Nelcast Limited (NELCAST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Nelcast Limited Q3 and 9 Months FY '25 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Abhishek from E&Y Investor Relations.

Thank you. Good morning, everyone. On behalf of Nelcast Limited, I welcome you all to the company's quarter 3 and 9 months FY '25 Earnings Conference Call. You would have received the results and investor presentation, which is 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 CEO; and Mr. S.K. Sivakumar, CFO at Nelcast Limited. Before we proceed to the call, our 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. 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 e-mail address mentioned in the company collaterals. With that, I would now like to hand over the call to Mr. Deepak. Thank you.

Thank you, Abhishek. Good morning, and thank you all for joining us on today's call to discuss our performance for Q3 and the 9 months of FY '25. I'm excited to share the wonderful news that Nelcast Limited has recently celebrated our 40th anniversary. I'd like to express my heartfelt gratitude to everyone for their unwavering support. That's gotten us through 4 decades. It's been a period of considerable challenge for Nelcast. The resilience that we have shown in the face of market fluctuations is a clear indication of the strength and stability of our business model. We're not just navigating through a temporary dip in demand. We are actively preparing for a future filled with promising potential. During the quarter, our exports witnessed a decline because of macroeconomic headwinds in our key export market, which is the U.S. However, the domestic market has shown signs of recovery, particularly in the Tractor segment. We believe the worst is behind us, and we are poised for significant growth in FY '26. Our confidence is supported by the promising prospects of new order wins on the export front, which we expect to materialize from the beginning of FY '26. Coming to the segmental performance. During the 9 months of FY '25, the Tractor segment witnessed a year-on-year growth of 10% in volumes and its revenue share grew to 24% from 21% in the 9 months. The M&HCV segment revenue stood at 37% despite a moderate volume decline. Export volumes during the 9 months of FY '25 witnessed a slight decrease, yet that share of total revenue remained consistent with the previous year at 35%. Our commitment to business development has never wavered. Our team has been proactive in our efforts to secure new orders and we're poised to see a significant addition of export orders that will enhance our order pipeline. This momentum is set to build a strong order book which we believe will be the key catalyst for strong revenue growth in the upcoming financial year. Moreover, the domestic market is showing some positive signs of infrastructure development pickup as well as growth in e-commerce sector and new scrappage policies are expected to sustain demand for commercial vehicles. Looking ahead, we are confident in Nelcast's trajectory of growth and success with a clear order visibility, an exciting range of new products in the pipeline. We are strategically positioned to deliver enduring value to our stakeholders and solidify our standing in the market. Your continued support is invaluable to us as we progress on this path to a promising and prosperous future. Lastly, commenting on the financials. The total income for the quarter stood at INR 297.1 crores, compared to INR 323 crores in Q3 of FY '24. The total income for 9 months stood at INR 934 crores compared to INR 982 crores in the 9 months of FY '24. And our exports stood at INR 318 crores compared to INR 338 crores last year to the degrowth of 6%. EBITDA for the quarter was at INR 22.9 crores compared to INR 28.2 crores in the same quarter last year. And our EBITDA for 9 months stands at INR 71.3 crores compared to INR 87.2 crores in the 9 months. The profit after tax during the quarter was INR 6 crores and INR 23.7 crores for the 9 months, respectively. So thank you. And I'll now open the floor to any questions you might have.

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

Sir, firstly, in your press release part, sir, I'm just quoting you, we have mentioned that we have a relentless focus on business development, and the team has been working tirelessly to secure new orders and we anticipate a significant addition to our order pipeline going ahead, and a strong momentum in export, which you alluded in your opening remarks. Sir, if you could give us some more color to what are we trying to express? And sir, firstly, sir, for this 3 months, what were our export numbers in the absolute and the comparable with the second quarter?

Yes. Our export numbers in this quarter was about INR 91 crores approximately.

Right, sir.

And in the previous quarter, it was about INR 129 crore, about INR 129 crores about INR 130 crores approximately. So we believe that this slowdown was specific to the quarter, mainly because I think there was a lot of uncertainty that was there in the U.S. with the elections that were happening and potential rate cuts. So this is the reason we believe that there was a significant slowdown. I think there's also some amount of inventory level correction that our customers were doing at their end and therefore, reducing their production numbers as well. So this is why we believe that there was a significant drop in the third quarter. We're looking at a fourth quarter that is at the moment looks to be coming back towards normal.

And sir, you alluding to the fact about the new order and also how are the -- firstly, sir, as requested earlier also, we have not mentioned the challenges for the quarter and for the 9 months. So I would request, again, the IR team to please provide the same input on a continuous basis along with the results, that would suffice some of the questions.

Yes. So let me answer this point as well as the one that the previous one that I had not answered. So this -- in terms of tonnages, our sales quantity in terms of tonnage in the last quarter was about 19,700 tonnes. And a production quantity of about 19,450 tonnes. So comparing to the second quarter, we were at -- production quantity was about 22,000 tonnes, and the sales quantity was 21,800 tonnes in the previous quarter.

That's a significant lower tonnage, sir.

Yes. So the second quarter to third quarter, I think the dip is one, of course, as I mentioned, in terms of the reduction in the exports, so primarily driven around some uncertainty regarding interest rates as well as the U.S. election. But I think some of it was also a general seasonal drop that happens due to the tractor industry moving from Q2 to Q3. Q2 is the peak of the tractor industry and Q3 is -- and Q4 are the low points. And commercial vehicle has not -- did not yet pick up until at least we started to see a pickup in probably towards the end of November. So we don't really see that reflected as well here. Now I think for the full year, if you look at from a sales perspective for the 9 months so far, we are at about 61,500 tonnes. The same 9 months last year was about 62,700 tonnes. So we believe we will be able to -- at this point, based on our current order visibility, I think we will end up at a number that is the same or very close to the same as last year. So on a year-on-year basis, we will see -- we anticipate at this point that we will see a stronger Q4 this year than we did see last year. That's the indication at the moment. Now coming to the new orders, the question that you had asked and what we are working on. I think there's quite a bit of serious discussion that is happening, and we believe we're very close to being awarded some business that would potentially be able to add anywhere from about $25 million to about $60 million of new product wins, that we hope will materialize in the next 3 months or so.

Okay. And sir, what would be the likely deliverable schedule for them -- this disorder after securing the order?

So these are -- this is not one order. So there's a variety of different orders. Some of these we'll be looking at a start of production that will be in early part of maybe -- at Q4 of the next financial year of Q4 of FY '26 to will be the start and then there will be a ramp-up period. And -- but I expect that within about 2 years or so that the ramp-up will be completed towards the business value.

Right, sir. And sir, 2 questions for Siva, sir. Sir, lastly, for the September -- Siva sir, the capital work in progress closing balance on a consol level was INR 68 crores for 30th September. And sir, if you could just put some more color where is this money we have spent and what...

See, earlier also, we mentioned that the modernization project at our Ponneri plant has been capitalized now.

Okay. So the entire amount has been placed under depreciation. Therefore, we have amortized the same also for this quarter?

Yes.

Okay. And sir, can you give the debt numbers also, sir, our long-term borrowing and short-term borrowing or the net debt level also would suffice.

Net debt for the quarter ended INR 267 crores, including short-term and long-term.

Okay. INR 267 crores?

INR 267 crores, yes.

And any color -- any maturities we have for the coming quarters, sir, March ending 2025?

The repayment is continuing, whatever the yearly repayments. So that we are continuing. Fourth quarter repayment.

What should we end the year, sir -- as a closing balance?

As of now, I cannot do that because first quarter repayment is...

The next question is from the line of Vidit Shah from Spark Capital.

My first one was on the M&HCV volumes and sales. We've seen a little bit of a slowdown over the last couple of years, couple of quarters and continuing into this quarter as well. So any terms of -- any outlook that you could provide on where we are seeing the sector in 4Q and how we are seeing recovery come through and if we are witnessing a prolonged slowdown there?

So we are seeing M&HCV more so, I would say, in the tipper type of a product than the haulage product. We're seeing some recovery. It seems to be that maybe this is due to infra spend. We also had a very low base last year if you look at the fourth quarter because there was any fairly drastic cut in production numbers that all the OEMs undertook because they were expecting, again, a very slow first quarter because of elections happening in India. So this year, we don't anticipate that, that will happen. We're not seeing any signs of it. In fact, we're seeing fairly good projections, robust projections for Jan, Feb and March, which is typically the peak season for the M&HCV. So I think we're seeing in the current quarter, what we expect to see is more of a normal seasonality. But that being said, I think we still do expect that as a whole year, M&HCV will have a degrowth as a -- from a total industry volume perspective. That being said, we expect at the moment that we will have a moderate growth on our sales to the M&HCV segment. There have been a couple of places where we've gained some market share. And so I think that will help us offset that industry degrowth and actually be able to grow a little bit.

Got it. And previously, you had stated a target of about 110,000 metric ton of volumes in FY '26. Now given where we are right now and the order book visibility you have, do you think that you're still on target to achieve this? Or do you think this is pushed to FY '27, given that the new order -- that $25 million to $60 million order that you said is -- will only ramp-up from FY '27?

So I think this is a number we'd like to work towards about 105,000 metric tons to 108,000 metric tons is what we are currently hoping for. Some of that has to -- will depend on 2 factors. One is the industry itself. And so if the industry doesn't -- I think if the industry grows by about 5% to 10%, then those are definitely on to be able to hit that. And the other part is the new product development and the launch timelines on the new product development. So there are specific timelines that we believe in terms of when the business would get awarded to us when samples would be required, when testing would get completed and when our customers would go into production for these new orders that we believe that we are very close to winning. So if that happens, then exactly as per plan, then yes, somewhere between 105,000 metric tons to 110,000 metric tons is on the cards. But if there are delays in that, then that might create some shortfall to that target.

Got it. And just one clarification. These new order wins are from what geography?

So the -- so it's a mix, but still a big chunk of these new orders that we are anticipating to win. We haven't won them yet, so I just want to be careful. But the new order wins that decision we expect taken in the next couple of months. Our biggest chunk of this is still from the U.S. and North American market. But even within the U.S. and North American market, a chunk of this is actually from a different segment, which is the Agriculture segment -- Agriculture & Construction Equipment of Highway segment and some of it is from the Commercial Vehicle segment.

Okay. So if you could just give us an update on how we're doing in Europe because that was the next line of growth that we were expecting. So that would be great.

So Europe, we've had one of the European customers come and visit and complete an audit. And based on the audit, they've given the -- there's an action plan to close a handful of points that they've requested, which we expect to complete within the next -- by the end of the quarter. So parallelly also some commercial discussions are going on. I think that customer intends to start with a small order to try us out. And then -- but there's fairly good order book pipeline that's there once the first order comes through and is successful.

But that -- like -- so basically, we start small, but meaningful, deliveries will only happen in FY '27? Would that be a right assumption?

Yes. Yes, I think that would be a fair assumption for that. So that's one. There's a few other discussions that are happening, and we'll see how those pan out.

[Operator Instructions] The next question is from the line of Priyam Shah from Value Equity.

So this is with respect to our revenue mix. Just wanted to know whatever revenues that we are garnering from M&HCV segment, does that comprises only of export or it is completely domestic sales? If you can just give the split of that.

So the 37% of M&HCV that I said, that entire 37% is domestic M&HCV. Exports is independent of that, and exports is about 34.7% and 35%.

Okay. Okay. And my second question is with regards to how does our ballpark of our order book pipeline, as you mentioned, looks about like you've seen that this is very strong. If you can quantify that?

Yes. So I think -- I think I did, I said a number that's probably between up to $60 million of new business is what we are working on, on the export front. There's also some stuff we're working on the domestic front. We believe that these are not just things that we quoted, but these are things that have a very high potential of us winning it.

Okay. And would these be executed over the next, let's say, 15-odd months?

Yes. So we -- so this -- the business will -- all of these businesses that we are talking are businesses that would start production within the next 15 months is what we are discussing. But the ramp-up of -- we'll start at that particular point of time, and the ramp-up might take up to another year or so.

Okay. Okay. And I'll take your last question, as mentioned in our presentation, our EBITDA per kg stands at INR 11.8. Okay. what are the measures that we are taking to improve our EBITDA per kg?

Yes. So I think there were largely 3 things that we are looking at. One is in terms of the product mix. So if these orders, new orders do materialize, we'd be looking at a significantly higher export volume, which is a better product mix for the plant. That is one. The second is in terms of renewable energy as well as other cost benefits that we can do out of our operations and cost reduction programs that we have running. And the third is also in terms of operating leverage. As we look at maybe 50% in the next couple of years, we'd like to target to grow by 50% in the next couple of years, which will happen if these orders materialize. So between these 3, we are quite confident that we'll be able to push this number to about INR 15.

Okay. Okay. So this INR 15 number that you are mentioning, that would be in the year FY '27 and beyond?

Yes. I think once these businesses are ramped up, which will probably be the latter part of FY '27, we believe these numbers would be achievable.

Okay. Okay. One final question. How do you see our company shaping up probably 5 years down the line FY '30, something targets like you have, a vision kind statement?

Yes. So we've actually just last week on our -- at our 40th anniversary, we did unveil our vision that we'd like to be among the top 5 iron casting companies in the world. This is something that we are preparing that road map and we've got a -- we know where we need to get and how we're going to get there. We've got to work on a lot of things, but that's our target. I don't know if that's realistic that we would achieve that in the next 5 years. But certainly, we believe we can achieve that in about a 10-year timeframe.

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

First of all, I would like to congratulate you for the 40th anniversary of the Nelcast. Sir, 2 questions from my side. So first one is -- can you please put some light on what will be the revenue mix going forward by FY '27?

Okay. Like I said, it's a little bit hard to answer that question because we are expecting a decent amount of wins on the export, as I've already mentioned. We're also seeing some amount of good traction on the domestic side on a couple of new things that we are doing, as well as some of our domestic customers who want to export but need to buy castings to make their assemblies that they export. So it's difficult to put a number. I would say the number that we would like to work for is 50-50. I don't know if that will happen in 2 years or 3 years. But if we miss that number because the domestic has grown faster, I'll be quite happy with that.

Okay, sir. Understood. And the next one would be, sir, just wanted to understand, according to you, like what would be the key macroeconomic factors anticipated to drive growth in the coming years?

So I think from a domestic standpoint, there are 2 big ones segments that we're in, right? One is M&HCV and more specifically within the M&HCV, we have a greater content that go into tippers. So that will depend, I believe, largely on infra spend. So if the government does make a serious investment in infra, I believe that, that segment will grow and that will have a significant impact on us. So that's one thing that I will be very closely watching in the budget tomorrow. The second is in terms of rural growth, and that would impact tractor sales, which is another key segment for us. So that's the other thing, right? So if I was to look at what are the macroeconomic factors, it would certainly be infra investment and rural growth.

The next question is from the line of Rahil Shah from Crown Capital.

Firstly, congratulations on the 40th anniversary. Sir, first question, you said you expect a really strong Q4 year-on-year, right? So if we have to look at the whole year numbers, FY '25, I believe in 9 months, we have done around INR 920 crores in that vicinity. So how do you expect to close out the year? Will it be flattish or more or less above last year's numbers in terms of revenue? And if you could also...

Yes, I think for the full year, we expect that sales will actually be negative. Even though the fourth quarter compared to last fourth quarter, we are expecting growth. But I think for the full year, it's -- there's still quite a bit of a gap of INR 50 crores that I don't believe that we'll be able to bridge in this current quarter. But certainly, we'll be trying to work for that. So a flattish to a very minor, low single-digit degrowth is what we see in terms of sales for the full year, in terms of revenue. In terms of tonnage, it will be largely flat. There's been a reduction in raw material prices, which got passed through to customers. So from a tonnage perspective, we believe will be largely flat and from -- or actually slight growth on a tonnage perspective. From a revenue perspective, there'll be a slight degrowth.

Okay. And your margins will also depend on those tonnage? Or how will they factor out?

Yes. So we think certainly compared to where we were in Q3, we would -- given the better volumes and I would say, resumption of export to a closer to normal level. We do believe that our margins in this quarter will be better than what they were in the previous quarter. But again, we'll have to see how raw material prices move and all of that. So I don't want to comment too much on margins. But my expectation is all things being equal, we should -- our margins in the current quarter will be better than what they were in the third quarter.

And exports, they offer better margins, correct, compared to domestic?

Yes.

Okay. So when you say you are expecting this huge export order, you have a big pipeline of a good amount, which you expect to materialize by end of next year. So is it kind of fair to say that like a year or like 15 months later, you can get back to those double-digit EBITDA margins?

That will be the goal. So typically though, with exports and with a lot of these more complex products that we're taking on, it's usually from the time we start production, it takes us about 6 months or so to stabilize before we really start getting to where we want to be.

Okay. And you mentioned something like exciting range of new products in pipeline. It was your statement. So can you give any details about these?

Yes. So I mean I think that's what I was referring to was the new business wins that we are some of which are in development, but the biggest chunk is what we anticipate that we will most likely win within the next like 60 to 90 days.

That was the big pipeline you mentioned, the $60 million.

Yes.

Okay. That's a part of that.

Exactly.

Okay. Any FY '26 revenue top line -- sorry, top line growth guidance you can give at this moment?

Not at this moment. Like I said, I think what we are targeting to do is -- and this will depend on all the factors that I mentioned earlier. So maybe if everything works very well, we believe 20% is possible, and that's what we are working for to get to that 105,000 to 110,000 ton range. But that would depend on the key factors, the domestic segment doing well, the export segment doing well and all the new products launches being on time. So -- which is not necessarily related to us. It's related to our customers and a whole bunch of other suppliers that they have and their end customers as well. So if all goes well, that's what we would like to be able to achieve.

The next question is from the line of Anand Gupta, an individual investor.

Sir, do you see prebuy already happening due to the change in upcoming emission laws?

This is specific to the U.S. market you're talking about?

That's right.

We don't see that impact yet. I think the anticipation is that we would see that actually in the next calendar year. The emission norm change, I believe, is scheduled for the 1st of January 2027. So the anticipation is that it will happen in 2026, more likely. I don't think there'll be a significant impact of that in 2025 calendar year.

The next question is from the line of Saket Kapoor from Kapoor & Company.

Sir, firstly, sir, we have seen some noncore asset sale for the 9 months. So are we done with all the land bank which are for -- which were to be disposed or to be sold out? Or do we have more assets, sir?

It's complete.

Okay. And as Siva, sir, was mentioning about the modernization where we have put around INR 60 crores. So sir, how will -- which units have we put that money? And how are our yields going to improve? Or if you could just elaborate the benefits that we would derive from the sale?

Yes. So this particular modernization project was done at our Ponneri plant. The biggest -- so that's the biggest chunk of that CWIP that you're talking about. The biggest chunk of it was at our Ponneri plant. And the purpose of this modernization that we did at Ponneri is because if you look at our product mix today, the biggest chunk of our export comes out of our Gudur plant. So we wanted to also have that ability out of our Ponneri plant. So to increase our exports, specifically, the -- we have made this investment in our Ponneri plant. So it will be the new investment will help us grow our export business there.

Okay. And sir, what is our take on our Pedda Pariya unit, sir, currently? How are the utilization levels there? I think that is the most modern plant built by us.

So the utilization levels at Pedda Pariya have now, I think, finally come up to about 30%. And I think that is -- going forward, if you look at this $40 million to $60 million range of -- or $25 million to $60 million range of new business that we are looking at, almost 50% of that or 60% of that is actually intended for the Pedda Pariya plant. So that will make a big difference to the plant.

Right. Sir, you also mentioned about businesses taking new shapes for the domestic industry. We have also seen players like Craftsman and DMW who are into the CNC machining part also looking for backward integration. So if you could just explain to us, sir, how are -- how is the landscape changing with respect to your customers? -- correct me there, are themselves looking to create the casting and the foundries themselves going ahead? So what is your thought process on the same side?

So if you look at, I think, what they're doing, whatever their investments into foundries are actually complementary and in spaces that we are not present. They're not necessarily in spaces. They are not intended to be in spaces where we are already working with them. So that is -- so -- and they are more than customers, the majority of what they do, they are our vendors. They do the machining activities for us on a job work basis. So we've got an extremely strong relationship with them and we look to grow together. Of course, there are spaces that we are not present, and we don't intend strategically to be present in the -- at least the medium-term future. And so we don't have a problem if they invest into those spaces.

Just to ask, for the machining part, so why are the capabilities not being created by us for the machining segment? And why do we rely on for the job work? Are these not margin-accretive line of business?

So I would say they are. But the reason why we chose especially not to focus on those areas and to focus in what we do best, which is the casting is, one, we believe that this is our core competence and strength. This is how -- what we know to do. And we do recognize that if you want to develop some other core competence, it will require a significant amount of investment of not just money, but also time and management attention. The second point is we believe that in these next few years, there is a great opportunity for growth. There are some really interesting things that we are working on, on this -- not just on new business, but even in terms of trying to take manufacturing to the next level. And I think the third point is, so far, we've not had a situation where we've lost any business with any customer because we've not been able to offer them a fully machined solution. We're able to use our vendors and work closely with them and be able to offer a solution that the customer wants -- so we haven't also lost business. So I think as long as these 3 conditions still hold, we will not be looking at getting into machining or expanding our machining. We do have a small operation in machining. But if these 3 change, then we'll have to rethink it. But at the moment, that's not on the cards.

And last point about this other income component, sir. You did alluded earlier during the call that it is the rupee depreciation that is what results into the higher realization and that is booked under the other income component. But I think it is -- quarter-on-quarter, it is up by INR 1 crore. So is it only the depreciation of the Indian rupee versus the dollar that has translated into the other income component? Or do we have some scrap and all sales also, if you could just quantify the same. This is a very high number, INR 5.6 crores.

Yes. So other income has a variety of other things other than ForEx. The biggest chunk is, of course, ForEx gain. There's a variety of different reasons, things that it comes to. But it's not just the depreciation of the rupee, some of it might be when we do some strategic forward covers and things like that as well. So there's a variety of things that go into it. If you've seen it's -- this is something that had been relatively there for us for the last several years.

So, what kind of number should we be penciling in then, sir, this is a big number because for 9 months, it is INR 12.49 crores. Our margins and EBITDA have not fallen in line, but our other income is -- have seen a good growth. So just wanted to understand this nature of the line item and the way forward also...

Saket, that is mainly on account of interest on our EBITDA [indiscernible] plus ForEx income -- for that's on only these 2 effects.

Okay. And last point, sir, on the value creation exercise, it is very heartening to hear from you that we will land into the top 5 -- if I heard you top 5 players in the -- in the casting business in times to come. And also the order wins, which we are anticipating going ahead. Sir, if we take into the value creation exercise for your shareholders who have the faith on the organization and on the management, since time of listing until today, I think so the results have been subpar for the investors. So the very short point was that the wait has been very long for your investors and you among them being the largest shareholder. So that was only the concluding point that investor value creation has not happened, although market capitalization over the years for various listed companies have moved up by leap and bound along with good profitability. But somehow, some way or the other, the time has been tough for our segment, and your investors in particular. So I hope that going ahead, these plans fructifies and that translates into extra value creation for your investors also. That was my thought, sir, which I would like to share.

So let's hope that with the longer wait the fruits will be sweeter. That's all that I can hope for along with you, on this.

As there are no further questions from the participants, I now hand the conference over to Mr. P. Deepak for closing comments. Over to you, sir.

Thank you very much. I just wanted to thank everybody again for your trust in us and for being part of our journey. We look forward to sharing our success with you in the next earnings call. In case you have any queries, post this call or anything has remained unanswered, please connect to our IR team at Ernst & Young, and thank you very much. Bye.

Thank you. On behalf of Nelcast Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.