Pitti Engineering Limited (513519) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '26 Earnings Conference Call of Pitti Engineering Limited. [Operator Instructions] Please note that this call is being recorded. A brief disclaimer. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements do not guarantee the future performance of the company, and it may involve risks and uncertainties that are difficult to predict. With this, I now hand the conference over to Mr. Akshay Pitti, Managing Director and Chief Executive Officer of Pitti Engineering Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and a very warm welcome to the Q1 FY '26 Earnings Call of Pitti Engineering Limited. Along with me, I'm joined by Mr. Chaitra Sundaresh, Deputy COO; Mr. Sandip Agarwala, COO for Motor and Generator Components; Mr. Rishab Gupta, CEO for Machined Components; and Mr. Pavan Kumar, CFO. Along with us is also SGA, our Investor Relations partner. We have uploaded our results and related documents on the stock exchanges and company's website. I hope everybody had an opportunity to go through the same. I would like to note that unfortunately, there's an error on Slide #19 of the investor presentation related to FY '25 volumes, which will be rectified and uploaded shortly. Over the years, we have transformed from a specialist in electrical steel lamination into a comprehensive provider for engineering solutions. We have expanded our capabilities and diversified our offerings to include a wide range of high value-added components and subassemblies for rotating electrical equipment. Our operations are now structured around 2 key verticals: rotating electrical equipment and machined components, supported by our dedicated foundry division. We offer a broad range of services, including machined castings, co-building, shaft manufacturing, assembly, laser cutting, precision machining, tool manufacturing, fabrication to name a few. Serving a wide range of industries, our integrated end-to-end supply chain enables us to provide seamless delivery and exceptional value to our customers. FY '25 marked a transformational year for Pitti. We successfully completed the acquisition of Bagadia Chaitra Industries Private Limited and Dakshin Foundry Private Limited, along with the merger of Pitti Castings. These strategic moves are set to significantly enhance our product portfolio and broaden our industry reach, increase in capacities and capabilities and strengthen our customer base. Additionally, they support backward integration, enabling a more seamless and efficient manufacturing process. With this consolidation, we are now positioned as one of the most integrated engineering solution providers in this space in the country, offering a comprehensive product range and the ability to serve a wide spectrum of industry. Our strategic priorities moving forward include seamless integration of the acquired entities to realize the synergies and drive operational efficiencies, enhance productivity and efficiency to improve our consolidated margin profile, investing in R&D and automation and lean manufacturing to reinforce our presence in high-value, high-margin product segments. Let me give key specific highlights for this quarter before dwelling into the financial performance. Based on the current run rate, we expect -- sorry, based on our current revenue run rate and FY '25 projections, we expect to operate near peak capacity for the fourth quarter of the current financial year. To support the next phase of growth, the Board has approved a capital expenditure of INR 150 crores to be deployed over the next 18 months. This investment will enable the following capacity expansion. Sheet metal capacity will increase from 90,000 metric tonnes to 18,000 metric tonnes per annum. Machine hour capacity will increase from 648,000 machine hours to 720,000 machine hours annually. Casting capacity will expand from 18,600 metric tonnes to 24,600 metric tonnes. This CapEx is a strategic step to ensure we are well positioned to meet growing customer demand and capture emerging business opportunities. In the previous call, we had mentioned the commissioning of the revarnishing line. We are pleased to share that technical approvals have all been received and commercial production and supplies have commenced. We are seeing strong global demand from data centers and have successfully secured a second platform with an existing customer. The development of this alternative components will begin shortly. At peak revenue potential, this platform is expected to generate more than INR 20 crores of recurring annual revenue. Now to share the operational and financial highlights, I will hand over to Mr. Sandip Agarwala.

Thank you. Welcome, everybody. Let me now share the key operational and financial highlights for Q1 FY '26. Our consolidated revenue for the quarter stood at INR 457 crores, marking a 17% year-on-year growth compared to INR 391 crores in QY (sic) [ Q1 ] FY '25. Exports accounted for 31% of the total revenue during the quarter. EBITDA came at INR 75 crores, reflecting a strong 30% year-on-year increase with EBITDA margins improving to 16.5%, up 170 basis points from 14.8% in Q1 FY '25. Profit after tax also grew by 17% year-on-year to INR 23 crores. Sheet metal volumes for the quarter were about 16,000 metric tonnes. It is worth noting that Q1 and Q2 have historically been softer quarters for the industry. And in line with our past trend, we typically see about 45% of our annual revenue generated in H1 and the remaining 55% in H2, a pattern we expect to continue this year as well. We continue to closely monitor the evolving geopolitical development and tariff situations. However, we remain optimistic of achieving a top line growth of about 15% for FY '26. This is supported by strong pipeline of inquiries and robust order visibility. With the anticipated increase in revenues and combined with improved operational efficiencies and benefits of operating leverages, we are confident in our ability to drive further margin expansions in the coming quarter. With this, I hand over to Mr. Akshay for the Q&A session. Thank you.

[Operator Instructions] The first question comes from the line of Sani from Axis Securities.

And I understand there is -- as you mentioned, there is some error on Slide 17, but I would like to appreciate the effort that I think there has been -- the presentation has been improved a lot. So it seems a lot more sorted. But having said that, I think the numbers for Dakshin and PIPL were excluded. So could you just elaborate, I mean, give the larger numbers because you have just mentioned that sheet metal volumes were 16,000 metric tonnes. But otherwise, it would be good if you could give the other numbers as well.

So what we have done here, we are trying to consolidate the sheet metal and casting and give the consolidated numbers. So the Dakshin and Bagadia numbers are rolled up into Slide #19 itself.

Okay. Understood. So -- and the correction, would you be rolling it out just after the call? Or would you prefer correcting whatever is there on the call itself?

Just after the call, SGA team will be correcting it and sending it out.

Okay, fine. And in terms of the numbers, I think in the last call, we had mentioned that the depreciation number going ahead will be similar to the Q4 number and the finance cost will actually start declining. Both the numbers seem to have increased. So can you throw some light on that and expectations going ahead?

Yes. So on the working capital side, if you see, we have moved from about 57 days to about 75 days in the working capital cycle. This is mainly on account of 2 issues. One, we have stopped factoring export receivables like in the past. Therefore, the cost of finance of that particular business is not reduced from the sales. It's now coming into the EBITDA line, interest line. So if you see the EBIT margin has increased and so has the interest rate, number one. Number two, we have also stocked up a little extra raw material, considering the current situation related to BIS and import of materials and the quality control orders on the steel mills. So we have seen huge shortages in raw materials in Q1, and the situation is expected to continue up till Q2 end as a result of this disruption, which is why our net debt has actually gone up to about INR 525 crores.

Okay. So -- but can we expect it to reduce a bit or because we have announced CapEx, it would remain elevated or may increase further going ahead?

The RM we are stocking up will be reduced by December and only depending on the situation in the market and the availability of raw material.

No, no, I'm asking about the net debt.

Net debt will be related to that because right now, the driver for the increase in net debt is mainly the inventory.

Okay. So financing the inventory.

Yes.

Understood. Okay. And depreciation would the current quarter's rate a fair assumption? Or do you think it may change?

So like we have announced this CapEx, which we'll start implementing probably from second half of the year. And as that CapEx will move from CWIP to gross block, the depreciation will rise. Till then, this should be the steady rate approximately. We have about INR 25-odd crores of CWIP currently left to be capitalized. So it's not going to be significant.

Okay. And given the new CapEx, I think it will be in phased manner and there will be some breakeven period. So what are -- is there any expectation in terms of our target for FY '27? Or shall we assume that the meaningful contribution to earnings side will only come in FY '28?

No. This is the -- see, CapEx that we are currently incurring is all aimed towards FY '27 sales numbers. As we mentioned, we are expecting a 15% top line growth for the current year. And in terms of quarter 4, we expect to be at full optimum capacity utilization.

Right.

So the quarter 4, we'll be at full utilization. So for quarter 1 of FY '27 growth, we'll be doing this CapEx in a phased manner.

Okay. Okay. So -- but we had earlier stated that you would be doing around INR 2,100 crores to INR 2,200 crores of sales in FY '27. So that -- does this change? And if yes, how much?

I think that should get revised upward. I think this year itself, we should be ending around INR 2,000 crores, if you go by our guidance of 15% Y-o-Y growth. And for FY '27, that will changed. But like we said, it's an evolving geopolitical situation, and we are still optimistic. The visibility and order pipeline is quite strong.

[Operator Instructions] The next question comes from the line of Deepesh Agarwal from UTI AMC.

Congrats, sir, for the good set of numbers. Akshay, my question is, how you plan to mitigate the U.S. tariff situation? Are you looking for alternate manufacturing or you would be looking for a newer market? Or do you think the customers can absorb this kind of a price increase?

So see, there are 2 parts to this answer. The first part, if you see our consolidated exposure to the U.S. market, firstly, our exports about 31% of revenue. Of that revenue, about 30% goes to U.S. So on a total revenue basis, the exposure to U.S. is about 9% to 10%, which is going to be impacted by this tariff. So it is -- while it is a decent amount of revenue, it's not critical to the company, if you may put it in one sense. Second, if you see the kind of tariff announced, I don't think any company, us or the customer can absorb it. Eventually, it has to be the end user. And secondly, if you see the supplier base, like I had mentioned in the previous call as well, it's either India or China. So currently, China has a 30% duty from what I'm given to understand, and we are at a 25% duty. There is a discussion on the Russia penalty, which is still an evolving situation. So from whatever discussions we have had with our clients, they are also a little confused as to how to navigate the situation. We are not seeing any decline in order inputs. I think quarter 3, our projections are really robust for our export business, including that to the U.S. market.

Do you think the capacity, so 10% of the revenue comes from U.S., do you think if you are not able to supply to U.S. because of tariff, you can chip into the other markets and actually compensate for this kind of a decline?

For sure. If you look at the other North American markets, what our customers have, they have facilities all over the globe. So if it is prohibitive for them to probably import this material to U.S. and manufacture it there, they probably will move it to some other facility in the global supply chain and get it manufactured there. See, what is interesting about our U.S. business is, this business is primarily linked to mining-related parts and not the locomotive-related part of our customers. And that is not in U.S. consumption. Those mining trucks are exported all over the world. So like it will be very easy for them to move that production somewhere else if this tariff situation continues. What we can't assess is the indirect impact of the tariff. So if we have customers in India who are exporting their products to U.S., that is still an unknown portion for us.

Right. The other thing I want to understand from you is on the capacity expansion. Right now, if I see you would be operating roughly at 70% utilization across the various verticals and there is a geopolitical uncertainty. Still you are going for expansion. So how confident are you on actually having the exit run rate on capacity utilization healthy enough for us to see next year new capacity being absorbed?

So if I talk of the total tonnage of laminations that we export to the U.S., I think that's in a year, somewhere around 3,000 tonnes, not significant, like I mentioned, in tonnage terms. In revenue terms, it's slightly higher because there's significant value add in those parts. If you ask me on volume projections for the current year, our annual business plan of 68,000 tonnes still looks very, very achievable. And it will be split something like 16,000 tonnes what we have done in the current quarter, 17,000 in the next quarter and somewhere close to 18,500 and 19,000 in the quarter 3, quarter 4. So if you look at our quarter 4 run rate, that will be actually well above the optimum 80% utilization levels, which is why we have decided to go ahead and invest.

Sure, sure. And this new capacity will be up and running by when, 1Q of next year, right?

It will be progressively implemented starting 1Q of next year, yes.

Sure. And lastly, the current margin levels of 16.5%, would we think that these margins would be sustainable and as you increase the utilization to 80% by Q4, there could be some upside risk to this?

Definitely. So if you see the employee cost, other expenses, those are all factored in for the higher operating level. So as we move from 16,000 to 19,000 quarterly output levels in the lamination business, the incremental margin should technically flow to the EBITDA line.

The next question comes from the line of [ Mohit Jain ] from DRChoksey Finserv Private Limited.

Sir, my first question would be on the EBITDA per tonne wise. So we have seen a good jump in EBITDA margin from last year Y-o-Y, 16.5% from 14.5%. What is the EBITDA per tonne realization this quarter? And could you please compare it sequentially and Y-o-Y?

So if you look at EBITDA per tonne, we can just work that out at INR 75.4 crores is the EBITDA for the quarter and the tonnage is about 16,000. But like we had mentioned in the past, that would not be the right metric to measure the company given the complex product mix that we have now because we have casting, machining, fabrication and even in lamination, different levels of assembly.

All right, sir. And sir, on the sector side, I've seen renewable energy share mix in the overall sector declining from like 5%, 6% to 3% this quarter. So what are the reasons behind this drop? And what sort of demand do you see in renewable space in the next like 1 and 2 years?

See, renewable space is typically a seasonal business as well, the windmills which need to be installed or the power generation projects that are getting implemented. So seasonally, this will keep varying. Overall, renewable energy in this year will be much higher than last year in absolute rupee terms. We are seeing huge demand coming in from domestic as well as international wind players as well as the requirement of electrolyzers for our hydrogen part of the business continues to grow. And with this revarnishing line that has been implemented, the hydro power-related business also should start growing starting Q3.

Okay, sir. And sir, earlier you mentioned out the...

Sorry, just coming back to your EBITDA per tonne. At a very simplistic level, it's about 46,875 tonnes on a consolidated basis.

Got it. And sequentially, I mean, last quarter?

That I think you can work it out. We have given the quantitative numbers. You can just divide the EBITDA by the tonnage. I don't have that on hand with me.

Got it. And sir, you earlier mentioned about 15% growth this year, which you are targeting, which comes to around INR 1,950 crores to INR 2,000-odd crores of revenue. And you also maintain a positive outlook for FY '27. I guess, sir, before like 2, 3 quarters, you mentioned about around INR 2,300 crores guidance for FY '27 at a constant raw material prices and EBITDA margin guidance was around 15% to 16%. Now do you think we'll achieve this revenue guidance or given the new CapEx, you are going to have incremental guidance on this number on FY '25?

I think we'll maintain that guidance for now. What we are doing is also a lot to do with the margin-accretive products. So I think you should see margin growth in FY '27 post CapEx progressively through the year. See, the capacity in lamination, the headline number is increasing significantly. While that's the case, if you look in the casting side of the capacity, it's increasing even more than the lamination. So you will be seeing those benefits in FY '28 because the machining and casting will be a higher profit margin business.

[Operator Instructions] The next question comes from the line of Rahul Kumar from Vaikarya.

Sir, just on the U.S. exports, what is the outlook for growth in the next few quarters you are seeing, especially in the context of the merger of their end customers? Is that…

Sorry, if you can just clarify what you mean the merger of the end customers?

No, I think there's an expectation of merger of the railroads in U.S., right?

Yes. So see, those are the end customers of my customers. So as that consolidation capacity takes place, I think it will help drive more CapEx and more modernization in railways in any case. That's for the overall market. The growth anyways is there. When we talk to our clients, we see robust order visibility and order flows coming to us. Ex of tariff, I think quarter 3 is slated to be our best export performance ever. And if you see quarter 4 of last year and current quarter, they were also some of the best quarters in our export history. The major question that needs to be answered is the tariff bit.

Okay. And second question is, I think -- I mean, you mentioned briefly, but what is the update on this import of electrical steel situation? I mean, when do you expect it to be resolved for, let's say, industry in general?

So see, what we are expecting was the imports from China would be stopped starting April. What we did not expect or nobody in the country expected was that there would be quality control orders for even integrated steel mills, which have BIS approvals, mills such as Korean POSCO or Nippon from Japan or the Russian mills. So that has actually resulted in a constrained supply to India of electrical steel. While we wanted a stop to the Chinese material, we didn't want to stop to all materials coming to India. So it kind of backfired dramatically. And I think the quality control orders are already lifted for the Japanese and Korean mills in this month itself. So we should start seeing the situation easing out from September onwards. We should see the shipments coming in. So holding mode for our raw material. We rather hold the material and keep it so that we don't incur any shocks in supply chain.

Okay. And the third question, which I have was, I think if I look at your product mix, which you have disclosed, I think this is for the stand-alone business, which you have disclosed. In that, if I see the value-added mix has improved sharply this quarter versus, let's say, Q4 of last year. Do we expect this kind of value-added product mix to continue? Or this is more of a one-off phenomenon this quarter?

See, the percentage is very sharp, but in absolute terms, it's not so big a number. So we will see percentage-wise sharp increases. This business is slated to grow. Like I said, the wind power business is going to do well. The railway business is doing well. The mining business is doing well. Data centers is doing well. So these are all the segments that take the higher value-added products, higher level assemblies and subassemblies.

Okay. And the last question, which I had was, I think there's a goodwill basis your last year acquisition.

Yes.

If I remember correctly, I think there was some discussion for how do you want to amortize it going forward? Or do you want to impair it? I mean, have you reached some sort of conclusion regarding that?

Currently, we are not impairing it as we have been advised. We are still taking some more advice from our tax auditors on how to amortize this correctly. So I think we'll come up with a policy of that shortly.

Okay. Okay. And on your U.S. exports, I think one of the key customers which you export, so given this tariff drama, is it possible for the customer to move that business out of that location and therefore, circumvent the tariffs like that?

See, part of the business, yes, not all of it. Certain things, I don't think they would be able to move out immediately. It will take significant time. But certain parts where they have dual capacities in the other global facilities, I believe they would start moving it down, especially for those businesses where the end market is not within the United States.

Okay. So broadly speaking, let's say, for the products which goes out of U.S. for those particular products, what would that be percentage? Let's say, if your sales to U.S. was 10%, what percentage is that related to the products exported from U.S.?

See, it's very difficult to correlate our quarterly sales or our annual sales to their sales because they also have an inventory, there's a transit time. And where they ship it is -- like it's very difficult for us to kind of correlate that. But if I have to make a guesstimate based on our discussions, it would be something like 30-odd percent.

Okay. Okay. Fair enough. And I think last question is on your business, I mean, is it possible that given the tariff on India is at a higher level and let's say, if it sustains, do you believe that -- I mean, you can move the business to some other location, maybe reshoring it to, let's say, Mexico or some facility like that?

So we have explored Mexico as an option. What we understand, if you take the steel prices that are prevalent in Mexico and the cost of labor arbitrage, I don't think it makes much sense to reshore it to Mexico. Anyways, Mexico is one of our largest export markets. Out of our total exports, about 55-odd percent goes to Mexico. So we have looked at that as an opportunity, not even due to tariff, even pre-tariff, trying to be close to customer.

The next question comes from the line of Balasubramanian from Arihant Capital Markets Limited.

Congratulations for good set of numbers. Sir, this INR 155 crores CapEx, how much CapEx to be incurred in FY '26? Probably we are starting at H2 only. And FY '26 number and FY '27 number on the CapEx side. And we are doing it's a brownfield CapEx or we are setting up a new facilities? Whether we are doing it out of Aurangabad or we are setting up some other plant? Are we getting any incentives or subsidies for this CapEx?

Yes. So just hold on one second. So if you ask whether it's a brownfield, yes, it's a brownfield. I don't know why, your line is… Mr. Balasubramanian, can you mute your line? I can't hear. A of disturbance.

There's a lot of disturbance. Please move to a quieter place, please.

Yes. So like I was saying, -- so yes, these are all brownfield expansions. There's no new facility being created. As you recall, the infrastructure is in place in both Bangalore and Aurangabad for increasing the capacity, and we'll be only doing incremental CapExes quarter-on-quarter in a brownfield expansion manner. In terms of CapEx spend of INR 150 crores, which is a fresh CapEx, apart from this, we already have about INR 40 crores of unspent under unutilized CapEx, which was approved from the last financial year carry forward. If I take the total INR 190 crores, including the carryforward, we will be spending somewhere around INR 80-odd crores in the current year and the remaining INR 110 crores in FY '27.

And how is the funding mix, sir?

It will be a mix of internal accruals and debt.

Okay, sir. So actually, earlier, we plan to repay some INR 100 crores kind of debt, whether like where we are going to repay or we'll continue the same in this year?

So we'll repay those debts and take fresh loans for this project at a better…

I'm sorry to interrupt. Sir, may I request you to mute yourself while you're not speaking, please. There is a lot of disturbance in the back.