Nelcast Limited (NELCAST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Nelcast Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Bhatt from EY Investor Relations. Thank you and over to you, Mr. Abhishek.

On behalf of Nelcast Limited, I would welcome you all to the company's Q4 and 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, Managing Director and Chief Executive Officer, and Mr. S. K. Sivakumar, Chief Financial Officer of Nelcast. Before we proceed to the call, a disclaimer, please do note that anything said on this call during the course of interaction and in our collaterals, which reflect 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 like to hand over the call to Mr. Deepak. Thank you and over to you, sir.

Thank you, Abhishek. Good morning, everyone. I would like to thank you all for joining us today for our Q4 and FY '24 Earnings Call. I would like to start by emphasizing that the company has accomplished substantial export growth in the fiscal year and also realized a vigorous compounded annual growth rate of 40% over the last 7 years, culminating in FY '24. We've also taken a noteworthy step in sustainability by launching a one-megawatt solar power plant at our Pedapariya facility, making a pivotal move towards reducing our carbon footprint and embracing green energy. This initiative is set to significantly lower carbon emissions and reinforce the company's commitment to environmental responsibility while also contributing to substantial cost savings. Now, let's begin with an update of performance of our key business segments followed by our outlook for the upcoming year. I'm pleased to share that our performance in the export market has been a pillar of success with a remarkable growth of 35% year-on-year from INR 329 crores to INR 445 crores in FY '24. While we continue to see strong performance in our export business, the performance of the medium and heavy commercial vehicle segment was subdued and ended up impacting our revenue growth. Total revenue for the quarter stood at INR 299 crores in Q4 of FY '24, which was down 5% year-on-year and 7.3% quarter-on-quarter. This is witnessed due to the significant drop in demand, which is influenced by the ongoing general elections, which has led some of the customers to postpone their purchases. However, we are optimistic about the substantial rebound post-elections and monsoon season, and we are projecting a strong upswing in the second half of FY '25. On the other hand, the tractor market also experienced an overall downturn in the industry during the quarter, but now stepping ahead into Q1 of FY '25, we're seeing good traction due to the normal seasonality that we see in the segment, and we're quite confident that this will continue for the year. Moving towards our export segment, as I mentioned, we did manage to grow 35% year-on-year and crossed our target, which was INR 400 crores for FY '24. The growth was fueled by launches of new products as well as increase in volume of existing offerings. For the upcoming year, despite the forecasted 10%-15% downturn in the US commercial vehicle market this year, we remain committed to maintaining strong export business growth in the coming years. Talking about sector-wise revenue breakup for FY '24, the largest share of revenue was contributed by M&HCV, which stood at 38.6%, followed by exports at 35.4%, tractors contributed 21.1%, railways was 2.2%, and off-highway equipment was 2.3%. Going forward for FY '25, we expect our EBITDA to be largely in the same range, which was about approximately INR 12.5 per kg and we believe that we should have fairly stable EBITDA with potential for some improvement. We believe that we see a lot of potential for growth in exports and several new product launches are aimed at the North American region, as well as we are working on several new opportunities in the European market as well in the coming years. The domestic commercial vehicle industry is expected to pick up in H2 FY '25. Strong GST collections by the government indicate good public investment on infrastructure, which will boost the CV segment. Additionally, this segment includes the construction equipments, tippers, which are part of our portfolio, which will see the rise in the demand. So we remain quite optimistic about our performance and remain focused strategically to navigate the challenges and capitalize on the opportunities ahead. With that, I'd like to open the floor for any questions and address any questions and queries you might have. Thank you.

[Operator Instructions] The first question is from the line of Abhishek Agarwal from Prithvi Finmart, Private Limited. Please go ahead.

So, my first question on the export numbers, we have witnessed good export numbers this quarter and for full years as well. So how do we see this upcoming next 2 to 3 years, this export revenue on a percentage of total revenue and what will drive this growth?

So, thank you, Abhishek, for your question. So, I think the exports, we do believe that exports will continue to be a growth driver for us in the medium and the long term. It's becoming more and more advantageous. India is a sourcing hub for buying of castings. So, a big chunk of our export growth has been driven by the US market. Is the current year we are seeing some slowdown, at least in the first half of the current year, we are seeing some slowdown in the demand for heavy commercial vehicles, the Class 8 and such. But we do believe that things will pick up a little bit towards the end of the year, as well as the forecast that we are seeing for customers is for a strong FY '25 and perhaps an all-time record in '26, because there is going to be some pre-buy effect because of some legislative changes that will come into effect in January of 2027. So, we do see the US market remaining fairly strong for us. And we also have a lot of new programs that we will be launching over the period of the next 6 months to 1 year. And I think that will also continue to drive the export growth. We believe the US has led the majority of our export growth over the last 7 to 8 years. But we believe that there's a great opportunity that is happening in Europe right now. We've seen a few companies in Europe that are in the casting phase actually closed down over the last year or so. And we believe that there is a problem with profitability in Europe and there is a problem with energy, there's a problem with labor. There's also a problem with environment. So, we believe that there's going to be a big opportunity that is right around the horizon in Europe as well, within the next couple of years. So, we'd like to keep growing our exports, we want to take advantage of the opportunity. At this point, I don't think we're in a position where we can lay out a clear number yet. But we believe that export growth will remain strong for the next 2 to 3 years.

Are we getting into any new sector like defense or aerospace for our casting division?

At the moment, we don't have really anything in defense or aerospace that we are working on, but we will continue to evaluate opportunities as they come along and if they are suitable for our kind of products.

So, we'll continue to be in auto components casting?

Largely, yes.

Okay sir. And sir what is our current capacity utilization for the Pedapariya plant?

Our current capacity utilization if you look at the utilization for the full year the capacity utilization was about approximately 25% for the full year.

In the last call, we have guided to achieve some 30% capacity utilization from this plant. There can be various reasons to not achieve this it’s okay, but what action are we implementing to increase the capacity utilization of this plant?

So specifically, one of the things that they are across all of our plants in the last quarter is we did actually reduce the number of working days that we were working because we did want to reduce our inventory levels. So on purpose in the last quarter, we have reduced our production in order to reduce our inventory. Unfortunately, the market also had a fairly severe downturn especially in the M&HCV they cut their production schedules quite severely in the last quarter. So that has impacted it. Otherwise, I think we could have hit the 30% last quarter. We're expecting that we will see some bounce back happens. Typically, in any given year normally about 35% of the production in M&HCV happens just in Q4 whereas this year that did not happen. It was much lower than even Q3. So that's something that was very unique about this year perhaps related to the elections is what we're being told. But it may also be related to some inventory reduction activities that the OEMs have taken up, but we believe that this year we should see it bounce back and some 30% is something that we do believe is possible to achieve. Also, a little bit based on some of the new product launches and ramp ups that are happening there.

Okay. And sir last question on the broader question what I have like as we know that in entire auto industry whatever product we are supplying, auto industry moving more towards hybrid and EV. Definitely some of the product what we use in this and we're supplying to this industry. So definitely it will have some impact. So overall, how do you see that, how we will compensate our business which will be gradually reduced in the near future?

Yes. So, I'll try to answer it in two different ways. One, if you look at it we don't really do too much in the passenger vehicle space. Most of what we are doing when we talk about automotive is commercial vehicle and tractor. We don't believe that there's any significant impact that electrification will have on tractor. Perhaps, hydrogen might have an impact in terms of the tractor, but we don't believe electrification will really have any significant impact. And the other part is on the commercial vehicle. So, on the commercial vehicle what we're seeing is, yes, the quantum of castings per vehicle will come down, but the type of castings that get eliminated like for example, the engine blocks,, the cylinder heads as well as some of the transmissions and things like that. Those kind of products that are linked to these type of vehicles contribute maybe less than 5% of our revenue. So, majority of what we are doing is more on the axle space as well as maybe some suspension related products. So, these kinds of products actually don't go away. In fact, these products become a little heavier and also more complex because they have some additional functions that they have to fulfill in an electric vehicle that they don't have in a traditional vehicle. So if you go to an electric axle, the motor gets mounted directly onto the axle. That's what the technology that seems to be coming up today and that actually means that the rigidity as well as the complexity of the parts that are on the axle goes up. And we believe that this will actually benefit us rather than hurt us if it happens. Of course, there's also a little bit of a change of mood in the last 6 months where the pace at which electrification is happening seems to have slowed down all across the world and I think it will happen at a more natural progression over the next maybe 15 years or so. So, I don't think it's going to be a very quick transition as we may have been -- as most people may have been expecting as recently as maybe even 6 months or 8 months ago.

And sir last question do you have any CapEx plans for near 2 years to 3 years?

No, no major CapEx plans. I think the focus is going to be more on optimization, debottlenecking. So, we'll do a lot of maybe smaller projects in the upcoming 2-3 years, but no major CapEx. At this moment just for the next couple of years, we don't see any new lines or any new Greenfields or anything like that.

The next question is from the line of Poonam Sanghavi from Progressive Share Brokers Private Limited.

Congrats on the decent wrap that you've had for FY '24. Sir the kind of layout that you've given in terms of what you're expecting out of the exports I think in the previous concall you had indicated that you would be having an increase in the quarterly run rate about INR 150 odd crores. So you think you will stand by that particular number or should we tone down that a little bit on the quarterly run rate? Yes. So I was just talking about the layout that you've given us in terms of what you think the exports would be for FY '25. And in the previous concall, you had indicated that we could up our run rate on the quarterly to INR 150 odd crores. So you think we should be taking that number or we should be toning down at least for the first half?

No, certainly, I think for the first half we won't be on that number. I think what I mentioned perhaps before was that with all the new product launches that we have lined up and this is assuming there are no delays in terms of launches and all of that by towards the end of the year, we should be getting to that run rate maybe probably close to the Q4 FY '24. Our goal will be to get to that run rate. But I think for the time being certainly in the first half of the year, we do expect it to be a little bit slower than just given the market conditions and the fact that these programs are yet to launch. And typically, you never know when there is a launch happening there could be a couple of months delay or something like that is very much a possibility. So which is also why we're a little hesitant to put a number to this year just because we've got a few launches that might have a little bit of ambiguity on exactly when the launch month might be.

Okay. And secondly sir the new plant you had indicated the breakeven is somewhere around 40% on the capacity utilization.

Yes.

And now you've indicated that 30% is what you're looking at in FY '25. So, is this plant actually going to breakeven on the capacity front in FY '25 or we'll have to wait and see on that?

Yes, I think we will expect that perhaps towards the end of the year that we will get to that breakeven number. But I think like I said a lot of this will also depend on some new product launches. I think from our operations side, we did have some challenges given that this is a very unique facility and there were things that had never been done before in the Indian industry for products of this size. We believe that we've addressed those challenges that we had internally. So now I think it's more a question of some of the product ramp ups that will happen. The biggest chunk of products what we've been doing in that plant is actually axles that go into the four-wheel drive tractors, the front axle that goes into the four-wheel drive tractors. And now as of just last week we've been approved also for product for the commercial vehicles, the heavy commercial vehicles that we just received that approval last week. So we believe that there's some good opportunity there and there's a potential market transition that we can see on the dippers to go from fabricated axles to cast axles. So that's something that we are working on. So a lot of these new product launches will in my view have a fairly significant impact on the ability to ramp up. Like I said we did have some technical challenges internally, but we believe that those technical challenges we have now resolved those.

And sir lastly it was EV products that were actually delayed, are they back on track in terms of coming to production this financial year?

So those products which should have started perhaps I think 6 months ago or 8 months ago, the production has just started from the month of May at our end. So there is a startup production that has happened and there is a ramp up. However, it does look like the ramp up will be slower than what was initially projected. But yes, those programs which are on hold have been restarted.

Okay. And one last question, if you may allow, can we give a cumulative INR 60 odd crores of CapEx for FY '25-'26? Do we stand by that number still?

Yes, cumulative between FY '25 and '26, yes. That would roughly be the range our CapEx would be at. So, both years put together.

Okay. Good luck for FY '25.

Thank you.

The next question is from the line of Vidit Shah from Spark Private Wealth Management.

I hope I'm audible. So my first one was just a clarification to what you just said in the previous question on the production starting from May for the EV products. If I understand that correctly, this is the delivery van order that you all have, which has been delayed by a bit, right?

Correct. Correct. So there was about a 6-month delay. We were told it was also, that this was one of the reasons that they chose to make this delay was also related to the UAW strike. I'm not sure exactly what the details are, why they chose to delay it, but it was about a 6-month delay and so it should have started perhaps 6, 7 months ago and, but it's back on track now.

Got it. So when do you think this will fully ramp up by the second half of this year? Can we start seeing a meaningful contribution from this order or like will the entire order be fulfilled by the end of FY '25 or will there be any spillover in FY '26 as well?

So, this will be an ongoing order, an ongoing production. I believe I could be off by a year, but I believe it's a 4 or 5-year program. So, it will be an ongoing business that will continue -- continuously for the next 4 or 5 years. I think the forecasted sales volume that they were looking at is, I think about 2,500 to 3,000 of these delivery vans a month. That I do not know. Obviously, there is some slowdown in electrification pace, especially in the US. I don't know if it will take a little bit longer to ramp up to that demand, but that's the anticipated volume and that volume is expected to last for, like I said, 4 to 5 years.

Got it. And in terms of the volumes, I believe, I mean, despite the calculation of the reported EBITDA per tonne, we believe that we've done about 18,000 tonnes of volume this quarter. How do you see this both in the short-term and the long-term or the medium-term? As in, like, when you say that things will be challenged, do we remain at these levels for the next 6 months and then go to the 25,000-30,000 levels by the end of the year?

So we believe the second half will be stronger, certainly. The number that we're looking, I think that we were at in the previous quarter in terms of, production was around 23,000 tonnes and we did, production numbers came down to about 18,000 plus tonnes and sales quantity was around 19,000 tonnes. So I think perhaps one more quarter, I think we would be looking at, this current quarter, perhaps something in the 20,000 tonne range is what we're expecting this quarter to be. But when things do pick up, we do believe that, 24,000-25,000 tonnes is what we would like to we expect at this point, at least based on forecasts, to be at in the second half of the year on a quarterly basis.

Got it. And the next one was on the margins. Now, we've seen a very, very decent growth in exports in the year. And even during this quarter, when you look at Y-o-Y, there's been good growth while domestic has been subdued. But even then we've seen, the EBITDA per kilo go down from 8.8 in Q4 last year to 8.5 this year. So, if you could just help and explain what has led to this reduction in EBITDA per kilo?

I think the biggest impact is the volumes. We actually cut the volumes, quite significantly right. If you look at it on a Q-on-Q basis, from about 23,000 tonnes of production, we've come down to about 18,000 tonnes of production. This was driven by the market as well as our own desire to cut down on inventories rather than building. So, this is, I think, one of the probably the biggest factor in terms of what impacted kind of margins that we could achieve in the quarter.

Okay, understood. And just the last question on the CWIP, we have about INR 56 crores of CWIP that we've reported on the balance sheet. What is the nature of this CWIP and where are we spending the money?

Yes, so there are two areas which probably form the majority of that CWIP. One is there is a modernization project that we took up in Ponneri because I think for the next couple of years of export growth, there was some modernization that we needed to do. So this is at our Ponneri plant where we were installing one modernized line as well as we're also installing some additional holding furnaces at our Gudur facility and this is intended to improve our production efficiencies within the existing plant. So these are the, I think, the two major things that show up on the CWIP.

Got it. So, I mean, just as a matter of reference, like what is the efficiency that we can improve by? I mean, will this INR 12.5 per kilo once, the Gudur efficiency is improved, can this go up to, INR 13 or INR 14 or where do we cap this?

Yes, so I think that's what we're looking to do, right? I think we've clearly stated we'd like to move towards the INR 15 and I think these are part of that, these will help us achieve that. It will also help us increase our efficiency in our production, right. So, whatever we're producing today, our target will be about approximately 10% to 15%, we believe we can increase our production out of the same lines by with those holding furnaces that I mentioned as well. So, I think these are, I think what you're expecting or anticipating are, I can't put an exact number to it, but it moves us in that direction towards the INR 15 that we've been talking about as our kind of midterm ambition.

Got it. And just the last one from my end, is in the export market now, you mentioned that America or North America is expected to be a little challenged and we're looking at expansion in Europe. So do we see any growth in North America in FY '25 or do you believe that North America will kind of remain sort of flat for most of the year and whatever growth that we see will come out of Europe?

So, I think we will. See our expectation is, that existing product, if you look at, what was our volumes in FY '24, for the same product in FY '25, we do expect to see a reduction that's there. But we do have some products that, including the EV1 that you mentioned, as well as some other products that we have just recently launched that will go through the ramp up, right. So we will see some growth that will come out of new products and some degrowth that will come out of existing products, just purely based on market. So we believe that, we would still, at this point, it's a little early to tell, but at this point, we still expect to see growth coming out of North America, but probably not as strong as what we what would have otherwise been. And like I mentioned, we think FY '25 will be a good year probably close to the level of last year, which was a historic year for North America on the commercial vehicles. And the belief is that FY '26 will be, a record year, in terms of what they anticipate. Of course, some of that record year numbers will be driven by a pre-buy, which will, of course hit the calendar year '27 numbers. So, we expect a couple of years will be strong. This year while we do expect to see growth, the growth will be, a lot of that growth will be driven by new products and there will be some degrowth on existing products, just based on market volumes.

Understood. All right. That's it for me. All the best. I'll get back to you if I have questions.

Yes, and I think you mentioned about Europe. I'll just add to that. So, Europe, there's a lot of new business that we think, we expect that we will win the business this year. And some of those business may or may not translate into revenue within this year. Some of it might become revenue in the next financial year or some of it we think there's a chance we'll even get converted into revenue in this year. We believe that there would be a significant amount of order wins that happen this year in Europe.

Okay. Like regular updates of those would be very useful.

The next question is from the line of Himanshu Singh from IDBI Capital.

My first question is what are your projections for CV and tractor industry growth for FY '25?

Okay. So, we think tractor by and large will be kind of a mid-single digit growth. CV we believe will be probably a tail of two halves. We think the first half will be a little slow up until at least the monsoon. We believe and we believe there's a very strong pickup that will happen in the second half of the year. But overall perhaps maybe we'll be looking at about a 10% growth. That's what we are able to translate currently.

10% growth for the entire CV industry for FY '25?

That's what we are we're expecting. Yes.

Okay. That would be even higher than this year.

Yes. So, this year, actually, I think, especially the fourth quarter, in terms of the production numbers of what the CV manufacturers made, they cut their production quite dramatically after the 10th of February, I think based on whatever sales projections got revised. We don't expect that will happen next year. And we expect the numbers, especially in third quarter and fourth quarter to be stronger than what they were in FY '24.

Okay. And so what would be your revenue expectation in terms of a target for the next 2 years? And margin levels, which you would target to achieve? Because in the past we have had margins in the double digits as well. So what are your targets on revenue and margins over the next, let's say, 2 years or 3 years?

So I think in the next couple of years, I think our expectation in terms of revenues, what we would like to target is to try to push our numbers perhaps to about INR 1800 crore kind of a turnover, which is a fairly big jump, I understand that we're talking about almost maybe a 40% something growth in 2 years. So maybe it's a little optimistic, but I believe that's what we are working for. And that's what we'd like to be able to achieve. And in terms of the margins, I think we've stated this publicly as well as to move towards the 15 per kg margin.

Okay, sure. And so your current order books, can you like disclose what is your current order book?

So, I mean, currently, in the current quarter, we anticipate somewhere around the 20,000-tonnage kind of a number in terms of sales for the current quarter. The way that I guess the order books work is we don't necessarily have fixed orders. As the market keeps changing, we keep getting orders that keep getting dropped. And so, the way that we work is we have these purchase orders with customers, which is basically a price agreement. And then based on their monthly production schedules, they keep giving us monthly orders. So, I think trying to put a bigger number on the order book is not possible. And typically, a lot of these products have multi-year life cycles, in some cases, multi-decade life cycles as well. I mean, we have some products that we've been producing for almost 20-30 years now as well.

Okay. So if you look at your revenue sector wise breakup, we have very high exposure to cyclical industry as an M&HCV tractor. So, what is your strategy to move away from cyclically, like very high cyclical industries and maybe have some stable revenues or exposure? So what is your thought process on that?

So I think our view on cyclicality and this is, I would say, been fairly consistent over the last decade is to have more diversity in our product mix, so that we can overcome cyclicality. We understand we can't control the cyclicality, but we believe diversity in product mix will help us. So if you look at that in terms of what was our product mix 10 years ago to what our product mix is today, the biggest changes that you will see is you will see that we've had a fairly significant increase in exports. So we've, I think that's been one of the things that we hope that the Indian market and the European market or the American market are not exactly following the same peaks and valleys in their cycles, right. So that's one thing that we have done, and I think you can see that consistency. The other thing that we've tried to do is also we have introduced a little bit more on the off-highway side, albeit it's only a couple of percent even now, but it didn't exist 10 years ago. So we are trying to add more diversity and as I mentioned also, right, we're looking at growth in terms of exports in Europe, and that is also something that I think will, again, exports is not just limited to US, not just limited to one segment, so we also do in off-highway exports as well as commercial vehicle as well as passenger vehicle exports. So, we're trying to build as diverse a portfolio as possible to overcome cyclicality, even though the individual segments might be cyclical, I think as a whole it will adjust itself out.

Okay, and in terms of electric vehicles, how do you see the portfolio spanning out in the next 1 or 2 years? Do you see it contributing significantly, maybe like 5% to 10% in the next 2 years to your revenues?