Pitti Engineering Limited ($513519)

Ladies and gentlemen, good day, and welcome to the Q4 and FY '26 Earnings 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 date of this call. These statements are not the guarantees of future performance and 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 S. Pitti, Managing Director and Chief Executive Officer, Pitti Engineering Limited. Thank you, and over to you, sir.

Good afternoon, everyone, and thank you for joining us for the Q4 and full year FY '26 Earnings Conference Call of Pitti Engineering. Along with me are members of senior management team and our Investor Relations partners from SGA. Our financial results, revised investor presentation and related disclosures are already available on the stock exchanges and on company's website. I hope you have had the opportunity to go through the same. Let me brief you a bit on our journey because it provides important context to where we stand today and where we are headed. We began our journey as a manufacturer of electrical steel laminations, essentially a basic engineering commodity with limited value addition. Over the years, we have consciously and steadily transformed the company from just electrical steel laminations into an integrated engineering solution provider with strong capabilities in machining, casting, fabrication and high-value assemblies. Over the years, we have consciously moved up the value chain through sustained investment, customer partnerships and capacity expansion. Today, value-added and integrated products contribute an increasing share of both revenue and profitability. On the macroeconomic conditions, FY '25 was a challenging year for the industry, marked initially by tariff wars, followed by inflationary environment and West Asia crisis towards the close of the financial year. These developments impacted both broader economy and industries through shortages of commodity metals, supply chain disruptions and rising prices across domestic as well as global markets. Despite these headwinds, global supply chains continue to diversify with India further strengthening its position as a preferred sourcing destination, driven by cost competitiveness and well-established engineering capabilities. Although demand trends differ across end markets, the overall momentum remained healthy. Export-oriented business continued to demonstrate resilience, supported by improved visibility and relatively fair trade environment for Indian suppliers across key markets towards the end of the year. Against this backdrop, our core sectors maintained strong performance. Lamination business witnessed steady demand from sectors such as railway, mining and power. While growth in wind energy moderated, it was effectively offset by robust demand from data centers and industrial motors. On the end user industries, traction motors, railway components continue to be key strategic focus area for us. Although domestic railway CapEx has moderated to some extent, our exposure remains well diversified, supported by meaningful share of international locomotive and metro project business. Demand from power generation sector continues to remain stable, driven by ongoing investments across DG sets and thermal and hydropower plants. Industrial and commercial sectors are benefiting from infrastructure development and broader revival in capital expenditure and modernization, while data centers represent one of the most promising midterm growth opportunities, supported by new customer additions across multiple geographies in this category. In addition, mining, oil and gas and specialized motors continue to witness healthy momentum in new product development. For FY '26, traction motor and railway components contributed 33% of revenue, followed by power generation at 15%, industrial and commercial motors at 13%, special purpose motors at 7%, mining, oil and gas at 6%, renewable energy at 3%, data centers at 3% and other segments at 19%. On the volume side, in Q4 FY '25, total lamination and assemblies volumes stood at 18,400 tonnes, a growth of 7.3% on Y-o-Y basis. For FY '26, lamination volume increased to 69,500 tonnes, up by 10% compared to FY '25. Within lamination, higher value-added assemblies, integrated shaft and stator rotor assemblies grew faster than loose lamination, reflecting an improving mix. Total raw casting and machine components volumes for Q4 FY '26 stood at 2,783 tonnes. There was a temporary softness on the year-end due to -- sorry, there was a temporary softness in the year-end. For the full year, FY '26 volumes grew by 15.4% to 12,012 tonnes. On the capacity utilization front, Q4 FY '26 witnessed a meaningful improvement across operations. Sheet metal utilization stood at 80%. Machining hour utilization reached 87%. Casting utilization was 64% during the quarter. For the full year, utilization levels improved to 76% for sheet metal, 81% for machining and 71% for casting, reflecting consistent execution and improved absorption of fixed cost. We continue to progress on the previously announced CapEx aimed at enhancing manufacturing capabilities. Of this, nearly INR 100 crores has already been incurred and the capacities are expected to become operational by end of H1 FY '27. Given the rising capacity utilization levels and healthy order pipeline, we are announcing a new CapEx program to further expand our capacities and address growing demand. We have announced a greenfield facility for casting and machine components business with a planned investment of INR 290 crores. a proposed capacity increase of 11,400 metric tonnes in the casting side. The facility is expected to be commissioned by Q1 FY '30 and will increase our total casting capacity to 36,000 metric tonnes, more than doubling the current capacity levels. Additionally, machine hour capacity will also increase from current 720,000 machine hours towards 10.8 lakh machine hours. The CapEx allocation will broadly comprise of land acquisition and civil infrastructure, approximately 30% and the balance 70% going towards plant and machinery. The project is expected to generate asset turns in the region of 1.2x. This greenfield facility is developed with a focus on significant opportunities we are seeing in machine components and castings for the mining, locomotive, data center and power generation applications. Several of our global marquee clients such as Progress Rail, Siemens Mobility, Caterpillar, Voith and Wabtec, among others, are witnessing strong growth in their own businesses. And we believe as an integrated casting and machining supplier, we are most well positioned to partner with them in their growth journey and their diversification of their supply chains. Accordingly, our CapEx strategy is built around 3 key pillars: first, improving efficiencies and debottlenecking existing capacities. The second is expanding capacities in areas where customer demand visibility is strong; and third, creating a larger platform for machine castings and integrated components, which we believe will drive the next phase of the growth of the company. Moving to financial performance. For Q4 FY '26, our revenue from operations stood at INR 506 crores as compared to INR 472 crores in Q4 FY '25, a growth of 7%. For the full year FY '26, revenue from operations stood at INR 1,953 crores as compared to INR 1,743 crores in FY '25, registering a growth of 12%. Adjusted EBITDA for FY '26 stood at INR 326 crores, up from INR 272 crores in FY '25, registering a growth of 20%, with adjusted EBITDA margin improving from -- to 17% from 15.9%. Margins were also impacted on account of sharp changes in commodity and ForEx exchanges in Q4, but this is part of the business, and we see this now stabilizing, which will support the overall performance in the coming year. For the full year, adjusted tax stood at INR 128 crores compared to INR 123 crores in FY '25. On the other income front, we are planning to take the benefit of Maharashtra State Investment Promotion subsidy for the CapEx, which we have incurred in Aurangabad from FY '28 onwards to maximize our claim, which will be beneficial for the company. FY '26 has been a year of consolidation, capacity building and continued momentum of the value chain. We have delivered growth in revenue, improved full year EBITDA margins and expanded our product capabilities, increased value-added volumes and laid the foundation of the next phase of growth. The Pitti of today is very different from Pitti of the past. The next phase of growth will be driven by focus on value-added products, machine components, automation, working capital discipline and customer-led capacity expansion. With that, I will now open the floor for the question-and-answer session. Thank you.

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

Sir, that INR 290 crores greenfield facility, so if you could share some more details, what is the road map for this CapEx? And this CapEx is for existing products or we are planning for new products in that spread?

This CapEx is for machine castings. In terms of -- is it for existing products or new products? I would say it's for similar products. We make castings from 50 kilos all the way up till 4 tonnes single piece. We are catering this CapEx towards the larger castings, which will be required for mining off-highway and data center-related applications.

Sir on the inventory side, I think...

On the machining side, we are also currently investing a lot of that money towards the machine hour expansion. That is going to happen in a modular manner. It will not be commissioned only in FY '30. It will start getting commissioned from FY '28 and '29 as well to support the machining growth that is required in the current machine components business as we have already debottlenecked the casting capacity to 24,000 tonnes by end of H1 FY '27.

Second question earlier targeted inventory level of INR 300 crores. I think [indiscernible] INR 395 crores this financial year. So I'm trying to understand how do we look at inventory levels in coming years? It's remained at INR 400 crores as well. I think we have secured new supplies from Korea and Japan. And how do you look at supply side and inventory side in coming years?

So we have already like diversified the supply chain and the steel availability has improved significantly over the quarter 4 and currently in quarter 1 as well. We see the inventory levels maintaining at around INR 390 crores, INR 400 crores level going forward as we continue to grow. On the working capital cycle, our days payable have gone down as obviously to reduce the inventory from its high watermark, we have not procured as much. As we start procuring material and consuming the same inventory, the days payable will go up and our working capital will get released.

The next question comes from the line of Avnish Tiwari with Vaikarya.

Can you articulate how over the years, in your experience, whenever the currency has depreciated in India compared to others, how has that impacted any either existing order book or customers looking for future orders from a sense of your profitability, your cost position relatively, assuming all else equal because you have done a great job in qualifying in so many projects visiting marquee clients.

Yes. So the currency position definitely helps India become more competitive as a destination. However, I would say it does not result in increased margins or anything as we have a quarterly price change mechanism with all of our international clients, wherein the benefit of any currency depreciation is passed on to them. And in the unlikely event that the currency appreciates, they pass on the benefit back to us.

Okay. And has it created any benefit in terms of the discussion about new projects? I mean, you said it benefits your destination in terms of cost position. Has that phenomena you experienced in past whenever the currency depreciates or even recently in last month or something where customers have -- engagements are getting more frequent or getting closer to the conclusion?

See, it definitely helps, but I don't think it drives anything in terms of customer decision-making as obviously, these supply chains are very long term -- it takes a long time to establish these supply chains and approve these products. So they are not looking at it from a quarter-to-quarter price change in terms of dollar strength or weakness. They are looking at India as a destination for low-cost engineering goods as an alternative to China. And definitely, the currency depreciation helps in bringing overall competitiveness when compared to other international destinations.

[Operator Instructions] The next question comes from the line of Vivek Ganguly with TGC AMC.

One simple thing we just were trying to understand in layman's terms. So in this table, you have given high value-added assemblies, laminations and laminations and motors and then loose. If you can, in layman's term, explain what this means in terms of value addition and how they are different and how -- while we are seeing the growth rates in different for the value add is much higher than in the loose assemblies, it would be helpful if you can articulate in your own terms.

Okay. So the loose lamination is basically an engineering commodity. It's a piece of sheet metal, which is 0.5 millimeters thick in which you do a stamping operation. So there's not really much value add that goes into it, and therefore, the margins also are lower. When we add low value-added assemblies to that, we add that for a simple reason. Sometimes the customer says, don't send it as loose lamination, just do a single weld and send it as a stack. By doing that does not become an assembly, therefore, by nature of it becomes a much higher value add. It's a very low level of value add in that assembly. So that is why we bucket these 2 into this segment. I would say you should look at it more like an engineering commodity, the loose laminations and low value-added assemblies. Now when you move to high value-added assemblies, firstly, these are possible in niche segments such as data centers, railways, wind turbine generators, special purpose motors to name a few, wherein the motor complexity is much more when compared to the other applications such as DG sets or a ceiling fan, if you will. So there are 2 different kind of end markets and end use cases. therefore, different levels of value add. So we classify them in a different category. If I have to give you a delta between a loose lamination to a high value-added assembly based on today's selling price, a loose lamination would be selling at approximately INR 180,000 a tonne -- INR 170,000 to INR 180,000 a tonne depending on the grade of steel. A high value-added assembly would trade somewhere between INR 220,000 to INR 230,000 a tonne. The second thing that happens is when you're going to these high value-added assemblies, it's not just laminations, which are just welded together. There are multiple things which we call as child parts, which you can see in the line below of total lamination. These are other machine components going into the lamination assembly. So that's what differentiates the high value from the loose and low value-added assembly. When we talk of stator frame and -- or rotor integrated shafts in the lamination business, these are basically these higher value-added assemblies wherein the customer wants us to either fix the shaft of the rotor or the frame of the stator and supply to them in a fully usable condition, where the only value add remains is the winding of the motor or the generator. So there, we take these high value-added assemblies and integrate them with the machine castings or machine shafts to get the final product. In terms of margin profile, obviously, this is going to be significantly higher when compared to the high value-added assemblies as well.

Does that answer your question, Vivek?

Just another question. So what is the borrowing at the end of '26 and the cost of borrowing?

You mean the total borrowing or the net borrowing?

Total borrowing.

The total borrowing is INR 698 crores.

And the cost of borrowing?

On an average cost basis, just give me a second. Around 7% -- 7% to 7.5%.

[Operator Instructions] Our next question comes from the line of Dhiral Shah with PhillipCapital.

Sir, if I look at your Q4 numbers and if I look at your export segment particularly, so on a Y-o-Y basis, there has been a degrowth. So any particular reason what has led to this degrowth? I mean, even if I look at overall FY '26 numbers, the growth on the export side has remained on the -- maybe around 5% to 6% kind of average growth.

Okay. So see, firstly, I mean, the answer for both the questions is interlinked. If you look at the Q4 numbers, there's a degrowth in the export numbers. That is largely led by 2 issues. One, from 1st of March, there were severe issues with petroleum products, which are used in our foundry operations. So if you see even our foundry output is lower in Q4. So that has impacted our -- and that is mainly on the export side. So that has impacted our overall Q4 number and more specifically, export numbers. Secondly, if you see on the lamination side of the business as well, where we were not impacted with the energy situation, the containers were still not moving out in most of March. So due to that, around about INR 20-odd crores of sales have not taken place, which would have taken place ideally, mostly which were export oriented.

Okay. So will this revenue start reflecting in Q1 itself?

It will be a slight slog because even now the energy situation is not fully normalized, especially on the LPG side, as you know. You're living from moment to moment. Anything can happen in West Asia right now. So I don't want to comment.

Okay. And sir, what is the overall growth that we are looking in FY '27 and for the next year FY '28 in terms of revenue and margins?

So let me first give you on the quantitative side. On the lamination side of the business vis-a-vis the 69,517 tonnes that we have done in FY '26, we have targeted 78,000 tonnes of sales. And on the machine component vis-a-vis the 12,000 tonnes that we have done, we are targeting around about 16,000 tonnes of sales. This should, in current commodity price terms translate into roughly INR 2,300 crores of top line.

And sir, in terms of margins -- margin improvement?

Yes. In terms of margins, I think we should look at similar margins in terms of percentage. Going forward, like I said, if the commodity prices continue to rise, obviously, your top line will grow more, but then the margin will be lesser.

The next question comes from the line of Nikhil Purohit with Fident Asset Management.

Just to understand on the capacity side. So by FY '27, we will have 90,000 from stand-alone and 80,000 from PIPL, right?

I would say you should look at it as we'll have 108,000 tonnes of consolidated capacity because you are moving capacity between facilities for optimization, which is why we have not given any breakup in stand-alone and subsidiary capacities.

Okay. Okay. So 108,000, okay. So in FY '28, where will this be?

By FY '28, this capacity will be the same. We have not announced any additional CapEx for the lamination side of the business.

But we'll be around at 80% -- more than 80% utilization, right, in FY '27?

FY '27, we should be a little less than 80,000 -- 80% capacity, 78,000 would be roughly 72.2%, it would be. Definitely, beyond FY '28, we should, depending on the market situation, look at additional CapEx on the lamination side. The current CapEx is sufficient to take us till FY '28.

Got it. Got it. And can you give the revenue numbers for PIPL and BCPL individually and the subsidiaries?

Just one second. I need someone to pull that up for me. For the full year, revenue from Pitti Industries was INR 314 crores and revenue from Dakshin Foundry was INR 67.65 crores.

Got it. Got it. And just to understand on quarter 4, our gross margins were hit in this quarter, right? They are down 100 bps, I think. And this is after we had indicated that BCPL will -- the production will ramp up from January onwards and margins should ramp up even higher. So why did we see this just to understand?

Two factors. Like I mentioned, we couldn't execute around INR 20 crores worth of sales of the machine components and export laminations, which are a higher value-added product. So that's lying in our inventory. So obviously, the gross margin has not been accounted for. It will only be accounted for when we sell it. And secondly, in terms of energy cost, we were on a very high energy cost regime in the month of March. And typically, our price change mechanisms are on a quarterly basis. So this was like a black swan event where there's a sharp increase in energy cost mid-quarter post the price change.

Okay. Okay. And like you mentioned, quarter 1 should also be slightly slower on that side, right?

Yes. Quarter 1 will continue to be slightly slower on that side as well as on the lamination side. It will not be worse than quarter 4, but you will not see a sharp recovery in quarter 1.

Got it. Got it. And on the debt side, with our inventory levels maybe stabilizing, how do we see net debt reducing our finance costs? And do we see our finance costs basically going back to FY '25 levels that inventory levels normalize?

I think it will be somewhere in between FY '25 and FY '26 levels, to be very honest. In terms of debt, what we are looking at is about INR 125 crores of credit are increasing. So our payables will increase by INR 125 crores, which should help offset interest cost to that extent.

Okay. Okay. And you mentioned in the opening remarks that the Maharashtra scheme for the Aurangabad plant coming in from FY '28. Can you maybe quantify that? And do we have any benefit in FY '27?

So we are eligible to take the benefit in FY '27. Typically, these incentive schemes are given for 7- or 9-year basis. So we have invested roughly about INR 400 crores in Maharashtra facility over the last 4 years, which we are now eligible to recover. Unfortunately, for us, the government has approved a 7-year recovery plan. So the recovery per year is very, very high. The requirement to recover per year is very high. And the current Maharashtra sales will not support maximum recovery. So we are doing 2 things. We are also looking to work with the government to allow us to recover this money over 9 years, in which case, it becomes very simple, we can start accounting for and therefore, start receiving these cash flows in the next 18-odd months. However, if that does not happen and we still have to recover in 7 years, we feel we have a better chance to recover more money if we delay the accounting by 1 year, because by then, the local sales in Maharashtra would ramp up further and thereby resulting in better recoveries.

Got it. Got it. That was clear. Just one last question, a bookkeeping question. So I was just comparing FY '25 full year numbers and noticed some changes in figures to other expenses and employee expenses. Like, has there been any reclassification here? If you could clarify that?

Other expenses, I don't think there's any reclassification from what I understand.

INR 22 crores has become -- so in FY '25, it was earlier INR 22 crores something. Now it is INR 27.916 crores. This is FY '25 number.

For Q4?

No, I'm talking about the whole year, FY '25.

INR 27 crores has become?

INR 27.619 crores is the current number, other expenses, right?

INR 271 crores, yes.

Yes. So that was earlier INR 220 crores approximately. Is that right? FY '25, if you look at it? And -- so I mean, your other expense has reduced and your employee benefit has increased. So is there some reclassification there?

No, there is no reclassification there. Let me just check on that. I'll make a note of it. But as far as I know, there is no reclassification. All we have done is we have started giving you the adjusted EBITDA on the investor PPT slide, wherein the employee cost is slightly reduced to the extent of the impact of ESOP cost. And one more thing which we have done is we classify the ForEx loss on contracts on our potential receivables in OCI as per the standard. However, last year, there was hardly any value to that number. Most of it is only in quarter 4.

The next question comes from the line of Mohit Jain with DRChoksey FinServ.

So basically, my question is on the segmental side. So Traction Railway segmental revenue dropped from 38% as a percentage of revenue to 33%, especially in Q4. In absolute terms, I guess, we have done around INR 165-odd crores versus INR 178 crores last year same quarter. We have seen an actual decline in the segment, especially on the quarterly basis. So I was just saying -- I was just checking on that Wabtec was described as a consistent and growing customer of ours. So either other railway customers, Indian loco Medha pulled back? Or what is the case that has been in this quarter, especially in the traction side?

No. So if you see, again, like I mentioned, there was about INR 20-odd crores worth of sales impact in this quarter due to various issues, including the energy situation and the dispatches that didn't actually get affected on produced material due to shipping constraints. And that is mostly an entirely for our export market, which is largely traction motor and railway components, both to Wabtec and Siemens Mobility.

All right. And -- got it. Akshay sir, my second question, basically, I joined the call late. So I don't know if this has been answered already. But this newly announced CapEx of INR 290 crores greenfield facility, especially for casting, where will this be located?

Hyderabad. It is adjacent to our existing facility. So we are in process of acquiring land right adjacent to the existing foundry facility.

The next question comes from the line of Sahil Sharma from Dalmus Capital Management.

Yes. So I just wanted to understand on the new CapEx program. So what are the expected margins and working capital investment requirements for the same?

So see, once it's fully operational, we are estimating a 1.2x asset turn with approximately a 25% to 28% EBITDA margin.

Okay. And working capital requirement would be how much?

Working capital requirement would be roughly 90-odd days in this -- 90 to 120 days, net working capital. So it's going to be a little heavier on the working capital side.

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

Just one clarification. Out of these machine components and the high-value assembly, what is the mix between domestic and exports?

So if I have to give you -- let me start from the stator frame and rotor shaft integrated assemblies. I would say that's about 50-50 ballpark. On the high value-added assembly, I would say it's about 1/3 to 40% export and the remaining domestic.

And in the machine components part?

On the machine components part, export and domestic, you're asking? Yes, that would be about 80% export and about 20% domestic right now.

Okay. Okay. Got it. So just on exports, I think last time we had mentioned about a couple of new clients, customer acquisition. So what is the development on that front?

So the products are under development. We have made the samples on some of the parts and the remaining parts are in process of sampling. We would expect revenue from Q3.

Okay. And this is for the competitor of our existing customer, right?

Yes, it is for the competitor of our existing customer.

Okay. Okay. And we had mentioned that in total, I think we are speaking to 2, 3 more customers on the exports front. So what is the progress on that -- those 2 companies?

Sorry, it was a little unclear. I couldn't fully hear your question. If you can repeat.

No, I was saying we were speaking to a couple of more customers apart from the -- on the traction motor front. So what is the progress on those 2 companies?

So we are already working with Siemens Mobility, as I mentioned in my speech, through our Dakshin Foundry. And then those parts which were going as raw exports are now getting machined progressively and being shipped out. Obviously, Progress Rail has been added as a new customer. And Alstom is already a customer in India, and we are exploring opportunities for the international requirements. If you take into account these 3 -- sorry, these 4 customers, including Wabtec, I think you cover majority of the railway, locomotive, metro client customers globally ex of China. I mean your Japanese, Mitsubishi and Toshiba are the only ones left.

Okay. That's great. I think for the FY '27, I think you had given a guidance of volumes and the EBITDA margins. Would you be comfortable sharing the bottom line PAT number for the same for next 1 year or 2 years? Can you share your guidance for the PAT for FY '27 and '28?

That would be a little difficult for me to predict as this CapEx, which is going on, when does it get capitalized and how the depreciation will start getting accounted [indiscernible] is something which will be slightly more nuanced as we keep going forward.

Okay. Okay. How much is the CapEx -- ongoing CapEx for the new casting and lamination facility?

For INR 50 crores. And as of 31st March, INR 100 crores was already spent. INR 50 crores of cash flow was yet to be spent.

Okay. Okay. And this -- you mentioned that it will be commissioned by H1 of FY '27?

Yes.

Okay. In the opening speech also, you mentioned about adding a couple of clients on the data center part of the business. Can you just talk about a bit more on that front? Are they export customers and what products are these?

So we have 2 products that we've added for the export side, both with existing clients. It's just the application is new for the client. One is casting for data center. This is basically our housing for data center generators as well as certain engine parts, which we are looking at now for the data center turbine engine on the casting and machining side. The other client, again, based out of U.S., it's basically right now loose laminations going to them for assembly in the U.S. Once we get that relationship into a mature level, they will then explore taking these high value-added assemblies out of India from us. So it's a 2-step program with them. And thirdly, there's again, an existing client in the diesel generating space based in India. which is looking for the data center assemblies, again, for their domestic and export requirement. But for us, those would be domestic sales. So these are the 3 additions on the data center side.

The next question comes from the line of Harsh Patel with Share India Securities.

I just wanted to understand that what would be our total on consolidation level, the debt on considering working capital as well as long-term debt for FY '27, '28. Like we had an approach that we would go for debt free. So what would be the debt reduction plan going forward?

So see, as of now, the net debt is around INR 570-odd crores. We expect INR 125 crores release from working capital. So that should take our net debt down to about INR 470-odd crores before any current year earnings and cash generation. Out of the INR 290 crores of new CapEx and the INR 40 crores -- INR 50 crores of pending CapEx from the previous announcement, we intend to spend about INR 100 crores from own funds and the remaining is going to be funded through net debt. So whatever cash we generate, I believe, should flow through to your net debt numbers going forward.

Okay. Okay. So for FY '28, '29, what would be our net debt expectation?

See, again, this is without looking at any further CapEx in the lamination side. As I mentioned in my previous response to one of the questions, the current lamination capacity is sufficient till FY '28 requirements. So ideally speaking, if the market supports us, we should be looking at further CapEx in '28. Having said that, if you don't look at any CapEx happening in '28, I would estimate that your net debt should be down to about INR 250-odd crores.

Okay. And sir, one more thing. On consolidated side, like our tax rate has increased to 30%. So is there any deferred tax adjustments going forward? Or what would be our sustainable tax rate for FY '27, '28?

See, there are deferred tax adjustments which are there and unfortunately, they'll continue, one which is relating to ESOPs, which is not permitted as an expense under income tax computation. Secondly, in terms of the hedge accounting that we do, so the ForEx losses, especially the ones which are uncrystallized on open contracts again not considered in income tax and the difference in depreciation. So these are the 3 reasons why your tax rate is different from your -- and looking at around 33%. Going forward, I think this would be similar. It may come down slightly, but it will be similar. This issue is not going to go away till the ESOP and the difference in depreciation rates goes away.

Okay. So it will stay for at least a couple of years to the same?

I would believe so.

The next question comes from the line of Keshav Kumar with Niveshaay.

So sir, like on the data center side, do we supply anything to the global giants like Caterpillar, especially for the windsets?

That is a customer which is under development, which I mentioned in my opening remarks. So one of the key clients is Caterpillar, both directly and indirectly, directly for their data center housing and engine-related components, which are machine castings and indirectly for the generator part, the stators and motor assemblies, which we are supplying to their vendor. So these 2 are under development, and we expect, again, Q3 for start of commercial revenues on these 2 products.

The next question comes from the line of Avnish Tiwari with Vaikarya.

This capitalization of depreciation you mentioned, so that is regarding this INR 50 crores of capital work in progress you have? Or is there more CapEx which you think will have an impact on depreciation, which is hard to predict right now?

See, the INR 50 crores of investment, which is pending from the INR 150 crores announced last year, that is pretty well predictable. Out of the INR 290 crores of current CapEx that we have announced, there are 2 parts to it, which is why we have to give the revised slide. The greenfield foundry will take 2 to 2.5 years for commissioning and then becoming operational. However, the machine hour capacity that we are increasing is for immediate consumption. So how quickly these machines will get delivered given the current global environment and how quickly we will be able to ramp up will determine the rate of depreciation Out of the INR 290 crores for the foundry side, it's only about INR 110 crores, INR 120 crores of investment. The remaining is largely going into the machining centers.

Right, right. So those depreciation rates are tougher to predict how much and how fast can you...

How much and how fast, both. Yes. More so because they are under a lease finance arrangement.

Correct, correct. But they will start getting revenue and EBITDA also as soon as they start getting capitalized. So they will be profit accretive, right?

Yes, yes. Obviously. I mean your EBITDA will shoot and only then the depreciation would come in.

Correct. And beyond like that machine component part, if you just look at the base business, the depreciation rate should be largely at the rate currently are at and plus INR 50 crores, which is not yet capitalized? Or is there any other moving part on depreciation?

Yes.

Okay. So there's no moving part other than that, right?

No, nothing else.

The next question comes from the line of Dheeraj Reddy with AlphaSqr.

I have 2 basic questions, sir. One is like how should one think about margin structures for basic casting, machining -- I mean, casting plus machining, subassembly and integrated assembly, like these are 4 different things done by a company. Like how are the margin structures different for these 4 works?

They are vastly different. It's a good question. So if you look at raw casting, right, at a gross margin level, they would be somewhere around 50%, 55% gross margins. And in terms of EBITDA, it would be roughly around INR 30,000, INR 35,000 a tonne kind of EBITDA on the raw casting. The minute you move to machined casting, firstly, the weight drops, you are machining away some of the casting element, right? So -- and you're putting in a lot of value add. The sale price shoots up somewhere around INR 350-odd kind of, and you look at, again, about 55%, 60% gross margins. However, the flow-through to EBITDA is much better. Here, you would look at almost INR 80,000 to INR 1 lakh a tonne as your EBITDA margin.

Okay. Okay. Sir, if you can mention the percentages, that would be much better actually.

Percentages is misleading because as you know, we have a full pass-through on costing, barring a black swan event where towards the end of a quarter, you have energy cost, all costs are passed through to the customer. So when the prices go up, the percentage goes down. And the prices go down, percentage margin goes up. So we are always more comfortable giving you in per tonne basis because that is what is the actual margin that is negotiated with the customers.

Understood. Understood. And how about subassembly -- integrated assembly?

Now when you go to lamination side -- I'll finish the lamination in the second part. When you talk of the stat of frame integrated casting, if you are already accounting for the machining margin in the casting, then you have to look at it slightly differently. If you're only looking at stat of frame related thing from a lamination side, it's a different thing. Otherwise, it'll double-count the margin. So if you now look at the lamination side, your loose lamination and low value-added assemblies are roughly INR 15,000 kind of a margin, INR 15,000 to INR 18,000 EBITDA margin. Your high value-added assemblies are somewhere between INR 30,000 to even INR 60,000. It all again depends on the type of high value add that there is. There is no definition for high value-added assemblies, right? So if it's a very complicated product, if it's a limited quantity, then it's a higher margin. If it's a regular high running volume and not as complicated, we are lower margin. So it is very variable there. So you have a very wide band in that. Now when you come to the stator frame and rotor shaft integrated assemblies, it's nothing but a high value-added lamination assembly, which is integrating with the machining casting. So there, you can add the margin of both and then something on top of that for processing.

Understood. No, this is very helpful, sir. This is very helpful. Sir, if I may ask you one more question. See, fundamentally, I think the company overall profitable structure and growth structure has changed a lot in the last 5 years, if we see right? What has led to this kind of -- what has led to this kind of inflection point? And how do you see the next 4 to 5 years because we have moved that phase? And what are the next complicated or like areas which the company is working on, which are very, very hard to replicate or where fundamentally there is a moat which the company is trying to establish?

On the loose lamination side, it's very strange, but we are always doing the higher value-added assemblies and the stator shaft integrated assemblies in the past. Our exposure to loose lamination, low value-added assemblies was lower. So the inflection point for the company was that we tried to grow this lower-margin volume-based business, therefore, increasing our overall capacity and ability to absorb the higher fixed cost that we have. So that is what has led to the inflection point number one. Inflection point number two was this whole consolidation of Pitti casting into Pitti Engineering, vertically integrating a casting facility, which has both iron casting and steel casting facilities along with the machining supplier. So with that, the ability of the company to offer solutions to customers, especially in the challenging environment of the COVID years, which are not -- which are fresh in our memories where the supply chains are all disrupted and our ability to execute across lamination and machine casting for these customers helped us grow our capabilities as well as our base. Now we have gotten into a virtuous cycle, I would say, wherein the demand for such kind of products is increasing due to trade wars with China, U.S., buying iron casting from India is cheaper than to buy from China now due to the duty structures. There are FTAs coming in. So it is leading into a cycle wherein India is more and more emerging as a strong contender for being the next supply chain solution to China for most of the global OEs. And if you have demonstrated capabilities in terms of products or facilities, obviously, your name is on the top of the list with all these clients. So that's how the future is evolving from that inflection point.

Understood. And if I may ask one more question here. How can a company actually extend their capabilities into new metal areas? Like, for example, today, Pitti has both steel and iron capabilities, right? How can someone really expand their capabilities into titanium, nickel or like some of the more complicated areas where the future is also like growing a lot in terms of space or be it aerospace, defense, et cetera, right? I mean, those are the applications where we are currently hearing. So how can one company even expand their capabilities into those areas? Is Pitti Engineering even thinking about it, et cetera?

See, in terms of ability to expand, I would say we have maybe 60% to 65% of the tools required in our toolkit in terms of understanding how to do those machining, understanding how to do the simulation, pattern making, et cetera. In terms of doing the other stuff, which is institutional knowledge of how a particular metal would behave when it is being casted or how it reacts with certain sands and coatings, those are things that you learn as you go through the journey. So if you ask me, it would take like 3-odd years for us to expand into the nonferrous side. I won't just say titanium. I'm saying like nonferrous castings. It would not be a far leap from where we are. However, today, we are not looking at it as a sector for growth because our core competencies, which is iron casting and steel casting, we are seeing a huge requirement. And things that you mentioned are typically used in aerospace and defense, where the volumes are smaller, obviously, your values are higher. But then the sustained growth across such core sectors such as mining, off-highway vehicle, locomotives, these are more sustainable businesses, which we understand very well, and we don't need to reinvent anything. So today, we are not looking at anything on that side.

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

Just one question on this ESOP cost. So till when this ESOP cost will continue to be expensed?

I believe given our schedule of ESOP cost, if we have not, we'll be shortly updating it on our website. I think this INR 10.3 crores ESOP cost, which is booked per annum, this would be there for the current year. And then after this year, it starts tapering off. So we can give you a small Excel sheet, which has this accounting treatment over the next 7 years, how it will keep going downwards.

Okay. Understood. And second question on this value-added products in the lamination. I think -- how do you see this going forward? Do we see the share going up? Or do you believe that the next volume growth is going to come from lower value-add laminations?

See, both are going to grow. They are completely different drivers. Now when we qualify something, say, as a DG set, we would put it in loose and low value-added lamination because of the value add that there is into it. So we are seeing all of those sectors still growing. And again, some of the wind lamination assemblies goes loose. Some of the railway-related laminations that we supply within India go loose. So those sectors are still continuing to perform strongly. And if you ask me how I see the mix in FY '28 for something like a 90,000 tonnes, I would say that loose lamination and low value-added assemblies will be something like 65-odd tonnes and the remaining -- sorry, 60-odd thousand tonnes and the remaining would be high value-added and steel laminations. So the growth rate in those would be slower -- smaller. The growth rate in the others would be higher. However, the base effect is such that, that is still going to grow exponentially.

Okay. Okay. And this 90,000 tonnes, which you mentioned is the total lamination volume, including the -- it includes the lamination as well as assemblies?

Yes. What is 69,517 tonnes today, I'm talking of that cut.

Okay. Got it. And similar question on the casting side also, how do we share this -- see this machine component share going forward?

So the target that we have for current year of 16,000 tonnes, I would say that your machine castings going into SMDs will expand to maybe about 2,000 tonnes. And total machine components, the second line in the Slide #8, that should rise to somewhere around 6,000 tones, 6,500 tonnes. And the remaining would be in the raw casting bucket. And this may change depending on how quickly we get our machines and how quickly the ramp-up happens. It goes back to your same question on the depreciation side, right? So it's all related to that.

The next question comes from the line of Kushal with Asian Broking.

Sir, I just wanted to know one thing. In your con calls, you have said that you do not hedge. Like, I just want to know the reason behind it. Like as far as I know the entire business is surrounded around electrical steel. So there should be some correlation with steel prices and all, like there should be hedging possible, if I'm not wrong.

See, there are 2 things. We 100% hedge our ForEx. I don't know which hedge you're talking about. So if you're talking about the ForEx, 100% hedge. So commodity hedging is not required in our business. If you look at our business, we typically hold 1 month's worth of inventory with us in raw material stage, if you look at historically over the last, say, 2.5, 3 years. And the way the price change mechanism works with our clients is that you have a quarterly price with them, and we have a quarterly price with our raw material suppliers, which is stable. The quarter for pricing to the customer is deferred by staggered by 1 month. So for example, my new prices for Q1 FY '27 with my client will get implemented from 1st of May. So the 1 month of inventory that we hold, the low-cost inventory, which will be lying in our books in April gets consumed at April pricing, which is the last quarter pricing. Similarly, in an environment where the steel cost is coming down, if I'm holding high-cost inventory, it will get liquidated in April and the lower prices get implemented from 1st of May. This largely works and there's no reason to hedge. The contract structuring is in that way.

Okay. So raw materials are priced every quarter, like new prices and all for every quarter for customers and everyone?

Yes.

The next question comes from the line of Abhijit Mitra with Aionios Alpha Investment Management.

Just to sort of understand the mix change as the machining CapEx comes in. So you mentioned that currently this year, 2,000 tonnes will be machine castings into assemblies, machine components will be 6,000 tonnes, 6,500 tonnes and almost 7,500 tonnes will be raw casting. So as machining hours pick up, 7,500 tonnes will move from raw casting to the machine components bucket?

Yes, I would say that is the right way to look at it and also new products which are getting developed. So the 16,000 also will rise further. And all that development that is happening is in directly a machine component. There are certain segments and clients such as pump casings and cement mixer related plants where the machining is not so value accretive for us. So we are not focusing to do that today in-house.

So machine components, 6,000 tonnes, 6,500 tonnes will be the number which will keep growing as you move to 24,000 tonnes and then to 36,000 tonnes?

Yes, absolutely.

Got it. Got it. And also the machine casting into assembly, the 2,000 tonnes that will also grow?

Yes. That will not grow significantly. That will grow significantly over the next 12 to 18 months. This is part of a transition of certain clients where they are taking more value-added products from us to offset the duty structures in the U.S. If you recall, I had mentioned that about a year ago, and this is a longer-term plan. So that is now playing out. So some of the high value-added assemblies that you see will move into the stator frame and integrated assembly bracket and some of the machine components will move up the bracket into the machine casting going into lamination assemblies.

Understood. And just to understand, yes, the margin numbers which you mentioned earlier, you mentioned that machine castings -- I mean, raw castings EBITDA is around INR 30,000, INR 35,000 per tonne. And machine castings would have, what, around INR 80,000 per tonne EBITDA?

INR 80,000 to INR 1 lakh per tonne.

Okay. Got it. Got it. And for integrated casting, you have to sort of add machining and -- I mean, on top of that lamination, which is essentially [indiscernible]?

Yes, add machining, add lamination, add the other machine components going into assembly. So these are basically at tasks or they are basically like other machine pieces, which come from, say, forging or bar steel that we buy and machine. So all of those values plus then something on top of all 3.

Ladies and gentlemen, due to time constraints, we would take that as the last question for today. I would now like to hand the conference over to the management for the closing remarks. Akshay sir, please go ahead.

Thank you, everyone, for your time and for joining us today. We appreciate your continued interest and support. And as we move into FY '27, our focus remains on disciplined execution, improving working capital efficiencies, completing ongoing CapEx and scaling our machine components vertical, strengthening our position as an integrated engineering partner for customers across India and global markets. Should you have any other queries, please feel free to reach out to our Investor Relations partners, SGA, and we'll come back to you with our answer shortly. Thank you.

Thank you, sir. Ladies and gentlemen, on behalf of Pitti Engineering Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.