Pitti Engineering Limited (513519) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Earnings Conference Call of Pitti Engineering Limited. 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. This statement do not guarantee the future performance of the company, and it may involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akshay Pitti, the Managing Director and the Chief Executive Officer of Pitti Engineering Limited. Thank you, and over to you, sir.

'26 earnings call of Pitti Engineering Limited. Along with me are the senior management team from Pitti Engineering and SGA, our Investor Relations partners. We have uploaded our results and related documents on the stock exchange and the company's website. I hope everyone had an opportunity to go through the same. We are pleased to report another strong quarter of performance. Total income rose by 10% on a Y-o-Y basis to INR 499 crores, the highest quarterly figure in the company's history. In line with revenue growth, EBITDA also recorded an impressive 17.5% Y-o-Y growth to INR 78 crores. Margins remained stable at 16.3%, reflecting a strong degree of operating leverage in the business. Volumes for lamination were up from 16,700 tonnes to 17,700 tonnes, of which loose lamination and low value-added assemblies were 11,801 tonnes, down by 2% on a Y-o-Y basis. High value-added assemblies grew by 16.5% to 3,168 tonnes. Stator frame and shaft integrated assemblies grew by 33.4% to 1,146 tonnes. Our machine casting volume business fell from 2,583 tons to 2,434 tonnes, in which the raw castings fell to 1,354 tonnes, 11.3% decline. Machine castings grew by 2% to 1,080 tonnes. We have been shedding the evolving over the years to become a more integrated player across the value chain for our marquee customers by manufacturing a greater share of precision engineered products with superior quality and reliable supply chain. We have successfully increased our wallet share and strengthened our position as their preferred partners. We have also expanded our product portfolio with more value-added products, which will enhance our customer stickiness and diversify our industry presence. On the industry landscape and demand outlook, we continue to witness sustained order inflows and steady demand for traction motor, railway, components and data center and renewable energy sectors. Our deeper customer engagement has enabled us to enhance our wallet share in these areas. Surge in global data center requirements have significantly boosted the need for power generation solutions, presenting a major growth opportunity for our business. We are actively engaging with customers, both in India and overseas to realign our capacities and capabilities with this anticipated rising demand. Backed by our diversified industry presence and uptick in India's CapEx cycle, we remain optimistic about domestic growth prospects across traction motor, power generation and wind power segments. Globally, demand continues to remain strong, accompanied by steady flow of inquiries. With this, I would like to open the floor for the Q&A session.

[Operator Instructions] The first question comes from the line of Balasubramanian from Arihant Capital.

My first question, the new capacity comes online progressively from Q1 FY '27. What are the planned ramp-up curves for the new sheet metal and casting capacities? And how long it will take to reach 80% to 90% utilization on these new capacities? And what are the key dependent sales in terms of customer qualifications and skilled labor, et cetera? These are my first question, sir.

The capacity increase in our Bangalore facility has already started. We expect the order flows to start from Q4 onwards. In terms of reaching 80%, I think progressively by end of FY '27, we should be at 27 -- 80% utilization of the consolidated capacity. In terms of skilled labor availability, I don't see much challenge. We have actually started these facilities and the customer approvals are already in process. And we are taking the same time to increase our training to the new manpower to help us bring this facility and capacity online quickly.

Okay. So what's the road map for new CapEx of INR 150 crores?

In terms of road map, I think by end of this year, we should be adding close to 8,000 to 9,000 tonnes, and the remaining will get added in FY '27 before H1.

Okay, sir. I think so we are the supplier for Indian railways and like for traction motors. And what percentage of revenue coming from railway sectors in those side? And how sustainable in this demand given the government CapEx cycle? And what is the competitive landscape against established players?

So for Q2 FY '26, our revenue from traction motor and railway components was about 32%, of which the demand from Indian railways, including Vande Bharat trains, freight locomotives would have constituted about 25% of the total railway business, which is to say that 8% of total revenues was exposed to this local railway and metro rail segment. The remaining is predominantly international business, which continues to remain very, very strong.

y last question in terms of supply chain side. The raw material, the QCO issue caused a significant inventory buildup. What structural changes have been made to the procurement strategy to derisk the supply chain from similar regular -- regulatory in the near future? And are you exploring any long-term contracts or strategic partnership with the domestic steel producers?

So see, on this front, as you know, India is currently deficit in the total capacity versus the demand of the steel. Until and unless the new capacity from JSW comes online, which is expected in FY '27, we'll continue to see volatility in availability and pricing of this raw material. More especially since all the imports from China, which was a predominant supplier that bridge the demand capacity mismatch has not been renewed. The COQ orders and the BIS approvals are still in place, those restrictions. So as a company, what we have done, we have started importing materials from Korea and Japan from approved mills. And as a strategy, we have decided to start about 25% of our total requirements for imports till the situation in the Indian manufacturing of this steel stabilizes. Beyond that, then it will be a price-related discussion. Today, it's purely availability-related discussion.

Sir, a small question on the data center side. I think revenue contribution is around 4% to 5% kind of range. And what are the demand drivers coming up in this segment? And what kind of opportunity size we have?

So data centers, I think about 4% of total revenue for Q2, and they continue to remain strong. For the corresponding period last year, it was about 2% in terms of revenue. So quite literally speaking, data centers on its own has doubled up in terms of revenue for us. The current outlook from our customers remains very, very strong on this particular product line. I think some time ago, I had mentioned that our customers have forecasted double requirement in this segment, which we have already realized. From here on in, we are given to understand further 50% to 60% growth in volumes. However, I remain cautious on this particular statement as the demand is huge. And to sustain this level of increased demand, I see some challenges in the future.

The next question comes from the line of Rahul Kumar from Vaikarya Funds.

Sir, I think you mentioned that your exports continues to be pretty strong. However, your key customer actually, they mentioned in the call recently that the railroad companies merger, actually, they reduce investment in the near term. So what are the discussions happening with them for, let's say, for FY '27 onwards?

Yes, I think you're referring specifically to Wabtec Enterprises and their statement. Am I correct?

Yes, yes, yes. Correct.

So if you look at that statement, I think it was geared more towards new locomotive deliveries. The business that we supply to them is for all of their business verticals, including marine, off-highway vehicles, oil and gas as well as locomotives. Within locomotives, you have two subsegments. One is for modifications and upgradations and the second is new loco builds. So from what we are able to understand from our customer and the outlook that we are seeing, the modification remain -- business continues to remain very strong in the current calendar year, and the new locomotive business is expected to pick up from next year. So for us, we have seen a record year with the customer this calendar year. However, Q4, as per usual business practice, given that it's their holiday season, will be slightly slower, Q4 calendar that is. Starting January, we see again a huge uptick in demand and requirements going forward.

Okay. Okay. I think in the last call, you had mentioned that Q3 was supposed to be your best quarter in terms of exports. Does that stand to be revised?

So Q3 calendar because they work on calendar years.

Okay. Okay. So you meant Q3 for them actually?

Yes.

Okay.

See, typically, October, December is their holiday season. So that always kind of suppresses the demand and then it picks up again in Jan.

Okay. Right, right. Understood, understood. And second question would be, I think for some of your domestic customers who might be in turn exporting to other countries, including U.S., what is your assessment of growth and ordering over there? Are you picking any signs of some sort of slowdown because of disturbances?

So far, we have not seen any significant slowdown specifically on account of that. See, there are two things, right? So we have this reciprocal tariff, which is kind of booming large on everyone. But if you see the fine print on the taxes and tariffs, there's a Section 232 tariff, which is applicable for all iron, steel, aluminum and copper parts. So irrespective of the trade deal with the United States, a 50% tariff is imposed on products containing these items. So it's not having a negative impact on exports from India as such as on this particular date. Of course, these things are fluid and they do change very quickly. But as of now, we don't see any significant fallout of this at our domestic customer level.

Okay. Okay. So you mean to say that the actual products, which, let's say, would be motors, et cetera, they would be subject to this 232 tariff and not the reciprocal tariff?

So for what -- see, this is a very complex, what do you say, tariff regulation. We are also not very, very clear on this. But from the understanding that we've been given, if a country has, say, for example, a 10% reciprocal tariff, the 232 would apply for the content of steel, iron, aluminum and copper in a given product. And that tariff stands at 50%. So for India, it makes no difference, right, because we're already on 50% tariff. But if suppose there was a South Korean company, which now with the trade tariffs is at a lower tariff rate, the content of these materials in the product would still attract a 50% tariff. And as you know that the material cost is the most significant part of any of these products, it effectively negates any negative tariff impacts.

.Okay.

I think that this is something that we understood very recently, and I think that explains why we were not very badly affected by the tariffs despite the tariffs being at 50%.

Okay. Understood. Perfect. Understood. And third question which I had was, if I look at your stand-alone sales growth, that has actually slowed down to 4% Y-o-Y growth now versus over the past three quarters from 20% plus, while your subsidiaries have grown pretty strongly at 60% in this quarter. So I mean can you just help us understand that.

So see, as part of business optimization, we had already indicated that we would be shifting equipment and manufacturing between our Bangalore location and Aurangabad and Hyderabad. So this is part of optimizing production at the nearest location to customer. And going forward, you shall continue to see this. We'll be transferring some of our legacy Pitti Engineering business to the subsidiaries.

Okay. Understood. Understood. So basically, you have to look at the consol to -- Okay. Got it.

Yes.

Got it, got it. And your subsidiary margins are actually again lower at, let's say, 10% versus, let's say, the overall business at 16.5%. So is there an outlook? Or is there a target to improve this to industry -- sorry, company level margins?

See, when you look at the subsidiary, I think the right way to look at it is each subsidiary in its own right. So if you talk of Dakshin Foundry, they are currently operating at about 17-odd percent EBITDA margin. So they are in line with Pitti Engineering. In fact, in terms of raw casting, I would say they are better than Pitti Engineering margins. The Pitti Industries, which is a lamination business based out of Bangalore, has slightly underperformed this quarter. That's mainly on the back of the new capacities, which we have put into stream in that location. We have got the customer approvals, and the production will start to ramp up from January. However, the overhead costs and the labor costs are being incurred. So you will see that margin come back starting in January quarter as the volumes pick up there.

Understood, understood.

[Operator Instructions] The next question comes from the line of Sunny from Axis Securities.

So sir, my question is, if you see, I think there is a very decent amount of visibility for FY '26, '27. But what is our strategy for the longer term? How do you see beyond FY '27 now?

See, until FY '27, like you rightly said, we have a clear strategy in terms of organic growth. I think this organic growth, subject to macroeconomic conditions, should continue at a similar rate going forward, while we continue to focus on inorganic growth beyond FY '27.

Okay. So I mean, we plan to expand our horizon in terms of geographies or in terms of product, how do we plan to do that? Or are we sticking to the current product line that -- we are there -- and the regions that we have?

See, the product line will continue to be engineering components, specifically lamination, machining, casting. In terms of end markets is where we look to diversify. We are quite bullish on getting into or expanding our presence in appliance, pump, automotive and smaller laminations. And also geographically, our intent is to move towards the north of India. That's a market which we underserve due to our geographical disadvantage being based in Maharashtra and Karnataka. So we would be looking for something inorganic in that segment if something comes our way. If not, then we'll have to consider something greenfield.

Understood. I think -- but broadly, do we have any specific say, acquisitions or acquisition targets in mind right now because that is where the growth will come from, I think, in FY '28?

There are multiple competitors in the industry, and we are engaging with all of them to see what would be available. If something is available at an appropriate time, we shall move on it.

The next question comes from the line of Dharmil Shah from Dalmus Capital Management.

Some of them are already answered, but I had more specific question on the data center opportunity. When we see our data center opportunity, is it more like global data center is the TAM? Or is it more India specific for us? Because one of our customers mentioned that -- sorry, go on.

So yes, it's -- it's both. The customer that we supply to caters to both India and export requirement. But if I have to segment it, most of the sales that we are doing to our customer would be eventually for the global market. As you already know, the data center in the global context is a huge market, and India is a very small market of that segment.

Understood. But the customer's commentary was more that -- I mean, the export opportunity for them is quite limited. It's more of India and the neighboring countries which they cater to. So just wanted to, I mean, understand on that part because these are heavy gensets. So what they mentioned is export, I mean, shipping these gensets over longer distance is not quite feasible for them.

So it does not typically go to North America in terms of any significant volume. But from what we understand, it is primarily catering towards the European requirement. The India opportunity is good, but it's not as big as the overall global opportunity. The new product lines which have been approved and not just the one customer that I think you are referring to, there are two more customers which are coming into this segment. They are predominantly export opportunities.

Understood, got it. And another question was for the inventory. I mean, the inventory levels have increased by almost INR 80 crores. So is it purely volume increase in...

Sorry, Dharmil, I lost you in between. Can you please repeat that question?

Yes. So the question is more on the inventory levels. If we compare March to September, it has increased by around INR 80 crores. Is it purely because of increased volumes or the price is playing a role in this as well?

No, this is purely to protect ourselves from lack of availability of materials. As I mentioned in one answer prior, there's a huge disruption in the availability of various grades of steel in India due to the quality control orders and the BIS nonrenewal of Chinese mills. As you know, the deficit between production of electrical steel in India and consumption is about 200,000 tonnes. So to secure ourselves, we have started importing material from BIS approved mills other than China. And this has elongated our inventory holding period as we have to typically buy these materials on LCR side from these countries and bring them in.

And this issue you would assume would pertain, I mean, how long, at least a year or longer?

See, if the COQ orders and BIS is withdrawn, I think this would get regularized very early. If not, until the capacities increase in India, which are slated to increase in FY '27, only then this will get normalized. In terms of risk mitigation, like I mentioned earlier, we have decided to start 25% of our quantity as imports.

Okay, okay, understood. And so the other impact would be your net debt levels would remain high. Is that a fair understanding? Because the net debt has also increased by a similar amount. So would it be fair to assume that?

Yes, it will remain at this level until this sourcing issue does not get stabilized. We had expected that this would get stabilized by April, but it continues to persist.

Understood, but I see INR 140 crores of cash as well on the books. So why not utilize those cash and I mean those would be -- I mean rather than borrowing at higher rate?

See, this is a function of operations. If you see the bank and bank balances, this would be the LCs that would -- the margins that would be there typically for the LCs. Cash and cash equivalents are pure cash. There are certain long-term borrowings that we cannot repay. So it would be coming in from that. And we have the CapEx -- and just to finish that answer, we also have CapEx, which is ongoing. So these are the funds that we have kept aside for CapEx. We don't typically like to keep long-term and short-term funds intertwined.

Okay. But CapEx, INR 80 crores is already, I could say, on the cash flow statement. So...

Yes. We have announced about INR 150 crores of CapEx. So there's another INR 70 crores to go.

Of that INR 150 crores, INR 80 crores was supposed to be in FY '26, right?

Yes. So now we are almost at end of FY '26, we are in November. So we will start the CWIP. So we'll start the advances, so we need to have the cash flow to back us up.

[Operator Instructions] The next question comes from the line of Ganeshram from Unifi Capital.

I have two questions. The first is just to develop an understanding, which is when we look at the sales breakup and the volume of it, right, you've categorized it as value-added volume-based byproducts. So would these categories be largely exclusive? Or is there some portion of the volume-based product that is also value-added? So just to understand and how do we sort of gauge how the realizations are across these three categories given we have a consolidated revenue number? That's question number one. And the second question is just to understand, over a period of time, you seem to have moved from laminations to higher value-add assemblies, right? So how -- how has this mix evolved over the last three, four years, if you could give us some context? And what would be the future for this? What would drive this improvement if there is?

I'm sorry, I'll answer your question one by one. I'll ask you to repeat your second question after I answer the first one because I'll lose the track. So to answer -- answer your first question, you asked me what are the quantities that are sold and what our internal consumption, if I could understand that correctly, correct?

No, I'm just trying to understand between -- when you say value-added products and volume-based product, is some portion of volume-based product also part of your value-added product, like you -- maybe you machine something that's volume-based, where would you account it? And how do I see the realization across the three categories?

Okay. So let me clarify this in one simpler way. So if you take the loose lamination and low value-added assemblies, this would be the lowest tier of the lamination. These are basically loose lamination as the name suggests. Then you would take child parts, which we have given you in the quantification, child parts machine components going into assembly. You take these child parts along with loose lamination and make assemblies and these therefore turn into high value-added assemblies. And the third level of value add on, say, the lamination business is you take these high value-added lamination assemblies. And on the other side, you take a raw casting then which is machined and integrate this machine casting with the high value-added lamination to get a stator frame or rotor shaft integrated assemblies. So if -- if I were to break up the quantity, which I mentioned in my speech, 17,722 tonnes of lamination volume, that would constitute 16,500 tonnes -- 16,115 tonnes of the lamination weight, which is namely quantified in loose lamination, high value-added assembly of lamination and stator frame or rotor shaft integrated assemblies-laminations, which indicate the lamination weight going into the finished products, along with the weight of the shafts, which is -- with now shafts machine components going into assembly and child part machine components going into assemblies and stator frames/core drop products, machine components going into assemblies. So this is all the assembly and lamination volumes. This we have done in such a way because there's an interaction between our machine components business and lamination business when it comes to high-value assemblies and core drop products. Apart from this, we also sell machine components and raw castings, which is then quantified separately. So if you have to correlate this to revenue of the company, you can probably value it in such a way, and this, of course, is just a thumb rule and management estimate, loose lamination and low value-added assemblies would be about INR 170,000 per tonne. High value-added assemblies would typically yield about INR 250,000 a tonne. Stator frame and rotor shaft integrated assemblies would yield at INR 675,000 a tonne. The shafts which are going into the assembly, child parts, which are going into the assembly and stator frames, which are going into the assemblies, we are not going to value because we have already valued it in the per tonne realizations of the main product above. The raw castings typically yield about INR 2 lakh a tonne. And the machine components typically sell at about INR 350,000 a tonne. The byproduct and scrap at are about INR 50,000 a tonne.

And just a follow-up on this is to understand over a period of time, how much should we expect the higher value-add and machine component mix to increase? And what could drive that growth, right? And is there more scope for work beyond this? This is just to get a, I mean, crystal gaze or five-year picture from here.

So see, definitely, machine components business, we see growing quite significantly in the near future. In terms of growth of high value-added assemblies and stator frame rotor shaft integrated assemblies, while this business will continue to grow, the biggest addressable opportunity in the market is on the loose and low value-added assemblies. And in the nearest term future, out of Bangalore, we are focusing on this part of the business. So we will see a significant growth here in the coming times.

And is there something like an order book that you have on a recurring basis? How are orders typically booked? Does this happen on a recurring contract of nature? Or is it project specific? How does that process work?

So for different products or different sectors, it works slightly differently. On the locomotive traction motor side of the business, we have a combination of three. The business with the Indian Railways is on a tendering basis. The business with Alstom, Wabtec, Siemens India, these are multiyear contracts, which they had won back-to-back with Indian Railways and therefore extended. That's an anomaly in the business. Nobody normally has that kind of a contractual obligation. Our international business on locomotives and traction motor part typically has a three- to five-year long-term agreement with assured blends of volume. So for example, if my customer makes 100 locomotives and I have a 70% blend, I get 70 locomotives worth of business from him.

Got it. That's very clear.