KSH International Limited (KSHINTL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KSH International Limited Q2 and FY '26 Earnings Conference Call hosted by Nuvama Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Archit Joshi from Nuvama Institutional Equities. Thank you, and over to you, Mr. Joshi.

Hi. Thank you. Good morning, everyone. On behalf of Nuvama Institutional Equities, I welcome you all to the 2Q FY '26 Earnings Conference Call of KSH International. We thank the management for letting us host their con call. We have with us today Mr. Rajesh Hegde, Managing Director; Mr. Amod Joshi, Chief Financial Officer; Mr. Dhruv Chopra, Head of Investor Relations; and Mr. Nakul Patil, Head, Secretarial. Without further ado, I'd like to hand over the call to Mr. Rajesh Hegde for his opening remarks, post which we can have a Q&A session. Over to you, sir. Thank you.

Yes. Thanks, Harshit, and good morning and wish you all a very happy New Year. I would like to welcome all current and prospective shareholders to the KSH's debut earnings call for the second quarter and the first half of fiscal 2026. I want to once again acknowledge our Board, our team, our investors and all our advisers for their support and the pivotal role they played in getting us to this point. From here on, the onus now shifts to the company to set the strategy that will deliver long-term profitable growth and as importantly, to execute set strategy in turn, generating long-term value for all our stakeholders. Our second quarter and first half financial results, along with supporting information have been submitted to the exchanges and uploaded to our website last evening. However, given that this is our first earnings call, I would like to spend a few minutes outlining who we are, how we are placed and where we go from here. We will then provide an update of the second quarter financial and operational highlights as well as the recent developments before opening up the call for questions. KSH International is a 45-year-old manufacturer of magnet winding wires, which is the most critical component of coils used in large and small electric machines. From power transformers down to the smallest compressors for AC and refrigeration and everything in between, this is where the coils are used. We are the third largest winding wire manufacturer in India with an installed capacity of 41,045 metric tons annual capacity, and we are also the largest exporter of winding wires from India. Once Phase 2 of our Supa expansion is completed in FY '27, we would have an installed capacity of 59,045 metric tons in place. We are a B2B company servicing approximately 120 leading domestic and global OEM customers and maintain long-term relations with these customers, resulting in more than 90% of our revenue being from repeat customers. In fact, 5 of our top 10 customers have been with us for more than 10 years and the oldest for close to almost 40 years. Our track record with our customers is our biggest asset. Additionally, our business is make to order, which means that we procure the copper and begin processing only after receiving a purchase order from the customer. Thus, LME copper prices and exchange rate is a direct pass-through for us, and we do not take any exposure to short- or long-term variations in the copper price. Roughly 75% of our revenue comes from large power transformers and medium power transformers used in generation, transmission and distribution in renewables, railways and in data centers, driven by our core product, which is continuously transported conductors or CTC, this product, which we are the market leaders in India. CTC is a complex engineered wire product that goes through 5 or 6 precision technology steps and fault minimization processes to arrive at the finished product, unlike standard round wires, which is essentially a 2-step process. Additionally, all of our exports is exclusively to transformer companies across 24 countries. A few incremental points I would like to highlight about CTC specifically are that we are one of the first companies to introduce and scale CTC in India almost 20 years ago. As an import substitute and have maintained our leadership in this product ever since. In addition, given our successful track record, we are approved for all classes of power transformers, including being the only Indian company approved to supply to HVDC 400 kV transformers. CTC is what differentiates us from all our listed peers and accounts for more than half of our specialized winding wire business. Why do we succeed? In an ultra-precision field, our long-term mantra has been that quality has to be built into everything we produce -- into everything we produce, not something that gets inspected at the end. This results in the quality and longevity of this product, most of which is still actively working out there in the field. Coming back to the T&D sector, it is experiencing a structural long-term cycle driven by renewable energy, grid modernization, urbanization and growing power demand for AI data centers. This is not just an India phenomenon, but it's a global one as well. The primary bottleneck is the supply of power, medium as well as distribution transformers, which is driving capacity expansion by transformer manufacturers globally. But without high-quality winding wires, the transformer is just a sophisticated box. This is a demand environment in which we operate and the reason why we began our capacity expansion efforts 2 years ago. One of the key barriers to entry in our business is approvals from OEM customers as well as utilities. And we have approvals not only in India, but in each of the countries that we service. From inception, we have always been a manufacturer of specialized winding wires, which are used in transformers, railways, EV traction motors, wind generators, et cetera. And it was only really in FY '22 that we expanded into standard or round wires to focus on specific applications such as compressors for ACs and refrigerators and EV traction motors for 2-wheelers. Our focus on power transformer benefits from the robust demand for the foreseeable future given substantial increases in local as well as global power generation irrespective of whether it is traditional or renewables. This is a further validation by publicly announced strong order backlogs and a capacity expansion plan by all of our core customers, be it BHEL, CG, CG Power, Hitachi Energy, GE Vernova, Bharat Bijlee, Siemens, Toshiba or any other such transformer manufacturer. Longer term, our investments in the specialized magnet winding wire for EV motors and certain types of standard wires should help us create a more diversified and balanced portfolio with sustainable growth and profitability. Shifting to exports for a minute. We have historically managed export contributions between 30% to 40% of our total revenue. In FY '25, this contribution was consciously brought down closer to 30% given our capacity constraints and certain high-value opportunities in India. Now that our larger capacity is in place, we can address both -- the demand both in India as well as abroad. In summary, our key strategies to drive sustained growth is, a, to grow volume from higher value-added segments like T&D, EV motors and exports, then expand our international presence, including expansion with our global clients, then also to increase wallet share with existing customers and drive operating efficiencies through scale and backward integration. And lastly, to, of course, improve our sustainability efforts. Let me now turn to execution and our second quarter and first half FY 2026 performance. We are delighted to report a record second quarter in our 45-year history across all key metrics. This performance not only sustained our first quarter trajectory, but in fact, improves on it, continuing our growth and profitability leadership amongst the listed peers in our industry. During the second quarter of FY '26, our revenue from operations of INR 712 crores increased 50.7% compared to the same period last year. Specialized winding wires represented approximately 77% of our total revenue, excluding other operating revenue during second quarter of FY '26. Revenue from exports grew 21.7% compared to Q2 of FY '25 and represented 29.5% of the total revenue, excluding other operating revenue during the period. Second quarter FY '26 EBITDA of INR 46.1 crores improved 74.2% year-over-year. EBITDA margin and Q2 -- in Q2 of FY '26 increased to approximately 6.5%, up approximately 90 basis points from last year. As we have stated, reported margin can fluctuate due to the movements in copper price, given that copper is a pass-through. It is reflected in the revenue, but also in the cost of sales. Therefore, to evaluate the underlying progress of the company's profitability, it is more important to look at the unit economics of the business, which is EBITDA per ton. Thus for second quarter of FY '26 was -- our EBITDA per ton was approximately INR 65,500 per metric ton on a consolidated basis and increased to 42.1% from roughly INR 46,000 per metric ton last year. This improvement was driven predominantly by growing volumes of CTC and within that towards our focus towards higher voltage transformers, higher export volumes, better utilization and fixed cost absorption. During Q2 of FY 2026, we reported PAT of INR 29.6 crores, up 128.9% from INR 12.9 crores in Q2 of FY '25 and up 30.5% from Q1 of FY '26. PAT margin during the quarter was 4.1% compared to 2.7% a year ago, showing approximately a 140 basis point improvement. Diluted EPS for the Q2 FY '26 was INR 5.2 per share, growing 128.8% over the prior year. I would now like Amod Joshi, our CFO, to go over some of the details on the IPO proceeds. Over to you, Amod.

Thank you, Rajesh. A very good morning to everybody. I would like to wish everybody a happy new year. Coming back to the IPO proceeds, if everyone recalls, the company has raised INR 420 crores in fresh issue proceeds from the IPO, which had 2 primary uses, excluding the general corporate purposes. The first was INR 226 crores towards repayment of long-term and short-term debt. I am pleased to let you know that the company has already paid INR 225.9 crores towards reducing its term debt as well as certain working capital lines. The benefit of this will become visible going forward. Repayment of this debt also further enhances the balance sheet and the financial position of our company, thus allowing us to focus on our growth and further establish our leadership position in key end-use industries such as T&D and EV motors. Now the second primary use of the fresh proceeds was INR 97 crores, which was towards capital expenditure in Supa and Chakan plants as well as installation of the rooftop solar power plant at Supa. Now orders and advances for some of the machines have already been put in place, and we expect deliveries of this equipment to happen over the course of the next 15 months. Now given the current demand environment in the T&D sector, our endeavor is to ramp up the CTC capacity as quickly as possible and bring some of the standard and EV wire machines over the course of FY '27. Once completed, we would have more than doubled our capacity from 29,000 metric tons to 59,000 metric tons. Now with that, I'd like to hand over the call back to the moderator to open up for questions.

[Operator Instructions] The first question comes from the line of Nidhi Shah with ICICI Securities.

My first question would be whether you could provide us with the breakup of specialized and standard wires in terms of volumes? And what has driven this growth in volumes we're seeing Y-o-Y?

Specialized and standard winding wires?

Yes.

Yes. So revenue from specialized is around 77% of the total sales in Q2 of FY '26. And the growth over specialized between the 2 quarters has been almost 20% on the specialized front and yes, almost 20% on the specialized front.

So you mentioned that this is volumes, right, the volume growth?

Yes, yes.

Okay. And what has driven this volume growth? And how much of the current volumes in specialized comes from power T&D?

Yes. So almost -- when you look at the specialized, almost everything comes from the power T&D, wind generator and railways is what we talk about. So it's not just the power T&D, it's also the transformers that go into the railways. So that basically comprises of the specialized winding wires that we manufacture.

Also in the press release, you mentioned that the company has exclusive licensing of HPW's PEEK wires. Could you provide us with some details on what capacity are we looking to build here? What is the current competitive landscape within the country where PEEK wires is concerned? And could you walk us through the rationale of licensing? As I understand, all the products that we do currently have in our portfolio are not licensed. So what has led to this decision? And overall, just giving us some understanding of what could be the revenue potential of this segment?

Okay. So in India, basically, the current landscape for traction motors is up to 400-volt capacity. And if you see globally, what's happening is the shift is happening from 400 to 800 as the vehicle sizes become larger. And globally, what's happening is the -- when you shift to 800 volts because of faster charging, et cetera, then the PEEK wires are generally used by these manufacturers of traction motors. Our -- I mean, why we have gone with HPW is that HPW is one of the 2 manufacturers with patented technology for PEEK wires. And they have a global patent as well. And what we are trying to do is we are trying to indigenize this technology. Like we have taken up a license because this is a patent technology. And we'll use this technology and set up lines for indigenizing this product to be supplied to the local manufacturers here of traction motors. Now keep in mind that this is more of a future -- like we are investing a little bit early in our cycle. But this will not have an immediate impact, but we'll be working on programs with some of the manufacturers for EV motors. And that's where the real benefit will come maybe after FY '27 is when we expect.

All right. So from what you're saying, I understand that currently, PEEK wires are not really being used in India. Is that a correct inference?

Yes. So currently, India is not available because these 2 manufacturers are based out of Europe. But there are traction motor manufacturers who are setting up capacity to manufacture traction motors for the 800-volt and above segment. So this is more -- it's a work in progress is what I would like to tell you. And we need this capacity right now because you take part in the program. And once the program matures, then that's where you would see a meaningful volume going forward.

Next question comes from the line of Kushal Kasliwal with InVed Research.

Thanks for briefly introducing in detail. Sir, my first question was around your EBITDA per ton, which seems to be significantly higher than some of the other listed peers. So any particular reason why you say why you see a higher EBITDA per ton? I mean, almost everyone also manufactures CTC and most of our products are also being manufactured by those peers, but our EBITDA per ton seems to be higher. So any particular reason for that?

Yes. So if you compare us to our peers, we would -- out of the total capacity, almost 75% of our business is actually specialized winding wires, whereas if you compare with some of the other peers, they would be exactly reverse or maybe focused only on the standard magnet winding wires. Although it comes within the magnet winding wire basket, -- but when you look at in terms of profitability, specialized winding wire is a much higher profitable -- a higher profitability product as well. And the reason why we are more -- have a higher EBITDA per ton is within transformers, also we are focusing on the 765 kV and the HVDC segment and the large power transformer segments, which are more complex and of higher value addition in nature as well as our focus is also there on exports, where almost about 30% of our production we export, where export gives you a slightly better margin as compared to the local manufacturers. And when you look at the large CTC for the large power transformers, especially as you keep going up towards the 765 kV segment, you have fewer manufacturers who are approved for the 765 kV or the HVDC transformer segment. So that kind of gives us -- it might look that there are many players, but there are a few players right on the top actually.

So maybe just a follow-up on that, sir. One of the large company transformer rectifiers, which is a higher kV transformer manufacturer, they are actually backward integrating into CTC, which seems to be our main product in specialized winding wires. So any risks with these large players only getting into backward integration? And then apart from these large players, I mean, how many other customers are there who are not backward integrating or maybe, let's say, 2 or 3 years who will probably be a market for us?

Yes. I mean, so transformers and electrifiers, we've heard that they are also backward integrating. But I mean, you keep in mind that these are all continuous processes again, and these run 24/7. And for manufacturers to really backward integrate, they need that kind of volume also. And we have not seen this trend anywhere else. In fact, anywhere else in the world that we have seen most of the transformer manufacturers are not doing -- and there is a certain degree of complexity also that is involved in manufacturing CTC. And that's why we don't see this as a risk coming up in future.

Got it, sir. My last question was on working capital. It seems like due to some lower payable days, our working capital is a bit higher versus some of our peers, which with the kind of growth you are seeing that increased working capital is not allowing us to have a positive cash flow on the cash flow statement. So any comments around it? How should we look, let's say, 2 to 3 years from here? Will we be able to generate some positive CFO in the cash flow statement?

Yes. So rightly pointed out, our working capital days are around 75 days and as compared to peers a little more. We are actively engaging and undertaking steps to bring down the working capital days consistently in the next 1 or 2 days at all fronts, may it be receivable days, inventory days or increasing the payable days. And we hope to achieve some sort of positive results in the next 1 or 2 years on that front.

This is Dhruv. Just to add one point on this. If you look at our 10-year history, generally, most of the years, we have generated positive operating cash flows. It's only in the years where growth has been north of 30%, 35%. But again, going forward, our endeavor is to try and reduce those working capital days so that we can sustain cash flows even during high-growth periods.

Next question comes to the line of Mahesh Bendre with LIC Mutual Funds.

Sir, the second -- I mean, the expanded facility, new facility at Supa, I think, has come up on stream now. So will that add a substantial volume in the current quarter and next quarter?

Yes. So the Supa facility -- is available, the 12,000 tons, which was completed in Phase 1. That capacity is actually available from 1st of October onwards. And it will be available till the end of this year -- financial year. And definitely, I mean, this capacity, we intend to use it to service the market. That's why our capacity has gone up from 29,000 to 41,000 tons.

So has that capacity stabilized or still in the ramp-up phase?

Yes. So typically, see, in our industry, 85% capacity utilization is a good indicator in terms of capacity utilization. Now any plant, any new plant that is there, it takes about, say, 2 to 3 years to reach that 85% peak capacity utilization. Now having said that, this plant is already operational, and we have started utilizing this 1,000 tons per month capacity, which is available for the next 6 months of this year and the entire 12,000 tons will be available for next year, plus whatever additional CapEx that we will do now from the IPO proceeds, that will also come on stream for next year in FY '27.

Sir, you also mentioned about we have received orders for BHEL from BHEL for HVDC transformers. So I mean, can you slightly explain in terms of size of orders? And will these kind of orders can also come from the other OEMs in the Indian power sector?

Yes. So this BHEL order is an initial order right now, which they have placed for 11 transformers where the specialized winding wire is going to be used. And if you see our past also, we have a history of supplying to HVDC transformers as well as 765 kV transformers, which are -- but in between, there was a lull in the HVDC side. And HVDC -- specialized magnet winding wires, which go into the HVDC segment are the highest value addition actually or the most profitable orders within our family of products as well. And we -- this is an initial order of 11 transformers. This is actually a consortium where the Bhadla Khavda project, which is there, where for power grid. And there are other players who have also bagged transformer manufacturers like Hitachi Energy and BHEL has some more transformers also, which will come in the future. And we are the only ones right now in India who are qualified -- the Indian supplier qualified to supply for the HVDC 400.

Sir, last question from my end. In terms of export, I mean, we generate a substantial part of our revenue from the export side. So how those opportunities are in terms of export? And rupee has depreciated, will that benefit us? And any impact because of the tariff?

Yes. So in terms of exports, we export to, like I said, about 24-odd countries. And we have some global relationships also with some of the large power transformer. I mean, almost 100% of our exports is actually to transformer companies where the specialized magnet wires are being exported. And we have some global relationships with the likes of GE, Hitachi, then Toshiba, et cetera, where we are supplying to some of their global locations as well. All of these companies -- all of these locations, they are adding capacity as well. And we will definitely see some benefit of that capacity expansion that is happening to maintain our wallet share with these customers as well. Rupee depreciation, of course, I mean, from a value addition standpoint, it does help us. And we'll probably see that in the coming quarters. But tariffs -- okay, I'm sorry, the last question that you had was about tariffs for the U.S. So today, we do supply to the U.S. market. I mean we've been in this market for the last 10 years plus, and we have a diversified base of customers. Now there is very little capacity of specialized magnet winding wires within the U.S. And if you look at the U.S. demand, I mean, the demand is far greater than the supply position that is there. And if at all, the local manufacturer has to really step up in terms of capacity, it will still take them some time. And so then that leaves all of the specialized magnet winding wires that are being exported to the U.S., whether it is from, say, Europe or India, they are subject to this -- the tariff. But today, the customers who are buying this material, they are paying this tariff and absorbing this tariff and passing it down to their end customer.

Next question comes from the line of Ashutosh Chaubey with ITI AMC Limited.

My first question would be on the raw material sourcing side. How would the sourcing for KSH International would differ to any of its peers and along with the client concentration? These 2 questions.

So when it comes to raw material sourcing, we would probably have the same sources when it came to copper. I mean there are -- there are a few sources for copper available in India. And we import, of course, to have a spread between local as well as local suppliers as well as import suppliers. So in terms of that, I think we would have similar suppliers. On the volumes that we buy would be a lot different compared to the other manufacturers of winding wires. And in terms of concentration risk with suppliers, we don't really have a concentration risk with any particular supplier. We are quite well spread also. No. And what was the other question you said?

On the client concentration side.

So client concentration risk, we -- like we -- I mean, top 10 customers we have is about 50-odd percent is the spread of business. And also -- so we are not really having a very high concentration risk with any one particular customer, I would say.

Yes. I think just, Ashutosh, to add on that, the fact of the matter is that we are a B2B company with about 120 customers. So your top 10 is always going to be a meaningful component, but that doesn't necessarily introduce concentration risk because of 2 reasons. One is that within the top 10, they're fairly well diversified. And secondly, they've been clients -- repeat clients of ours for years, in some cases, decades. So it's a fairly repetitive kind of relationship we have with them.

Okay. And sir, on the sourcing side, again, you mentioned that it is the volume that comes into play. So going by that, does the scalability provide us -- if you can just give me in hindsight some numbers to understand the quantum of volume that we place the same set of domestic procure -- domestic vendors and the imports that we make. Any pricing benefit that we get over there in terms of sourcing compared to the peers?

I mean peers are larger with certain product categories. But I mean, if you compare the top 3 or top 4, I think we would have similar benefits in terms of when we are purchasing. Maybe -- I mean, I'm not sure how much differently within the top 5, I think we would have similar benefits is what I would say.

Top 5 wire manufacturers from volume sourcing?

Yes.

Next question comes from the line of Shrinarayan Ramkishor Mishra with Baroda BNP Paribas Mutual Fund.

So my first question was on the supply side again. So what are the bottlenecks for the industry that CTC supply is not able to catch up with the demand? If you can elaborate on that?

You mean to say what are the bottlenecks for the transformer manufacturer or for us?

For you.

So for us, there is no real -- capacity has been a bottleneck for us. As of October 1, we have addressed that bottleneck because we have started this process of setting up this new facility in Supa, and it took us about 2 years to set up this new facility. And now we have about 12,000 tons of fresh capacity that is available. So capacity has been the biggest bottleneck. And because of the spike in demand, especially on the specialty magnet winding wire side.

Okay. So specifically there, importing of -- sourcing the plant and machinery, has that been the issue? Or is that people had not set up capacities and now since the demand is there, people are now going ahead and setting up the capacity? So is it due to delay in getting machineries, is it because of that or because of not setting up the plant and machine -- the capacities in advance that is causing this?

Well, the capacity expansion that has happened, we were slightly early in the cycle, and that's why we are sitting with the capacity that is already there on the ground. And typically, in this business, these are all SPMs that you require and this -- there is a long lead time also. It can be anything from, say, 8 months to almost a year if you really were to order new equipment. And then again, commissioning, et cetera, is another aspect of this. So -- and then finally, you also have to go through the approval process. Let's say, if a new company is coming in to manufacture CTC, -- it's not just that they make this CapEx investment. They also need to work up that value chain of starting from a medium power transformer and then you supply it up to the 765 kV transformer. And this could take anything in the upwards of, say, about 5 to 7 years for them to reach that. And finally, of course, the biggest bottleneck for all these people would be -- the constraint would be to -- even if you have capacity is to get the end utility approval, which is like power grid, NTPC, they all want to see a track record for your product to have been used in the field. So that also creates some issue. Even if capacity comes in, what I'm trying to say is that it's not that it's easily available for everyone to use it.

But since these transformer players already have relation with the end customers, will it not be easy for them to get their products approved or they will have to follow the same process as an independent magnet winding producer will have to do?

No, no. Even a transformer manufacturer, one is, of course, the complexity of the product also is there and which is, again, it's -- there are different complexities when you're manufacturing these products. But for a transformer manufacturer, he would also have to go through the same steps of getting approved by the end utility as well. So I don't think it is any different for whether a transformer manufacturer is manufacturing it or if we are manufacturing it or any new player is manufacturing.

Yes. I think just one clarification that ultimately, a transformer manufacturer supplying is only able to select a vendor such as us or anyone else if the vendor or us is already prequalified and appears on the sub- vendor list of the utility companies. So they cannot go and institute any other vendor unless it's preapproved with the utility.

Okay. And if they were to resort to importing, so how easy is to switch to imports and for these manufacturers to cater to their demand because they are also sitting on order books, but this shortage of CTC and boosting is what constraining them. So if I were to import these and supply, so how easy or difficult would it be?

Yes. Well, we know that there is some imports happening, but that's at a much higher cost right now. That's because the capacity was not available. And we don't see this trend continuing because now that capacities are available, we would be in a position to service all the local customers as well.

So what would be the gap there?

In terms of the quantity being imported?

No, no, pricing.

Pricing -- see, I mean, in this product, if you just -- on a like-to-like basis, there is a 10% duty element, which is applicable on any import. Now you add that 10% on the copper price as well, which is roughly -- I mean, you can take INR 1,000 a kg is just the LME element of it, then it becomes quite a substantial gap.

So secondly, just copper prices, U.S. is stocking a lot because of duties and elsewhere, we are facing shortage. So for your order book for next year or 18 months, how do you see your raw material sourcing? I know pricing is a pass-through. But in terms of having sufficient inventory levels to execute your order book, how are you doing that?