gap of our green power versus what we could buy from exchange that has stopped. And also the -- in the last -- compared to this first quarter versus last year, there has been also impact of change in the regulation. Earlier, we were allowed to use the green power for 17 hours. Now it is only allowed for 8 hours. I think there is a small impact coming because of that. I think these are the few components, and we will have to work around this to bring down our power and fuel cost or pass it on to the customers.

Okay, sir. And sir, regarding this regulation change, are we expecting any impact from -- so we were -- we are putting 35-megawatt solar right now in windmills too. So does this regulation change affect any savings from those projects also?

Yes, yes. It affects the savings because the efficiency goes down, only 8 hours we have to do. But I would still say that whatever capacity we have built, we are well within the limits. Say instead of getting INR 100 crores benefit in a year, we may get INR 80 crores benefit in a year. Payback period from 3 years may go to 3.6 or 3.7 years. There is a negative impact, but we continue to progress because still there is benefit. And we are also already examining how quickly we can move on to battery storage systems on megawatt level so that we can continue with our journey of solar and wind power and not really go back on that commitment of green power and also thereby the commercial benefits coming. But battery storage is still not in big way, but I'm very sure that we will start and we will take certain power through battery very shortly.

Okay, sir. Sir, my second question was on the annual report, we've disclosed the contingent liability with forest development fee of about INR 350 crores. Can you explain what is this about?

I think as Mr. Srivatsan is online, I would request for his help to answer this question.

Yes. Srivatsan here. Government of Karnataka had levied forest development fees in 2016. Then we all went to the high court and the petition was came in favor of us. Then government has gone to the Supreme Court and still Supreme Court judgment has not come. The fee is 8%, which we are providing and showing it as a contingent liability.

Any time lines on when we expect a judgment.

This is height. This is the Supreme Court, sir.

Okay. So I mean, is the case pending? I mean order...

It has gone through the hearing and then we reserve for the order. So it is conclude as long as of now.

The next question is from the line of Vipul Modi, an individual investor.

Am I audible?

Yes, you are audible.

Sir, so my question is regarding our casting business and even the other way. See, right now, whatever steps we are taking is like more about efficiency in cost and efficiency in production. So apart from the efficiency, are we looking to develop something else, something else in the sense that beyond castings, so maybe we can go in for subassembly or something like setting up our assembly lines to integrate internal components like valves, pistons, brackets, seals into the casted housing. So we supply kind of subassembly instead of just the casting. Now something like a fully dressed cylinder head or a completed tractor axle housing. So this transforms the company from a component foundry to Tier 1 modular engineering partner. So maybe -- are we looking to do something like this or something expanding into very large exotic steel, exotic castings, niche products. So it is like in high-margin downstream sectors like aerospace, defense, renewable energy, heavy industrial machinery or something. And then there are different sectors like a lot of casting, I think it has a lot of scope and many sectors are still untouched or we are not too much into it. So are we -- and how about the -- what's the status about 3D core mold printing, rapid prototyping? Are we doing it? Or is it on the process? So can you just throw light on this?

Yes. Thank you very much. I think we are on this direction though still the aggregates could be a little far away. But as you know, we have started the machining plants or machine shops in all the 3 locations, Koppal, Solapur and Rajpura. And from all the 3 plants, we are already supplying the fully machined components, which are ready for assembly. For example, we are supplying to one of our OEMs a 6 cylinder head, which is fully machined and ready for assembly with child parts. So it's highly value added, and it is a forward integration for us. So we are committed to doing that and more and more orders will be fully machined and ready for assembly coming orders -- coming from our customers. We are expanding the machine shop in all the 3 locations. Now we are also looking at different casting components fully machine, they could be away from automotive industry, they could be from earthmoving equipment. We are talking about large casting, fully machined supplies going beyond the tractor and auto industry, which could be high realizing low volume, high value-added products. We are also talking about compacted graphite castings, which could also be high value and high-end castings. So all our orders year after year are only going north in terms of the pricing is concerned. If you must have also noticed that last year, though the commodity prices went down, our casting realization did not go down, rather, we maintained or slightly improved. So I would say that though may not be up to the fully assembled parts, but machined and with child parts we are already doing, I think we will increase that. Another thing is we have 3D printing, and we have a proto manufacturing facility and our protos are very close to serial production. Hence, our customers have been able to buy large volumes, like, for example, 50-cylinder block through the proto route. So we are doing well on that. It's also a feeder for our new business coming out of the new components being developed by our customers. Thank you very much.

Are we looking at no-bake resin sand foundry or something like that?

Yes, we are commissioning shortly. So I think by October, we will commission the no-bake or 2-part casting foundry. And we have created good capacity like 1,250 metric tonnes per month. And we will -- we are confident the capacities are getting booked faster. And we are also working whether we can expand in other location, one more 2-part foundry as the capacity requirement comes up, we will work on that.

Okay. And what would be the maximum size of castings after all these things are done? Like 1...

Around 3 tonnes.

3 tonnes.

3 tonnes.

3 tonnes. Okay. And are we supplying to any mining crushing mineral processing industry?

We are not into any mining or wear resistant parts. We have not entered. But as we go to 2-part foundry or the no-bake castings, we'll get more flexibility. We don't have to stick to only one bauxite. I think it opens up to other business sectors as well. I take your point, I think there will be more opportunities beyond the term stractors.

I think even renewable energy, wind turbine hubs and all that stuff.

No, I think as you know, foundry is a very vast business. And it's like we are talking about 12 million to 15 million tonnes of castings from India, like China is 45 million, 50 million tonnes. We can't do everything. We are selectively looking at what are our strengths? Where are the opportunities? And I can say that we are not given to miss any opportunities, but at the same time, we can't do everything. We will work we connect to our business. Yes.

[Operator Instructions] The next question is from the line of Saket Kapoor from Kapoor & Company.

Yes. [Foreign Language] Hope, I am audible?

Yes, audible.

Just telling continuation to the facts that's being shared by you, so taking into account the one-off factors, how should our EBITDA margin be shaping up for entering part of the financial year? And I think so with the ramping up of our machining shop capacity, how will that result in higher EBITDA per kg on the casting business. If you could just show -- give us some more color on how things are going to shape up going ahead depending upon the current business environment and the order and the deliverables from the customers?

Yes. First of all, I would like to touch upon that currently for quarter 1, we are at 12% to 13% EBITDA. It's very important things which are the developments in the last 1 or 2 quarters. One is the continuously falling commodity prices have taken a break and we have some improvement in the commodity prices. For example, the pig iron prices have gone up and the steel price increases also have been announced by many manufacturers. So I feel that the commodity prices going southward is reversed. And also, there is a lot of input cost pressures on all the commodities. So I would expect the prices not to go down, but to improve. Second important point is that compared to last year, we have got some better scenario for pig iron. Second point. Third point is that international prices of pig iron have picked up. As we are talking, we are also exporting 30,000 metric tonne of pig iron and the prices -- realization is slightly better than domestic prices. So many of the pig iron manufacturers are selling -- exporting the pig iron, and we are getting support for the domestic pig iron prices. At the same time, also, there is some break to the dumping of coke into India, which was taking the other connected commodity prices low. I expect that we get a support there, and this should stabilize the pig iron business. Demand for castings, I think over the many months now and especially now it has been very strong from all the sectors, tractors, automobile as well as the earthmoving equipment, stationary engines, every sector is improving. I would say that this will give us the support to get the price corrections done because of the commodity price increase, other price increases. I expect realization improvement substantially coming in the casting business as well as some increase coming in the steel business. And I would say that as casting business, realizations and the pricing improves, we should also be able to ramp up the volumes and realize higher sales. So over the coming -- and also this quarter, especially quarter 1 was end of commodity prices going down, and we have to increase the prices. We are still in the process of concluding price increases and cost increase pass-ons. I expect that we will get these benefits in quarter 2 and 3 and thereafter. So I would say that I'm optimistic and we should look for improved performance in the coming quarters.

Sir, our EBITDA margin trajectory has been in this 12% to 12.25% levels only. So with the type of improvement that we are seeing and I think about the cost that has been mentioned by you, how are the EBITDA margin percentage going to trend going ahead?

No, I think what I would like to say here that our steel and tube EBITDA margins have been in the range of 14% to 17% in that bracket, whereas our pig iron business being substantially high. Last 4 years, we suffered on the pig iron business. Our EBITDA margin overall company level got pulled down because of the pig iron prices. I expect now that we have some support on the pig iron. So it should support us for improving the overall company level EBITDA as well as pig iron EBITDA improvement, which supports for the casting and steel tube as well. Overall company level should improve. But as I have told many times, I think I'm a firm believer that 15% EBITDA plus/minus 1% is a right level to operate on castings. Castings could go up now in the -- because of the demand and because of the capacity constraints, we can look for better pricing and better EBITDA margins in casting. Whereas we are into wait and watch situation on the tubes because of ducting from China continuing as well as the subdued demand condition as on today. But let's see how the tube picks up. I don't think it will go bad long period, but it's a short period right now. We can't push too much of line pipes into market. So the island gas should take its share and the project should take its share, then it gets balanced and we get the overall value from the tube business.

So sir, going ahead, there should be then improvement in our EBITDA percentage also or even on a sequential basis because of the factors just alluded by you, especially for the pre-guidance. That understanding is correct?

Absolutely. Yes. But in case of castings, we have to get the customer correction. In case of tube, it is a market dynamics and nothing to do with. There's no understanding in the market for price escalation. So we have to really get the increase from the market for the tubes.

Sir, I think tubes realizations were flattish or somewhat higher if we take the year-on-year comparison. However, quarter-on-quarter, the realization did move up. So can you please explain to us -- definitely, the volumes were on the lower side, but the realizations were up. So what kind of volumes are we expecting? And I think so we had a large order also in execution from an oil major, so where are we? And what should be the trajectory for the tube segment in terms of the volumes that we are going to execute for the remaining part of the year?

No, I would right now only say that in the remaining 3 quarters, we are looking forward to recovery of the volumes and recovery of the margins coming in the remaining 3 quarters, and we should not read only with quarter 1. I would not get into -- I'm not prepared how much really it will make an impact on EBITDA.

Okay. And if I could just add one thing on this. For the pig iron part, sir, you mentioned that we have exited the downtrend and which is very much evident that on a Q-on-Q basis also from a base of 39,000 per metric tonne, it is now closer to 42,400. So what are the current realization? And how much of this realization has been eaten up by the higher RM prices?

Yes. I think you have dot on point. One is the dollar exchange rate. Other is the coal prices are also impacting on the cost front. But we still have a slight delta improvement on realization in spite of the cost increase. I will just keep it there. I think you understand.

[Operator Instructions] The next question is from the line of Dhruvesh Kanakia from Antique Stockbroking Limited.