Nelcast Limited (NELCAST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Nelcast Limited Q3 FY24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Sonia Keswani from EY Investor Relations. Thank you and over to you, Ms. Sonia.

Thanks Manuja. Good morning, everyone. On behalf of Nelcast Limited, I welcome all of you to the company's Q3 and 9-month FY '24 Earnings Conference Call. You would have already received the results and investor presentation which is also available in our filings with the exchange. To discuss the company's business performance during the quarter and outlook, we have with us today, Mr. P. Deepak, the Managing Director and Chief Executive Officer and Mr. S.K. Sivakumar, the Chief Financial Officer of Nelcast. Before we proceed with the call, a disclaimer, please. Do note that anything said on this call during the course of the interaction and in our collaterals, which reflects the outlook towards the future, or which should be construed as a certain forward-looking statement must be viewed in conjunction with the risks the company faces and may not be updated from time to time. More details are provided at the end of the investor presentation and other filings that can be found on our website www.nelcast.com. Should you have any queries or need any further information at the end of this call, you can reach out to us at the email address mentioned in the company collaterals. With that, I would now like to hand over the call to Mr. Deepak. Thank you and over to you, sir.

Thank you, Sonia. Good morning, everyone. I would like to thank you all for joining us today for our Q3 and 9-month FY '24 Earnings Call. I would like to start with the business developments in Q3 FY '24 followed by our outlook for the next couple of quarters. On an overall basis, while we continue to see strong performance in our export business, performance in the medium and heavy commercial vehicles and the tractor segments was subdued and ended up impacting our revenue growth for the quarter. Total revenues stood at INR 323 crores in Q3 FY '24 which was down 3% year-on-year and 11% quarter-on-quarter. For our export segment, we continue to sustain quarterly run rate of excess of INR 100 crores and did close to INR 118 crores in the quarter and around INR 339 crores in the 9 months of FY '24. While the 9-month figure now already exceeds what we have completed in the entire FY '23, this gives us the confidence to comfortably meet our FY '24 export guidance of INR 400 crores. Going ahead, the growth trajectory will continue to remain strong, driven by a robust order book and new product launches. On the other hand, underperformance in the M&HCV was due to reduction in production in the overall industry. Tractors suffered muted demand in the rural economy. We expect M&HCV to recover back on the pickup in construction activity and infrastructure spends. However, tractors are expected to report only a modest growth next year as well. Talking about the sector-wise breakup of revenue for the 9 months, revenues for M&HCV stood at 38%, exports contributed 35%, tractors was 21%, railways was 3% and off-highway equipment and others contributed around 2%. EBITDA per kg for Q3 FY '24 stood at 12.1 rupees per kg, which is a growth of 21% year-on-year, driven by an increase in contribution from exports that have higher margins as well as the normalization of raw material prices and operational efficiencies. For the 9 months of FY '24, EBITDA per kg was INR 13 per kg, which was in line with our guidance of about INR 12 per kg for FY '24. Going ahead, we expect our margins will continue to improve on the back of our growing export business as well as the recovery in the domestic segments and improved operational efficiency. In the last earnings call, we outlined our detailed strategy around improving profitability through four key levers. To reiterate, there's been a conscious shift from manufacturing basic components to higher margin value-add components, which is supported by our state-of-the-art manufacturing capabilities. Second, is our focus on our fast-growing export business. Third is the improvement in capacity utilization levels and removing bottlenecks. And fourth is overall cost optimization. While we remain focused on our strategy internally, we've been recognized by prominent customers as well as institutes. During the quarter, we were awarded the 'Best exporter of the year' in the large foundry category from the Indian Institute of Foundrymen. Tata Motors awarded us for our cost competitiveness during their Annual Supply Conference in 2023. And Automotive Axles recognized our efforts to setting up the Pedapariya plant by rewarding us with our Excellence in new facility creation in castings. We are immensely grateful and appreciate the faith our customers have in us and are committed towards delivering quality. We can now open the floor for any questions and address your queries. Thank you.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Namit Arora from Indgrowth Capital.

Thank you for the opportunity. Deepak, thank you for the helpful opening remarks. My question is specifically on exports. Could you give us some color, firstly, on the new product launches that you are planning for H1 FY '25? Some color on what kind of products and where you are in terms of the development cycle for these products? And secondly, you know, in terms of customers, are you looking to go deeper and get more wallet-share from your current customers? Or are you also in the process of breaking through with some new customers, specifically on the export side? Thank you.

Sure. So I think on the exports front, we do have several products that are slated for launch. I think there's a couple of products that are in the EV space that was actually slated for launch in H2 FY '24 that got delayed by the launch of the actual end product. The vehicle itself got delayed by General Motors apparently due to the UAW strike that was there. So they postponed the launch of the vehicle by about six months. so we believe that, that should more or less in the first quarter of FY '25 come into production. So that's some new products that are already there in the pipeline and that should have been launched. Other than that, there's some other products, again, for the US market that we are anticipating to launch towards the end of H1 of FY '25. So those are in the -- we've received an LOI for development as well as we've started -- all the technical reviews and all of that is currently going on. The tooling development will perhaps start in another 2 to 4 weeks or so is what we anticipate there. In addition to that, there's a couple of other products that I think were in the approval stages. so we expect that also to launch perhaps within the -- at the start of FY '25. So we have several products that are there. Different products have different development cycles as well as launch cycles in terms of depending on their testing requirements and all of that. So some of these might get slightly delayed. We don't know exactly, but we expect that, you know, in terms of an annual run rate for new business, you know, where we expect to be perhaps by the end of FY '25. So this is over and above the businesses that we have today. We think that something around INR 150 crores a year kind of a number is compared to where we are today, we should have that kind of an additional run rate by the end of FY '25. And in terms of wallet share was your second question. We're trying to do both. We're trying to improve our wallet share with our existing customers. Fortunately, we've done that quite successfully in the last few years, and I think we will continue to do so. But we are also working on new customers. There are some new products as well for new customers that we are working on. And hopefully if those do materialize, then we are quite excited because that gives us a lot more opportunities as well.

Got it. Thank you, Deepak, for a very detailed and helpful comment. I have just one more question that was on the Indian infrastructure space. I recognize there has been some sort of a slowdown, especially on commercial vehicles, but do you expect that post-elections, you know, sort of the focus on infrastructure and the spend might come back and your customers, you know, may be ramping up their volumes. And from a product suite standpoint, to cater to the Indian infrastructure opportunity, are you well-positioned or are you looking at adding some more products? I'm just looking at sort of the five-year period post-elections in the middle of this year, next five years. How are you positioned on the infrastructure opportunity in India, and what are your thoughts about the potential of that?

I think within the M&HCV space, a bigger chunk of what we do actually goes more towards the heavier trucks, specifically the Tippers, which are used a lot more on the infrastructure spends, construction, shallow mining, these kind of activities. So we've got a lot of products and a much higher share of business in these kind of products. So we are quite eager to look at India's infra going to the next level in terms of the kind of investment that's going to happen, and we will undoubtedly benefit from that. And we are continuously updating our products as well to make sure that we are part of that story.

Thank you very much. The next question is from the line of Rehaan Phophalia from Sicomoro Advisors.

Congrats on a set of good numbers. I think the revenues declined a little, margins were sort of maintained. Can you just help me with what is the top line growth you expect in FY '25? And what is your EBITDA margin expectation, given the number of new products that you'll be launching in the next financial year? I think you said an additional INR 150 crores of exports is what you expect year-on-year in the next year. So if you can also help me with how much growth do you see on the domestic business side?

Yes, okay. So I think next year is going to be a challenge -- slightly more challenging in order for us to project out, mainly because of the elections that are coming up. And that's creating some level of uncertainty, at least in terms of understanding, not just continuity of government, but also the other part is the kind of expenditures the government is going to over take -- undertake over the next year, right? So it's a little harder to estimate. We would certainly aim for a number that is in the double digits in terms of top line growth. That is something that we do intend to aim for. And we do have some new products in the pipeline that I think will help us with that. In terms of the export growth that I mentioned, that INR 150 crores, I'm just talking about, where the exit run rate would probably be at the end of next year versus where we are today, right? It doesn't -- I've not necessarily -- I want to make sure that from a clarity standpoint, I'm not stating that next year we expect to grow INR 150 crores in export, but I'm just talking about the exit with the new product launches that will happen, you know, during the course of the year, right? So that's that. And then in terms of the EBITDA growth, which I think was the other question that you had, we do intend to continue growing, we think that with the growth in exports as well as with better capacity utilizations, we've said that in the next two to three years, we'd like to get about INR 15 per kg. So right now, in the last quarter, we were at about INR 12 per kg the year so far, we are at about INR 13 per kg. So we think something in that INR 13 per kg to INR 14 per kg range is what we will be targeting for an EBITDA number for the upcoming year.

Sure, thanks. Also given that tractors are a large part of your revenue, I think 21% in nine months ended FY '24. How do you plan on replacing the segment since you don't see that much growth here?

Like I said, I think tractors is the long term also, right, I think it's probably a low to mid-single digit CAGR kind of industry growth that we're seeing right now. And that's what's being projected by the CRISILs and the ICRAs all these other agencies that are doing the research. So I think we believe that there will be more M&HCV growth, but I think exports is going to be really the biggest lever that we can utilize the opportunity on. And there are some really great opportunities that are there. And we are working on trying to break through on some of those opportunities.

Just last two questions. One question is, what is your plan with respect to the current level of debt on the balance sheet? Are we looking to maintain it or reduce or what is the plan?

So largely, it will be a maintained kind of a thing, perhaps for the next year or two, because we will see our working capital needs go up. If we have the right kind of growth, and we grow our exports, which we do intend to. So we will see some increase in our working capital requirements. And we will also, as we pay down term loans as well, we will expect to see some term loan debt come down. So over the next 2,3 years -- I think the next couple of years, I think definitely the debt level will stay similar, but I think the mix of it will -- of the debt will change. And it will -- I would expect that it would be more of working capital, where the increase will happen, where it will be justified based on business growth.

Sure, that helps. And finally, can you just help us understand the exceptional item? What's the location of the land and what was the purpose of the sale?

Sure. So the land that we sold was an excess piece of land. This is something that we had purchased in 2007, in the state of Andhra Pradesh. It was intended at that particular time, for setting up a foundry at that point of time. However, I think we don't feel that, that was the appropriate location to set up a foundry, and we didn't have any specific use for that land. And therefore, we decided to dispose off it. And we were able to find a buyer and a price that gave us that, INR 17.28 crores, which is reported as an exceptional item in the P&L.

The next question is from the line of CA Nihar Shah From Crown Capital.

One small question on the guidance we had given in Q1 of FY '24 for that company is expecting double-digit top-line growth for the entire year. But in nine months, we have seen growth of around 2%. So how are we planning to achieve it? Do you want to give revised guidance on that?

Yes, so I think, unfortunately, you know, at that point of time, we were expecting the tractor market also to stay fairly robust. I think we were expecting a 4% to 5% growth to happen in the industry versus what now looks like it might be a 3% to 4% degrowth that we might end up seeing in the industry right now in tractors. And also M&HCV, we were expecting a fairly strong push happening in M&HCV. We think Q4 in M&HCV will be fairly okay. But overall, we think M&HCV is going to be flat compared to last year. I think on the export front, what we expected to grow, we have managed to do a little bit better than that. But I think -- unfortunately, I think this was a tough year for the industry, both tractors as well as M&HCV overall. And so it looks like, the projections and the forward-looking statements at that particular point of time with the data available then, unfortunately, have not panned out.

So what kind of growth -- what's the top line we are expecting for this year to be in FY '24 for the entire year?

So I think largely where we expect the fourth quarter to be is, we think it will be -- perhaps in terms of revenue, it will probably be marginally better than the third quarter and perhaps somewhere between the second quarter and third quarter in terms of the revenue numbers, right? So roughly, that's where we see it, panning out, which puts us at about, maybe roughly speaking, maybe about a INR 1300-ish crores kind of revenue from, against, INR 1,268, I think, was roughly, was last year. So we would expect a marginal kind of low single-digit growth at this point. That's what we have seen.

The next question is from the line of Rusmik Oza from 9 Rays EquiResearch.

Thanks for the opportunity, sir. Wanted to know what is the current capacity utilization of ours and in the presentation, you have mentioned that you can increase capacity by 50,000 if required with minimal investment. So wanted to know if you have to do this 50,000 capacity expression, what could be the incremental cost for this CapEx going forward?

Yes. So our capacity utilization right now, if I look at it for the whole 9 months, it's about 56% or so. For the last quarter, it's about 58%. And the additional tonnage addition that we were talking about is really addition of additional melting furnaces and some other balancing equipment and all of that. So that is about, I think it will vary depending on the exact capacity and the exact investment we'll need to make. But the best estimate we can make at this point is perhaps something to the tune of maybe INR 60 crores to INR 80 crores kind of investment.

Okay. So another question is on the railways, because that -- railways accounts for only 3% of our revenue, but we've seen huge CapEx coming from the railway side. So any push or initiative on this, on the railway side to increase the business?

So there is something that we're working on in terms of railways. There's primarily 2 businesses that we do on the railway front. One is we produce the brake discs that are used on the, what they call the LHB coaches, which are the coaches used on the Rajdhanis, the Shatabdis and these kind of what the Indian Railways call the high speed coaches. So we produce that as well as we produce base plates for a lot of the metro rails across the country. We are working on expanding the portfolio of brake discs to other trains as well. There were some constraints earlier that did not allow it to do it. Something to do with the specific chemistry that's required, which we had other automotive business on that line, which we could not use that chemistry for. But now we've done some work on that. And so we are looking at some increase, but I don't think it would be anything that would make a significant difference to the overall top line, right? Because the base is still fairly low.

And the last question, sir, is regarding exports. We do ductile iron and grey iron castings right now. But any thoughts of getting into, say, a bigger opportunity like aluminium casting for exports because that segment could be a big segment for us. Any diversification beyond the ductile iron and grey iron in terms of casting?

At the moment, no. And I don't see that happening perhaps for the next, you know, year-and-a-half or two years. We leave the door open to the right decisions beyond that. But I think certainly for the next year or 2, I think our focus is going to remain squarely on our core business, which is the iron castings.

Okay. And with exports going up in the next one or two years, do you expect the utilization levels to go up from the current 56% to around 80%, 85%? Or what could be the max utilization levels we can achieve with this current gross block?

Yes, you're right. 80% is the number that is certainly on the cards. And that's what we would target within the next 2 to 3 years. That's a number that we definitely want to be at.

The next question is from the line of Mahesh Bendre from LIC.

Sir, the domestic market seems to be soft now, as of now, but our export side we are doing well. And you further mentioned that we could add incrementally INR 150 crores of revenue next year. So in the near term or maybe next year, do you think the export could form a 50% of our sales?

50% would be quite a tough number. We hope that the domestic will also pick up. Right now we're at about 35%. So let's move up to 40% and then look at growth beyond that.

Maybe 2 years down the line, is it possible, sir? 2, 3 years down the line?

Certainly, right. 2, 3 years, we're working towards it. We're also trying to work towards some new things on the domestic side as well. So hopefully those pan out -- we hope those will also pan out.

And, sir, you mentioned that capacity utilization, I think 55% to 60%. If we move to 80%, 85%, then obviously margins should move significantly from here?

Yes. So I think that's what we've talked about is we're looking to get too close to about INR 15 per kg EBITDA margin from the INR 12 per kg to INR 13 per kg that we currently are at for the year so far. So we think that that's certainly very much on the cards if we get to a higher capacity utilization, something in that realm of 75% to 80%.

This, typically, we have seen that whenever in foundry business or in a forging business, whenever the utilization goes up, there is a disproportionate benefit that accrues in the income statement.

Yep, that's what we're working for, right, for sure.

Okay. Sir, last question from my end. At macro level, are we benefiting? I mean, is there any China Plus One -- not China Plus One, plus -- Europe Plus One or any kind of more sourcing coming from international arenas in terms of inquiries?

Yes. So I think if we look at a lot of the business that we've won, especially in the last three years, right, during COVID and after COVID, a lot of it was -- earlier was actually domestic plus one. When I say domestic, let's say in the US market, they might have been sourcing locally within the US and then they added as a supplier. And then, you know, due to different constraints, capacities, costs, variety of things -- inflation, variety of things that were happening there, we were able to gain a much greater share of business. And in some cases -- in most cases, I would say, we went from being the plus one to being the primary, right? So we went from being some other supplier plus us to being only us supplying the components. So we certainly benefited from some degree of offshoring that's happened on the products that we do. In terms of the China Plus One, a large amount of the work that was being done in China was kind of a lot of it was a higher volume, but much lower in complexity and much more pricing driven kind of product, which we weren't necessarily there in. And a large chunk of our strategy has been to be in more complex, the higher value added work. So there is one specific product where we have won a business as a China Plus One, I don't think it will make a significant difference to the overall top line or bottom line of the company because it's not very big business, something to the tune of INR 10 crores to INR 15 crores a year kind of thing. But largely, we've been competing against local foundries, whether it's in US or in Europe, and winning business accordingly. Now, I think there's going to be a lot more within Europe of a Europe Plus One. I think there's a lot of question marks and concerns regarding the health of financial health, as well as some of the environmental restrictions that are going to come in for foundries in Europe. So we think that that's going to be a very strong opportunity to play out in the next 2 to 3 years.