Nelcast Limited (NELCAST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Nelcast Limited Q1 FY '27 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, sir.

Thank you. Good morning, everyone, and thank you for joining us. On behalf of Nelcast Limited, I extend a warm welcome to all the participants on the quarter 1 FY '27 Earnings Conference Call. The results and investor presentation have already been shared and are available on our website as well as through our filings with the stock exchanges. Joining us today to discuss the company's performance and outlook are Mr. P. Deepak, Managing Director and Chief Executive Officer; and Mr. S.K. Sivakumar, Chief Financial Officer. Before we begin, I would like to draw your attention to the standard disclaimer. Please note that any statements made during this call, including those in our presentation materials that reflect our outlook for the future or may be construed as forward-looking statements should be considered in conjunction with the risks the company faces. These statements may not be updated from time to time. Further details are available at the end of the investor presentation and in our filings on our website at www.nelcast.com. Should you have any queries or require additional information following this call, please feel free to reach out using the contact details provided in investor materials. With that, I would now like to hand over the call to Mr. P. Deepak. Over to you, sir.

Thank you, Abhishek. Good morning, everyone. Thank you for joining us today. Q1 of FY '27 was another important quarter in Nelcast's growth journey. We delivered a revenue of INR 345.4 crores, representing a growth of 2.8% year-on-year, which was supported by healthy demand across our key end markets. The tractor and commercial vehicle segments continue to witness strong growth momentum, while exports recorded a sequential improvement during the quarter, reflecting encouraging customer activity and demand trends. While profitability during the quarter was impacted by elevated raw material costs, labor availability challenges and a lag in passing through the higher input cost to customers, we view these largely temporary factors. We have already initiated customer discussions for price revisions and expect all of those to happen shortly. Importantly, the demand environment remains healthy across both domestic and export markets, giving us confidence in the underlying strength of the business. One of the key highlights for the quarter is the commencement of production for new products in Q2 of FY '27. These programs are expected to ramp up progressively through the year and contribute meaningfully to volumes and revenues during the second half. Beyond supporting growth, these products are expected to improve our product mix, enhance profitability and drive higher capacity utilization as the production scales. Exports remain a key strategic focus area for Nelcast. Export revenue improved sequentially to INR 113.3 crores during the quarter, supported by improving customer activity and encouraging demand levels. We continue to see opportunities in global markets as customers diversify sourcing strategies and increasingly look towards India as a reliable manufacturing partner. Nelcast remains well positioned to capitalize on these opportunities through its established customer relationships and manufacturing capabilities. We are also making steady progress in expanding our customer relationships and strengthening our presence in international markets. Our efforts in Europe continue to advance, and we have secured additional business opportunities that support our long-term growth ambitions. More importantly, our customer engagement across segments continues to deepen, creating a broader and more diversified growth platform for the company. Looking ahead, we believe Nelcast is approaching an important inflection point. The foundations laid over the last several years through product development, customer diversification, operational improvements and investments in manufacturing capabilities are now beginning to translate into visible growth opportunities. New product launches, improving utilization at Pedapariya, strengthening exports, a richer product mix and continued customer additions provide multiple levers for growth. We are increasingly shifting from a cyclical recovery to a structural growth. We are evolving into a more diversified value-added globally relevant casting company with stronger earnings potential than in the past. The progress achieved over the last 5 years provides a strong foundation for the future with revenue, EBITDA and PAT growing at CAGRs of approximately 17%, 19% and 40% between FY '21 and '26. Coupled with a stronger balance sheet and lower leverage, this positions us well for the next phase of growth. Our focus remains clear, driving growth through new product development, operational excellence and prudent capital allocation. With multiple growth levers now coming together, we believe Nelcast is well positioned to deliver sustainable growth, improving profitability and long-term value creation for all stakeholders in the years ahead. Now coming to the Q1 FY '27 performance. Revenue grew 2.8% year-on-year to INR 345.4 crores, supported by healthy demand across key end markets and improving export momentum. EBITDA stood at INR 20.1 crores and PAT at INR 5.1 crores, with profitability temporarily impacted by higher input costs and labor availability challenges. Exports improved sequentially to INR 113.3 crores, while customer price revisions, new product ramp-ups and improving utilization are expected to support margin recovery in the coming quarters. The company's strong balance sheet and disciplined capital allocation continue to support its long-term growth strategy. Now I would like to open the floor to the Q&A session.

[Operator Instructions] The first question comes from the line of Mr. Puneeth from SJ Investments.

Sir, you mentioned regarding a large order, I think, starting production right now. So, when do you expect to ramp it up to the full-scale capacity that you are expecting?

Yes. The volumes are just starting. The first orders are going out in the current month. And we expect that we'll be fully ramped up on these businesses probably within the next 9 months or so. So probably by Q4, we expect that these businesses that we are starting to ramp up now will be -- will reach mature volume.

But how many pieces are we expecting at peak volumes when you are supplying?

Sorry, can you repeat that? How many?

How many pieces. I think it's subassemblies -- partial assembly of like INR 750 crores what we are doing. So just to understand how many pieces would be supplying to the customer at our peak volumes.

So, I think rather than pieces, I think pieces might be a misrepresentation because it is actually 3 different programs that we are referring to and multiple parts that have different sizes. So, I think in terms of the revenue potential at -- once the ramp-up is completed, we believe that number is in excess of about INR 200 crores a year. That's what we expect to get to that run rate towards the end of the financial year on these businesses.

Understood. So, you also mentioned some more order wins in Europe. Are they in the line of these large castings? Or are they more traditional in terms of a commercial vehicle segment, maybe what we are looking.

The order wins from Europe are more traditional parts. These are not yet the larger casting parts.

So, in terms of, let's say, order demand generation for these large parts, where would we be looking next? Like would it be -- continue to be in agri space in the U.S.? Or would it be somewhere else that would be looking?

So I mean, the order book actually for the large parts is shaping up quite well. So the agri space in the U.S., where they have the largest tractors, I think, is a great opportunity that we are, I think, in the process of becoming well entrenched in. I think other than that, there are large castings even for the European market that we're starting to do, but I would say that those are probably not in as large volume. But we are also getting more and more of the truck axle parts for the Indian market as well. And so, we are -- I think there will be a very good diversification across geographies on these larger parts going forward. But at the moment, Europe doesn't look like it will be a very large percentage of it, but there are certainly opportunities there we are exploring as well on the larger parts.

Sir, you mentioned that axle parts are getting more incremental share. But I thought we were already supplying a large share to most of these customers were -- for most of them, we are probably the largest source of 80%, 90%. So, what are these additional parts that we are able to supply to them?

So if you look at axle specifically, I think we can break axles probably into 2 separate segments. So, one segment is the front axle of the 4-wheel drive tractors. This is a segment where the entire market itself is just blowing up. I think the growth in the 4-wheeler drive segment in tractors has really taken off. And part of the reason is also has to do with the structure of the market. So, if you have a tractor that is higher than 50 horsepower, the requirement of the emission norms is much more stringent, and it requires obviously more expenditure. So, the cost of the tractor goes up. And what people have realized is that you can do the work of a 50-plus horsepower tractor with a 45-horsepower tractor with a 4-wheel drive because the application of talk is better. So, we've seen actually a fairly dramatic shift in the Indian market towards 4-wheel drive in the last 4 years. So one, there is a market growth happening in the tractor segment of 4-wheel drives that we are referring to. The second thing that we're talking about is on the commercial vehicles, which is the heavy trucks, right, typically the large tippers that are there and conversion of these from fabricated housings to cast housings. So, a year ago, we had probably developed our first of these parts, the first couple of parts that were going into the Indian market. Today, we're in the process of completing the development for all the OEMs that are there in India for their high-end tippers. So, this is a segment that we expect to grow. So from about 2-part numbers that we had developed a year ago, we've got some samples that will be going out in the next couple of weeks. When I add all that up, we'll actually be at about 12-part numbers that we've developed, and many of these will go into production also in the next few months once the validation trials are done.

So the basic increment is from 2 to 12. So, like you increase 10 more parts. Is that right?

Yes. Exactly. We're only servicing to one -- catering to one of the truck OEMs in India. At 12, we cater to everyone.

Is it the fact that they ask for a single source or we're just increasing our portfolio of them going to the customer, like just trying to understand because getting share would be difficult if we are developing it right.

All of these parts are single source. So, this is sort of an extension to their product strategy. So fabric axles that were previously fabricated are being converted to casting because in a casting, you can do a lot more in terms of section thicknesses in key areas where the stresses are high, which you typically cannot do with a fabricated axle because you have to select the standard section thickness across the entire axle. So therefore, on heavy-duty applications, casting is much more resilient to abuse and heavy loads. So therefore, on the higher end of the market, all the larger tippers that are there in the market are moving towards cast axles from fabricators.

But in terms of the final demand, do you see the --

Sorry to interrupt, sir. The line for the management has been disconnected. Please stay connected while we reconnect the line. [Audio Gap] Ladies and gentlemen, the management line is reconnected.

Apologies for that.

I was just asking in terms of the trend, you mentioned that there's been like OEMs putting an effort into getting a higher class of vehicles. But do you see the demand also shifting to that saying that as the cash products, the market is growing? Is that a fair understanding? Or how is it?

Yes. I think the offerings that are there today are actually quite low. And with these products that are being developed, it is going up quite a bit, and it will continue to go up.

And one question I wanted to ask in terms of order visibility. So, say, with castings, it depends on offtake, right? So over the last 5 years, how has the order visibility and resilience of orders changed over the last few years? Could you give some idea on like how did it work out so far? So are we able to forecast for the next 6 months? Or how is it 5 years ago versus now?

So I think order visibility is a challenge, right? I think over the last probably decade, 1.5 decades, the volatility in the market has gone up quite a bit. So, I think while there is order visibility that is there. So typically, there's a lot of variation that does come with that order visibility that's there. So, a lot of this is schedule based. I mean we get typically a firm schedule for about a month or so and some order visibility beyond that. But both of these are subject to change. For example, even in this current month, one of the truck OEMs increased their production plan by about 10% sort of a week into the month. So, there is -- again, based on the market scenario and the demand scenario, there is a degree of adjustments that keep happening in the schedules from time to time. We do get visibility. I mean, usually, we get much longer visibility when the market is looking good and the visibility is a little bit more short term and there's a lot of question marks that are in people's minds.

So by the end of the year, where do you think we might end up in terms of tonnage and revenues? Because the last 3 years have been -- even though the product mix is changing and getting more profitable, it has not shown up in any of the numbers because I think the costs have been going up equally during the time and revenues have not grown. So by the end of the year, where do you think you'll end up in terms of the top line and profitability-wise?

So I think tonnage point of view, we believe that about 1 lakh tonnes or so this year is what we are expecting that the year will end up. Obviously, we'll have to see how we do depend on the market and how that moves. But we believe at this point that achieving 1 lakh tonnes this year is certainly our -- in line with what our expectations are as of the moment. And then from a revenue perspective, I think the number is somewhere around INR 150 a kilo type of thing, right? So, it's about roughly -- it should be a little over 10% growth given the current cost scenarios and the cost pass-throughs that are happening as we speak.

And during our last 2 con calls, you mentioned the fact that we are putting some effort into reducing the working capital, let's say, receivable days from our exports. So how did the market receipt to that? And what -- how has it been so far from the customer side?

So what we're doing more than anything else is with the new contracts that we're getting, we are actually spending a lot of time in making sure that we are negotiating this and that we are getting a lower number of days of credit, right? So, it's a lot harder to change existing contracts and existing agreements that we have with customers. But for all the new ones that we're getting, this is an area of focus, and this is something that we are actively ensuring that we discuss and negotiate. So that's something that as we see the new products come in and ramp up, we will see that number of days also come down on the exports.

And regarding the profitability wise, I think it's been up and down very drastically, and it's to be expected with that type of industry. But on an average basis by the end of the year, where do you think you might be ending up at average for next year?

I'm confident this year that we will get to INR 15 a kg. I think the results of this quarter are more of a blip than anything else. And we are quite confident that we'll be able to recover that and get to about INR 15-ish a kg type of a number for the year.

So, you'll be able to likely to meet your milestone of INR 15 this year. Is that fair understanding?

That's what we believe. I think certainly by the end of the year, we will be well and truly in that track.

So does that mean that you already started working --

Sorry to interrupt, sir. May I request you to please rejoin the queue for the follow-up questions? The next question comes from the line of Abhishek Chowdary Kanithi from Nivaka Ventures Private Limited.

Can you hear me?

Yes, Abhishek. We can hear you.

Sir, I just wanted to understand what are the tailwinds you are seeing in this industry? And are you trying to move your product base up the value chain in the future?

Yes. So okay -- So, when we look at the tailwinds that we're seeing in the industry, I think One, overall, the domestic volumes are looking quite strong. So I think if you look at Q1 performance on tractor, the tractor industry has done very well in Q1. The commercial vehicle industry also, albeit on a lower base of last year's Q1 has done fairly well. And we expect that these 2 segments for the year as a whole will grow. So that's the general -- on that part of the market. Then coming to exports, whatever dips we saw last year, which were primarily driven by tariffs, right? And the tariffs didn't really impact us. The tariffs really impacted our end customers to the point where they -- the sales of heavy trucks came down. So now with a lot more clarity and a lot more stability on the tariff regime, we're actually seeing a fairly good amount of both pent-up demand as well as a little bit of a prebuy effect for emission norm changes that are coming in January. So, I think even on the export front, we expect to see a strong next couple of quarters to remain fairly strong. Then coming to more specific tailwinds to the company beyond the market, I think there are maybe 3 things, 2 of which I already touched upon, which is the growth in the 4-wheel drive segment. The second is the growth that's happening domestically within the commercial vehicle industry for cast axles. And the third is the overall growth in exports and the new products that we've actually worked hard to win over the last year, many of which are going into production now. And of course, there are many more projects are there in the pipeline, which go into production gradually over the next 2 years. So, we've got a very robust pipeline of new business as well, driven by either direct or indirect exports that are there. So, I think these are the tailwinds that I can sort of point towards.

So sir, can we expect the EBITDA margins to remain in the similar range?

So I think like we said, we -- our EBITDA margin, if you look at for the last quarter was at about INR 9.48 per kg. We believe that that's actually an aberration, and we should be back towards our stated goal of about INR 15 a kg.

The next question comes from the line of Rohan Shah from RS Investments.

I just wanted to understand and get some sense on the new product portfolio. How will it improve the company's profitability, for example, EBITDA per kg and revenue? And also, is there any revenue contribution expected from these products in H2 FY '27? Any ballpark range could really be helpful.

Yes. So the new products that are coming in are larger castings, castings, there is really not much competition domestically within India.

[Operator Instructions]

Can you hear me?

Yes, yes. Please go ahead.

I'm still on the line. So -- sorry, I lost my chain of thought a little bit. So the new products are larger castings, more heavier, more complex. And I think that helps us with a little bit more of a premium on those castings. That's very much, I think, what's going on. I think in terms of the guidance on the new products, like I said, the mature volume that we see in terms of revenue is -- will be something in the range of about INR 200 crores a year, INR 200 crores to INR 250 crores a year. And we expect this maturity to happen towards the end of the current financial year, right? It's a gradual ramp-up. It's a little difficult to project the exact impact in H2 because that ramp-up curve might vary a little bit. We might ramp up a little faster or a little slower. But I think by the end of it, we should be able to hit that run rate.

Also, sir, can you throw some light on how the scenario from global customers looking to diversify sourcing towards India? And also what progress has been made in Europe in terms of new customer wins, if you could highlight?

Yes. So I think in terms of customers, I think there is a very good order book in terms of RFQs that are flowing through, good technical discussions that are happening. So I think overall, the scenario is very, very positive for the industry as a whole and certainly for us specifically, I think this is a very good scenario that's there. More specific on Europe, I think the Europe -- the challenge has always been people have been a little slower to move, right? I think people in the U.S. are quite aggressive with taking these kind of business decisions and growing for -- when they see the right opportunities. I think Europe is a little bit more circumspect. They like to take their time. We've won a couple of orders from European customers because their existing source in Europe was in the process of going bankrupt, and therefore, they needed to sort of make a decision rather than take a little bit more time. So as a result of that, we have won some business. And for us, the way we look at it is, I think the goal is to get the foot in the door. Once the foot in the door, then the space at which they work is much better, right? Because the perceived risk and all the analysis that they do is sort of replaced by performance. And I think that's our opportunity to shine. So we've got from one of the large truck OEMs in Europe, we have won some business, not a sizable business, but like I said, it's a foot in the door, and it's an ability to prove our capability wherein we're just another supplier, not a risky new overseas supplier as they view it.

The next question comes from the line of Ankur Gulati from Genuity Capital.

Two questions. Can you quantify plant-wise production this year? And any specific reason for production volumes to be slightly lower year-on-year and quarter-on-quarter?

Yes. So quarter 1, there was, I think, 2 reasons why there was a drop in production volume. I think one was because of an overall -- there was a challenge in manpower availability across the industry. So we did get impacted a little bit in April and May, and we started to see it recover in June. So that was one of the impact. The other thing is specifically in our Pedapariya plant because of all these new products that are coming in, we did take a short shutdown to make some improvements to the plant so that we could meet these requirements for these ramp-ups that are coming up now.

[Operator Instructions] [Audio Gap] The management line is reconnected and you may proceed.

Yes. Sorry. So in terms of capacity utilization, our Gudur plant was at about 53%. Our Ponneri plant actually achieved 100% utilization and our Pedapariya plant because of some of these stoppages that we had for improvements, we were at 21%.

And the realization went to INR 16 per kg. Is this because of repricing?

Yes. So the realization actually did go up because there was some price increase that was passed through to customers. So it was -- for the quarter, if you see it was about INR 152 as against, I think if you go back to the previous quarter, fourth quarter was about INR 146 and the first quarter of last year was about INR 150.

So, let's say, next quarter, Q2, once a full pass-through has happened, that's where you will start hitting at least INR 40 per kg EBITDA in a quarter or so? So once you get the full pass-through in this quarter or next quarter, that INR 40 per kg will come back, right? That's what you're guiding for.

Yes.

Last question, this INR 200 crores is achieve annual run rate sort of thing by Q4? Or do you think you will be able to get the entire incremental INR 200 crores this year from new orders?

Sorry, the INR 200 crores ARR is what we're talking about as it's an ARR that we believe towards the end of the year, we will achieve, right? I don't know if it will be the entire fourth quarter or at least part towards the end of the fourth quarter, but that's what we expect to achieve from these new product development in addition to the existing business.

[Operator Instructions] The next question comes from the line of Ganesh Munot from Motilal Oswal Financial Services Limited.

So I have 2 questions lined up. The first one that you flagged regarding the labor availability as an operating challenge, which affected the FY '27. So can you elaborate on the nature and scale of the issue and expected time line for improvement or to normalize?

Yes. So we are actually already seeing that it's fully normalized in July. The impact was really only in April and May. And really, we started to see recovery in June and now in July, it is fully normalized.

All right. That was helpful. And the other question, I would like to ask that given the Q1 margin, so can we -- you can guide us on the basis of realistic floor of FY '27 margins. So should we expect further compression before improvement begins or how it is, sir?