Pitti Industries Private Limited (513519) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pitti Engineering Conference Call for discussing the acquisition of Bagadia Chaitra Industries Private Limited. Joining us on the call today are Mr. Akshay S. Pitti, Vice Chairman and Managing Director, along with the senior management team of the company. Before we begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For a list of such considerations, please refer to the earnings presentation. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akshay Pitti. Thank you, and over to you, sir.

Good evening, and a warm welcome to everyone on the call. Before we move to the Q&A session, I'll walk you through the acquisition, touch upon the highlights of the entity being acquired and the synergies it will bring to the consolidated business. Pitti Engineering signed a definitive agreement to acquire 100% of the equity share capital of Bagadia Chaitra Industries Private Limited on 11th March, a historic day for our industry as this is the first such M&A in the lamination space. The entity's enterprise value was INR 124.92 crores as of 31st March 2023. The consideration payable on the closing date shall be the enterprise value adjusted for net debt and net working capital changes on the agreed baseline of 31st March '23. Further, the purchaser shall compensate for the capital expenditure and CWIP at the time of closing. The entity operates out of Tumkur district, Karnataka, where it set up a lean and modern manufacturing facility in 2019. The facility's installed capacity is 18,000 tonnes per annum. The acquired entity applies its products to various end-user industries, including alternator, motor and pump. Majority of its sales are in the smaller size laminations and SMBs. It achieved a turnover of INR 264 crores, earned an EBITDA of INR 14.11 crores and a PAT of INR 6.19 crores for the year '23. As you know, we are in the process of reorganizing Pitti Engineering's manufacturing capacities, concentrating all of our 72,000 tonnes motor and generator components business capacity in Aurangabad. Furthermore, with the impending merger of Pitti Castings, Hyderabad will become the vertically integrated center for all our machine components business. This acquisition will give us a strategically important manufacturing base in Bangalore, one of the largest consumption centers for motor and generator components in South India. Further, its proximity to Coimbatore, Chennai and Hubli will result in lower logistical cost and improved customer serviceability in the region. The entity is estimated to end with sales of 14,000 tonnes for FY '24. As part of our realigning of productions, we will move approximately 4,000 tonnes of annual production from Bangalore to Aurangabad and about 6,000 tonnes from Aurangabad to Bangalore. This will help significantly lower logistical cost on a consolidated basis. Typically, in the lamination industry, material costs are about 80% of total costs. Any savings here have outsized positive impact on the margins. As you are aware, Pitti Engineering predominantly manufactures large-sized lamination. The addition of smaller-sized products from this acquisition will enable better raw material utilization on a consolidated basis. And this concludes our brief on the acquisition and the synergies it brings. We will now move to the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of [ Piyush Jain ], an individual investor.

Yes. Am I audible?

Yes.

I just want to understand the objective behind this acquisition. Is it something the facility of the target company or the client customer as we have said that we will get to penetration in South market? So just wanted to understand the whole idea because when we see this company is having an EBITDA margin of around, let's say, maybe a very suboptimal level as compared to the Pitti. So just wanted to understand your thoughts.

Yes. So there are multiple reasons that this acquisition makes sense for us. If you see, as you rightly noted, the company's EBITDA margins are vastly lower than our margins. With the addition of this company in our product portfolio, the improved raw material utilization will enable us to significantly increase the EBITDA margins of that entity. In addition to that, since we are moving our entire lamination manufacturing base to Aurangabad in Maharashtra, we wanted to have -- still have a presence of manufacturing in south of India to lower the logistical costs. So if you see the 10,000 tonnes of relocation of production base, that will yield another significant saving in terms of logistical costs. So on a consolidated basis, this acquisition makes a lot of sense and will be extremely margin accretive.

But when the company is having a very suboptimal EBITDA, I believe it is around something around -- the EBITDA number is something around maybe a 5%, 6% or something. Then aren't we paying a valuation high because I believe we are paying some 8 to 10x of maybe EBITDA something number?

See, for the year '23, the raw material prices were higher, therefore, the EBITDA margin looks lower in percentage terms. If you see historically, that company has been able to achieve between 7% to -- 6.5% to 7% EBITDA when the raw material prices were normal. So as the raw material prices normalize, we'll get back to that level. We are paying more for the capacity and the volume of business that they are doing, which is about 14,000 tonnes of ready business and the type of business that they are doing, which is complementary to our material utilization.

Okay. So as I understood, they have a capacity of around 18,000 metric tons, correct?

Yes.

So how much revenue this 18,000 metric tons can generate?

So this 18,000 metric ton will typically generate about INR 300 crores of top line on the current raw material price basis.

Okay. So -- and any idea in the current year, 6 months or 9 months number, if you can just give some information related to because, as you said, 2013 -- '23 margin was subdued. So any color on the current year EBITDA number, something?

So we have the H1 numbers of that entity. They are at about 6% EBITDA margin, and the EBITDA margin is continuing to improve as a percentage of sales as the raw material prices continue to decline.

Okay. So as I understood from you, so the growth opportunity with this 18,000 tonnes will be limited because the company is already doing INR 260-odd crores, and you are saying 18,000 tonnes can do INR 300-plus crores or maybe 3x earnings. So the growth from here will be limited. So I didn't understand exactly how this will help Pitti or what synergies this can bring. As you said, this entity's margin will improve. But what it will bring synergy to Pitti, I'm still unable to understand.

See, if you -- first is dealing with turnover and the tonnage. The turnover which I'm suggesting is in the looking forward basis. If you see in terms of tonnage, they have done about 14,000 tonnes of production and they have a capacity of 18,000 tonnes. So we have about 4,000 tonnes of surplus capacity available in that particular location in Bangalore. We are doing two things. One, we are reorganizing the business to the right location. From our Aurangabad facility, we ship about 6,000 tonnes of material to Bangalore and its surrounding regions, which have a great logistical cost. So that will be relocated to Bangalore. And vice versa, the entity that we have acquired, ships about 4,000 tonnes to Maharashtra and further north. By relocating these 2 businesses to the right location of consumption centers, it will reduce logistical costs, which will enable margin growth. Secondly, the type of product that this company makes, which is the smaller products, it helps us in better utilization of raw material at a corporate level. We make larger laminations wherein the side strips are scrap products, that scrap will become the raw material for this entity's production. So your overall material cost will go down on a consolidated basis, which will increase your margin.

Okay. So this target entity, the sales will not be captive goods for Pitti, correct? This will again be sold to the end customer only, correct?

Yes, it will be for the end customer only.

Okay. And you believe this margin will be expanded in line with what Pitti is doing maybe around 13%, 14%, 15% type of margin in a year's time?

See, our margin is also a factor of the machine components. This entity does not have machine components, neither does any other lamination manufacturer have. It will not come in line with something like what our margins are. They may improve to maybe about 10% EBITDA margin on INR 300 crores of sales, roughly about INR 30 crores.

Okay. So they don't have a machining capacity, they don't have a lamination capacity?

They have a lamination capacity. They don't have machining capacity. Machining is typically used in the bigger SMBs and more complicated products, not in the simpler type of laminations and assemblies that they do.

Okay. And one more thing. I think we have already approved this, the merger of Pitti Castings also, correct? So where does this stand now? And how much is the top line or EBITDA perspective that can be added to the Pitti Engineering's balance sheet and P&L?

So the timeline for the merger is as follows: On 22nd March, we have a shareholder meeting to approve -- to consider and approve the transaction. Post that, I believe it takes about 2, 2.5 months for the final effect to be given, depending on the approval. As far as what we expect, it will add to our profitability, for current year, for FY '24, we are estimating about INR 20 crores EBITDA in that Pitti Castings.

Okay. And just last question, because of this acquisition, are we getting into any client-based acquisition or something? Is there anything else we are getting into other than the capacity and the regional what you said saving on logistics costs and so on?

So if you see, we don't cater to the pump industry today as the end-user market. So that will give us a presence into that. The company that we're acquiring, about 35%, 40% of the revenues come from the pump segment. And that's a huge business segment that we don't operate in. So that segment will further add, going forward, more sales to us.

Okay. And the last thing, do we want to do any expansion in this segment where we want to cater pumps, home appliances, and EV segment and to increase this capacity from 18,000 to maybe whatever X number? I know it's too early to ask, but still is there any vision and thought process behind this?

Most certainly, we'll be doing that. So if you see, firstly, Pitti Engineering, the 72,000 tonnes capacity that we are creating, we estimate full capacity utilization in FY '26, something similar will be there in the Bangalore location where they are currently doing 14,000 tonnes. As a result of these tonnages moving around, maybe that facility will be at full utilization by middle of FY '26 itself. So around that time, we should be looking at expanding into a new facility, a larger facility in Bangalore and think about something like a 30,000, 35,000 tonnes capacity in Bangalore, with a focus on the lower product segments such as pump and home appliances, which are very, very strong consumption centers in, what do you say, Coimbatore, and in Bangalore, both.

Okay. And what is the thought process on this debt? Because our debt is increasing, and we are still in the CapEx mode, this acquisition also we are doing, and I think INR 40 crores we are infusing. And further -- I think this is an EV of INR 120-odd crores, there would be some debt which also come into INR 50 crores. So what are we expecting our peak debt for 2024 or '25? And then what is our plan to reduce the debt to reduce the interest cost?

So if you see with this acquisition, we are going with debt to fund this acquisition. Our peak debt would be about INR 450 crores, INR 460 crores as a result of this acquisition. After that, we are not having any additional CapEx plans till middle of FY '26. So the cash accrual in this period should be, in my view, sufficient to ensure that we are nearly debt-free in that same time period.

Debt-free by?

By '26.

So are you saying INR 450-odd crores debt, we will reduce in 2 years' time? I don't think, sir, we have that much of cash accruals happening.

Almost it will be. If you see from Pitti Castings merger itself, like I said, they are doing about INR 20 crores EBITDA. That company has no debt in its books and therefore, no interest costs. Similarly, the entity that we are acquiring now, this Karnataka company, we are estimating the EBITDA to go to about INR 30 crores. And organically, the growth that we are seeing in our business, we should be generating about INR 200 crores of cash flow annually. So in the 2 years' time, we should be nearly debt-free.

Okay. And then just last one thing. Do we have any pending CapEx in current year or maybe FY '25 or something which is ongoing or we are about to expand some CapEx via debt?

So for FY '25, I think about INR 40 crores, INR 45 crores of CapEx would be there. And that kind of CapEx would be ongoing on a regular basis. Those are small incremental CapEx. They are not large projects that we are taking on.

Okay. To sum up on the debt and debt-free status, are you saying the INR 40 crores, INR 45 crores, INR 50 crores CapEx will be during the next 2 years? By FY '26 also there will not be much CapEx -- debt-laden CapEx there and with the...

Yes. Your audio is not very clear. I'm sorry, I can't hear you.

Yes. I'll repeat it again. What I understood from you, by FY '26, there is hardly much debt-laden CapEx is there. And with this acquisition also, we will be picking out our debt of INR 450 crores to INR 500 crores, which we expect the synergies with the Pitti Castings merger, with this acquisition cash flow coming in, with Pitti Engineering whatever generating, maybe 2 years' timeline, we will be able to get debt-free or maybe a type of INR 100 crore type of debt number. Is that understanding what I understood from you is correct?

Absolutely correct.

Next question is from the line of [ Ravindra Nath Naik ] from Sunidhi Securities.

Actually, can you please tell me what is the volume number for FY '22 and FY '23 for this company that we're acquiring?

So FY '22 was about 12,000 tonnes and FY '21, I don't have the volume numbers on hand now.

'23, I'm talking of '23.

'23 was INR 12 crores -- 12,000 tonnes.

Okay. So that means the EBITDA per tonne is around INR 11,758. So you said about this year, you will be finishing this year with INR 30 crores of EBITDA if I've listened correctly...

Not this year. After the acquisition is completed and we get the synergy benefits of raw material utilization between our existing products and that company's products, we estimate the EBITDA to move to about INR 30 crores. There's two savings. There's one on the logistical cost and the second on the better utilization of raw materials.

Okay. So last year, we did around INR 1,400 crores of EBITDA. And you are expecting at least INR 15 crores -- INR 1,500 crores or INR 1,600 crores of EBITDA and the rest would be the savings.

Sorry, I can't hear you and you are not clear.

I'm saying that this year, you said about the volume would be around 14,400 tonnes for this year. And if I say around, say, there is some increase in the EBITDA per tonne, it is around say like INR 1,500 crores to INR 1,600 crores -- INR 15 crores, INR 16 crores, then the rest would be savings.

Correct.

So that means...

So let me rephrase. They will do about 16,000 tonnes next year from their end-user segments, that should yield them about INR 16 crores, INR 17 crores of EBITDA and the remaining INR 12 crores, INR 13 crores will come from the synergy benefits.

Okay. Okay. And lastly, can you please tell me what is the industry -- focusing on revenue, particularly if we mention about the pump industry, and what are the other industries? It is largely consumer durables or any other industry you are seeing?

No. So see 30% to 40% is coming from pump industry, about 40-odd percent is coming from alternators and the remaining 20% is coming from general home appliances, those kind of stuff.

Okay, okay, okay. Whether we are planning any further capital expenditure in this business? Or...

So we will review that -- like I said, we'll review that in FY '26. So far with the expansion in Pitti Engineering in Aurangabad and this acquisition and the reorganizing that you have to do between Bangalore and Hyderabad facility, we think we have enough capacity to see us till FY '26. For FY '27 targets, which we'll start working next year, you may look at CapEx in FY '26 if required.

Okay. So we are not going to do any QIP for this acquisition, right?

Right now, I cannot comment on anything like that. This acquisition primarily today has been funded by debt.

Okay, okay. So there is no...

On any fundraising, I'm not allowed to comment.

Next question is from the line of Akash Singhania from AART Ventures.

Congratulations, Akshay, on this strategic acquisition.

Thank you, Akash.

Yes. I have two questions. So first, had -- let's say, if we would have acquired a greenfield facility in Bangalore, Karnataka, with a similar capacity in terms of lamination and land, so how much would it have costed us? Just any ballpark number?

So just the capital expenditure in land, building and machinery would have been at today's pricing about INR 50-odd crores. If you see the company that we acquired, their fixed asset gross book is about INR 30-odd crores as is. And if you adjust it for inflation, to set up such a facility today would cost about INR 50 crores.

Okay. Okay. And do we have land over there to, let's say, increase the capacity post FY '26 in case we intend to increase over there? So do we have infrastructure or land available for brownfield expansion?

No, this facility does not unfortunately have any land available for brownfield. If we have to expand that, we have to do a greenfield expansion, which we would anyway prefer as we would like to create a bigger, much larger facility going forward beyond FY '26. There is sufficient industrial land available in and around the same industrial part that this facility is located in.

Okay. And do we intend to put machining facility as well in this plant? Or we'll continue with laminations only?

So we will transfer some of our machining facility from our existing Hyderabad and Aurangabad facility, which will complement the tonnage move from Aurangabad to Bangalore. There is no intention to do pure machine components in Bangalore as of now.

Okay. Okay. Understood. Thanks so much. I think it was very clear and I think a brilliant acquisition, leading to a consolidation of the industry. I think a first of its kind in the laminate industry, and any consolidation augurs very well. So congratulations.

Thank you.

Next question is from the line of Sanjeev from DreamLadder Investments. Sanjeev, sorry, but there's a lot of static from your end. Sanjeev, if you can hear us, I'll request you to rejoin the queue or kindly disconnect and reconnect the call. There's a lot of static from your end. We'll move on to the next participant. Next question is from the line of Balasubramanian from Arihant Capital.

Congratulations. Congratulations, sir, for this acquisition. And my first question is like cash level for this company.

Sorry, Balasubramanian, your voice is not very clear.

Sir, what is the debt and cash levels?

So the debt as of 23rd -- sorry, 31st March '23 was about INR 29 crores in the entity. In terms of cash, I think there are about INR 8 crores of cash and cash equivalents in the entity.

Okay, sir. Sir, like you talked about INR 12 crores to INR 13 crores comes from synergy benefits. So what kind of synergies we have in terms of raw material and others?

So it's basically from the utilization of the coil. If you see the raw material that comes in a form of 1,200 millimeters with standard coils. We make the larger lamination, wherein if you're making any lamination more than 800, you cannot typically use the remaining side strip for anything equivalent to 800, obviously. So this company makes laminations which are smaller in diameter, so we can utilize these raw material coils in a much better way to derive synergies on the overall material cost.

Okay. So any other synergies, sir?

Secondly, like I already mentioned, there are synergies in terms of logistics costs. We, from our Aurangabad facility, typically ship about 6,000 tonnes of material to Bangalore, which after this acquisition will be produced in Bangalore and sold in Bangalore. Vice versa, the company that we're acquiring ships about 4,000 tonnes of material towards the north, that would be made in Aurangabad and the logistical cost savings should be significant also in that. So these are the 2 major financial synergies. Apart from that, obviously, the economy of scale kick in, the purchase benefit comes in. If you are buying a significant quantity of raw material, you have an outsized impact on the supply chain side, thereby reducing material costs. You'd have faster product development cycles. So the nonfinancial synergies also are many in nature, which we cannot quantify right now.

Got it, sir. Got it. Sir, this current capacity, 18,000 tonnes, post FY '26, like we are adding 30,000 to 35,000 tonnes, it's a nearby place, right, sir, that factory?

See, we are not adding. I'm saying if the market supports us, we may choose to then expand the Bangalore facility rather than the Aurangabad facility at that particular point of time.

Next question is from the line of Sanjeev Zarbade from DreamLadder Investments.

Yes. Sir, I think you have already answered about the nature of the small motors market. I just wanted to know how large...

Sorry, I lost you there in between. I can't hear you.

The line for the participant dropped. We'll move to the next participant. Next question is from the line of Prathamesh from Motilal Oswal.

Am I audible?

Yes, you're audible. Please proceed.

Yes, yes. Sir, my question is, first, you mentioned that some of the machining expertise would be transferred to Bangalore. So would it be fair to assume that there will be improvement in realization per tonne for the Bagadia facility?

So see, we will be moving our business to the Bagadia facility and Bagadia's business to our facility. At the end of the day, this will be a WOS. So the right way to look at it is as a consolidated basis, what is the margin. It's not like we are improving the margin of this business and moving from machining. This business does not require any machining. We are moving those products which are being manufactured in Aurangabad, which requires a certain amount of machining, to Bangalore for better cost optimization on transportation.

Okay. Okay. So like you mentioned that 6,000 tonnes would be moving from Aurangabad. So big laminations would be moving there and small lamination would be moving from Bangalore to Aurangabad. Is it fair to assume?

Yes. So we will -- it's not just about size, it's about where the consumption -- eventual consumption of that particular product is. So those would be realigned to save logistical costs. And whatever complementary facilities are required to do these productions would be moved. It may be that some machines may move if required.

Okay. Understood. So you've mentioned RM costs as well as logistics cost being one of the levers towards EBITDA improvement. Would, let's say, salaries, employee benefits would also be a lever going forward, which would improve EBITDA margins on the company level or at Bagadia level?

So see, obviously, with the more business, the overheads will be spread wider. So that indirect benefit we'll anyways get. As far as any employee cost rationalization at the Bagadia entity level, I don't see much potential there as they are very lean operation, as I had mentioned in my introduction. So there's not much scope for doing that there.

Okay. Understood. And could you please give us more color on the type of clients, like you've mentioned that these are basically small laminations, but are their clients -- who the clients basically were, to give a couple of names that Bagadia caters to?

Yes. So they are smaller in size, but in terms of end application, they still go into the alternator space, the motor and the pump. So on the pump side, Texmo Pumps is one of their largest clients, then they have a company called Nidec, erstwhile Leroy-Somer, which is a major client. And to some extent, about 20% or 25% of their revenue overlaps with our clients as well on the smaller end of their product requirements.

Okay. So would there be any client concentration at Bagadia's side, if you were to see, pumps at 30%, but then on the overall level, as far as clients are considered?

Sorry?

As far as client concentration is considered, customer concentration, how would they -- top 5 or top 2 customers account for, for Bagadia?

So for FY '21, top 3 accounted about 57%. And in FY '24, H1 FY '24, top 3 was about 70%.

Okay. And top most would be 30% again, if you were to see?

Yes, yes.

Next question is from the line of Sanjeev Zarbade from DreamLadder.

Yes, sir, my question was regarding the market size of the small motors. Could you take us through that, sir?

See, small and large motor put together, let me say, is about a 700,000 tonne RM equivalent market. With this acquisition, we should be reaching somewhere around 90,000 tonnes to 100,000 tonnes of industry consumption. So post this acquisition from the small and large, both put together, we are around 12%, 13% of the overall Indian market.

In value terms, how large would be the small motors market?

In value terms, see, this is not just motors that this company is making. If you see the lamination that they sell to Nidec, it's also for power generation -- generator. So it would be very difficult to kind of correlate that with this acquisition. As far as the small motor market is concerned, apart from the appliance and pump, I believe, based on whatever we understand from our customers, it's about a INR 5,000 crores to INR 6,000 crores market, it's a small one, other than pumps, alternators and home appliances.

Okay. Great. And sir, is it possible for any outsourcing opportunities from, let's say, the established small pump makers wherein we can deliver small motors for their pumps? Any such opportunities or scope for such opportunities there?

See, I think it's too premature for me to individually comment on this as we have just gotten into this acquisition. Once we get more interaction happening with the end customers and understanding their requirements, I will be in a better position to comment on that.

Next question is from the line of Khushbu Gandhi from Share India Securities.

Yes, sir. One question from my end. How do we see ourselves in the next 2 to 3 years in the lamination capacity? Because right now, we are extending 72,000, plus this 18,000. So any more expansion are we looking in this?

So till FY '26, which is the next 2 years, we are not planning any additional capacity. We first need to start utilizing this capacity towards most optimal utilization. For FY '27, we will take a call next year how the market is rolling out and then look at investment requirements.

Okay. And sir, in the lamination for the new acquisition that we have done, is this fully automated like what we have done in the Aurangabad facility? Or this is semi-automated?

So I would say that 70% of their production comes from highly automated processes because they are smaller lamination. A little bit of the mid- and large-size lamination that this facility does do comes from manual operations.

Okay. Any plans for revamping or for automations over there?

Right now, there's nothing planned. Maybe in the operational CapEx that we keep doing, like I said, INR 40 crores, INR 45 crores, we do have a budget for the next 2 years, each year, maybe in that we may take up some of that.

Okay. Do we do -- are we going to do any of the sales of these pumps and alternators to exports or this is purely domestic?

So the pump and the alternator that this company is manufacturing is purely domestic. They do have exports. I believe it's about 8% or 10% of revenue is exports, mainly to Europe.

Okay. So do we have plans to increase our export over there? Or this ratio will continue going forward?

See, this entire turnover will obviously get consolidated. It will become a WOS and we will reorganize the business towards right location. So there is no inherent benefit in doing the exports from Bangalore. It would be most appropriate if that export sales are moved to our Aurangabad facility where we can utilize the raw material in a much better manner and also help reduce our logistical cost by bringing up capacity in Bangalore to do our legacy Pitti Engineering business in Bangalore. So we will be doing those reorganizing between the facilities. We are not seeing these as 2 different companies. We are seeing these as facilities of the same parent company, which is Pitti Engineering.

Yes. So my point was that are we looking for exports in the alternators and the pumps to increase going forward? Or the ratio will be the same for this?

It will continue the same, I would say.

And any idea on what is the order book currently which we have for Bagadia? Or...

Just one second. I believe it's about INR 100 crores, INR 120 crores.

INR 120 crores. Okay, sir.

Next question is from the line of [ Akash Jain ] from MoneyCurves Investments.

I think I just heard a small clipping on a news channel that you had given where you had broadly guided that FY '26 at 70% utilization for the all 3 combined companies, you are expecting INR 1,700 crores revenue and around 17% EBITDA margin. So one is, broadly does that number sound right? Also, I want to understand for FY '26 not really a guidance, but if you achieve full capacity utilization across the 3 companies, what kind of revenues and margins are you expecting for FY '26, very broad guidance. That was part one of the question. Part two of the question was also -- sorry, you can continue.

Sure. Yes. So if I have to break it up so that you can better understand what we are trying to say, if you see the INR 1,700 crore top line, that's a factor of the current sales price per tonne of Pitti Engineering multiplied by the guided sales tonnage for FY '25. We are adding the turnover which will accrue from the acquisition as well as the merger of Pitti Castings. In terms of margin profile, if you would see, we have guided to about INR 48,000 EBITDA per tonne in Pitti Engineering. So that into the tonnage plus the EBITDA that will accrue with the synergy benefits from Bagadia takes us to about 17% on a consol basis EBITDA for FY '25. Now if you just extrapolate these numbers forward for FY '26 and again, this is a very basic and rough guidance, if I may call it that, would be that Bagadia business would kind of saturate at INR 30 crores EBITDA post synergy basis. And obviously, the machine components is growing in Pitti Engineering and the tonnage in Pitti Engineering will expand to about 56,000 tonnes, which would be around the peak utilization of our capacity in Aurangabad. And at that point of time, we'll be looking at about INR 50,000 EBITDA per tonne Pitti Engineering. So on a consolidated basis of all 3 businesses, we should be looking at about INR 350 crores to INR 360 crores EBITDA plus about INR 35 crores of the incentive income from Maharashtra state government.

Okay. And just one quick refresh question, sir. So post the merger with Pitti Castings, what will be the total outstanding new shares because some dilution will happen for the Pitti Engineering shareholders? So just a refresh for us.

Approximately, it's about 22 lakh shares which is being issued and the total share capital should become about 3.42 crores shares.

Next question is from the line of Karan Kamdar from DRChoksey.

Congratulations on the great acquisition. So I was -- maybe this question is already answered. I joined a little late. So the EBITDA margin in the press release was about 5%, if I'm right, for the Bagadia entity. So what I wanted to understand is how would we grow to 17% or 14%, which we are guiding for Pitti.

So you see Pitti Engineering, we are currently at about 15-odd percent EBITDA. If you add Pitti Castings post-merger, that for current year itself, we're doing about INR 20 crores of EBITDA. In terms of sales, if you cancel out the sales to Pitti Engineering, it will add about INR 50 crores to INR 60 crores only to the top line. So that itself kind of takes you to a pretty high EBITDA number. And if you add Bagadia Chaitra along with its synergy benefits, that will give about INR 30 crores of EBITDA. And for next year, we are talking a lot of this for next year. Next year, we also have volume growth in Pitti Engineering as well as EBITDA per tonne growth. So all these factors put together, we are estimating about 17% EBITDA margin on INR 1,700 crores of top line.

Yes, I lost a little bit of it. Can you repeat? Sorry. Last part, just the last.

So all the 3 factors put together, the merger of Pitti Castings which will add about INR 20 crores on an FY '24 basis in terms of EBITDA. The synergy benefits accrued in Bagadia Chaitra will add about INR 30 crores of EBITDA. Apart from that, the EBITDA per tonne in Pitti Engineering also, we have guided at about 48,000 tonnes for FY '25 on about 50,000 tonnes of sales. So if you kind of total these, on a consolidated basis, that takes us to about INR 290 crores, INR 295 crores of EBITDA, which works out to about 17% or INR 1,700 crores of top line.

Okay. Got it. So my question was more on the lines of percentage tonnes or EBITDA per tonne for the Bagadia entity. Will it improve or will it get in line with the Pitti consol level? Or will it stay at a lower level like it currently is for FY '23?

So it will continue to remain at a lower level. The right way to look at this would be, if you take Pitti also, we have a blended EBITDA per tonne. It's not like all of our businesses are hitting that same EBITDA number. Some are punching way above the average and some are punching below the average. So Bagadia legacy business should yield about INR 15,000-odd or INR 18,000-odd per tonne EBITDA and then you have the synergy benefits on transportation, which will bridge the gap on the movement from INR 17-odd crores EBITDA in Bagadia to about INR 30 crores on a consol basis.

Next question is from the line of Pulkit Singhal from Dalmus Capital.

Congrats on a good acquisition. Just curious about couple of things. One is, when I compare the working capital cycle of Pitti versus Bagadia, I see quite a bit of difference if you can help explain? So for instance, Pitti has 64 days debtor days, whereas Bagadia is around 37. And similarly, inventory days is 85 for Pitti, whereas Bagadia is at 25. So can you explain what explains this difference?

So Pulkit, you have to see it in 2 ways. One, Bagadia doesn't have significant exports. Our exports actually require us to give a longer credit time to customers plainly due to the transit time. Secondly, the nature of business. We are prominently into the pump and alternator business down south wherein the credit cycles to the customers are around 35, 40 days. So that explains the difference in the debtor days. Coming to inventory, they use about 2 different grades or 3 different grades of raw material, which are pretty standard in nature. We have a highly complex suite of products, and we have to maintain inventories on multiple grades and types of raw materials. In addition to that, if you see, we are also doing the machining and machine components, which further adds to our requirement of inventories and the lead times that are there for procuring these materials and actually processing them.

Okay. And to that extent, your debtor and inventory days going ahead, next 2, 3 years, can -- I mean because your share of exports, as it goes up and machining goes up, this will be on an increasing trend? Or is there any guidance you can give for just your business?

See, on the export side, if the ratio of export is to domestic alters dramatically in favor of exports, then it will mean a deterioration on debtor days. But if the exports go up and the domestic business in Pitti Engineering goes up more than the export, in fact, you will see a reduction in the debtor days. As far as the inventory is concerned, with this acquisition, we estimate that we'll be able to, in fact, reduce our consolidated inventory days. Like I mentioned, one of the key factors on this acquisition is the better utilization of materials that's not only in terms of the utilization of the slit raw material, but also in the utilization of the inventory that Pitti carries because today, I have to kind of store those sizes to be used for my smaller lamination, which are few when compared to my large. With this acquisition, we'll be able to flow that material through to this entity for immediate consumption.

Okay. So what is the consolidated inventory days you expect for INR 1,700 crores of sales that you're kind of thinking about?

It's too early to give you a definitive answer, but it will be net positive only for us.

Okay. In terms of the sourcing benefits, there are 2 aspects to it. One is that you are able to utilize the sheets better because of using the smaller lamination. But I'm also trying to understand the scale benefits, which is there. So as you're able to add, say -- or if you're able to source larger number of lamination of electrical steel, does that -- how much is that benefit that you get because you could have organically also grown at a certain rate of adding 8,000 to 10,000 tonnes. So do we have much of benefit on sourcing as you continue growing or adding 8,000 to 10,000 tonnes or that's the biggest thing about in [ decimals ]?

See, our raw material pricing when compared to our peers and competitors is slightly better and that will not further improve as a result of the acquisition. But most certainly, our better price will be applied to any entity that we own. Therefore, we should be directly able to positively impact the earnings of the entity acquired.

Understood. Okay. So the question really is, okay, so if you are at, say, 40,000 tonnes, and if you were to do production of, say, 50,000 tonnes, and if you are going to say 1 lakh tonnes at some point, 2, 3 years down the line, the current negotiation, how much better can you do on pricing? Is it like 0.5%, 1%? Or that's just too high in this for the commodity?

See, I think based on where we already are, maybe 0.5% or so would be a fair assumption. It would be par for the course, but anything beyond that would be not possible given where we already are in terms of raw material price.

Understood. And lastly, in terms of the capacity of 18,000 tonnes and you're mentioning that you can go to 16,000 tonnes. And when we Pitti itself, you always operated at 50% kind of utilization. So how come in this case, we're talking about 90% utilization, et cetera?

So if you have to see the type of products, Pulkit, we do those larger products, which require multiple operations through those notching process and the gang slotting process, there the number of changeovers become higher and therefore, your setup time increases, the number of setups and the setup time increases. This facility, like we said, is highly automated. They do most of the production through the progressive tooling wherein you put the coil and you take out the finished product directly from the machine, as you have seen in our factory. So there, the utilization percentages are always much, much higher. What we see as an 80% is the average of all our different types of manufacturing processes. If you look at Pitti Engineering's own progressive line, the utilizable capacity is closer to 90%, 95% in that, subject to not having too many models and tooling changes.

Understood. And this acquisition is allowing you entry into the lower-end segment, smaller segment. And I understand you are consolidating the industry as well. But if I just ask you 3, 4 years out, I mean, are there any plans to get to higher technology segment, for instance, or looking in that direction of the value chain, whether it be in terms of new products or where the kind of work involves more R&D and technology? Is that something which you have as part of the plan?

So right now, Pulkit, once we finish this, if you have to look at the other end of the spectrum, it would be to kind of give a wound stator and ready-to-use rotors to our clients. And that is something which we are actively working on, but we are cognizant of the fact that we don't want to load ourselves with too much debt. I think this acquisition, I think, is where I'm max comfortable. I would not want to go beyond this. But once we kind of ease out our net debt position over the next couple of quarters, we'll look at those initiatives.

Next question is from the line of Prathamesh from Motilal Oswal.

Am I audible?

Yes.

Akshay sir, my question was you've mentioned earlier that the acquisition has been funded with debt, right?

Yes.

So as of September '23 -- sorry, latest balance sheet, which is available with us, we had cash sitting on our books of INR 114 crores. Why didn't you utilize some of that cash or maybe to pay existing debt or maybe to fund this acquisition?

So see, we have the cash on our books, but we also report the net debt number. So if you look at the net debt, we were at about INR 300 crores of net debt. We had some CapEx that is still needed to be completed in the current quarter plus the current quarter's earnings. And then the outflow that we make for this acquisition. So our net debt will balloon to INR 450 crores. After the acquisition also, we should be sitting at about INR 100 crores of cash available, but the net debt would have ballooned to INR 450 crores. And that's a number where I would like to kind of pause. I would not want to go beyond that number.

Okay. So post the acquisition completes, the focus would be on deleveraging the business, right, as you mentioned?

Correct. To reduce our net debt.

Reduce the net debt. And so you have mentioned by FY '26, we would be net debt zero or debt zero?

Net debt zero. I mean effectively it's the same thing. We would have equivalent cash line, whatever debt we would have, we would have equivalent cash line.

Okay. Okay. Understood. And any -- would the Bagadia acquisition help us with entry into electrical vehicles, 2-wheelers or other moped that we see around in the market?

I don't think that would additionally help us. Having a location in Bangalore may enable us to cater to those industries in the southern market. As it is, we have a strong brand reputation in the country for laminations, and we are working with, as you know, many 2-wheelers and 4-wheeler companies on product development right now. So if an opportunity presents itself for the Southern Indian market, we can use that facility to better service those locations. That's about it.

Okay, understood. So like you mentioned the lamination capacity for, let's say, the smaller components, is there any number in mind for these existing businesses, what would be the domestic requirement for laminations across India, let's say, 3 years down the line?

I didn't understand your question.

You mentioned in the contract, 7 lakh tonnes per annum is required for smaller components, laminations for smaller components.

It's not smaller. It is all component other than automotive, including motors, generators, pumps, railways, the whole industry size is about 700,000 tonnes other than automotive.

Okay. Okay, understood. And how is it growing? How do you see it growing next 3 or 5 years?

So each end-user segment grows at a different rate. But at the overall level, we are looking at the industry growing at about 10% to 15% CAGR.

Volume CAGR, right?

Yes, volume CAGR.

Okay. Understood. And how much would auto would be there? How much auto would account for?

See, we have recently gotten into this whole automotive side of the business due to the push in EV. I don't have definitive data that I can today share with you. We are still trying to understand these numbers.

Next question is from the line of [ Ram Chandra ], an individual investor.

I hope you're able to hear me. And Akshay, congratulations. I think this is a fantastic acquisition and a bold move.

Thank you so much.

My question actually to you is when you consolidate the engineering, the casting business and also now this recent acquisition, what do you expect the overall turnover to be by, let's say, financial year '25?

So for FY '25, we are estimating about INR 1,700 crores of top line.

And if I heard you correctly earlier, you said the EBITDA margin is expected to be at around 17%. Is that correct?

Yes, that's correct.

Okay. All right. And also, you also said that you're reorganizing your business between Aurangabad and the one in Bangalore. There, I think, from 4,000 tonnes, you plan to move to Aurangabad and 6,000 to Bangalore. That basically means that out of the 18,000 capacity, you would be doing about 16,000. Is that understanding correct?

Yes. It is yes and no both, because there will be certain equipment that we'll also have to move from Aurangabad to Bangalore to service that. So the capacities are fungible between both locations depending on the type of product. The way we are actually looking at it is that we have a consolidated capacity of 90,000 and we would be producing and selling roughly about 16,000 to 17,000 in Bangalore and the remaining in Aurangabad by reorganizing the equipment in the 2 locations to most optimally reduce our logistical costs.

Okay. Understood. Just one more question. You're talking about from an industry size of around 700,000 tonnes. And you said, if you factor in the acquisition, you would be at around 90,000. You also mentioned that you expect the industry to grow at around 10% to 15%. If I have to extrapolate that 2 years down the line, we're looking at about 1 million tonnes. But at 1 million, will Pitti be 90,000 or 1 million? Or do you expect that 90,000 to also go up to maintain a market share of around 12% to 14%?

See, from a mission and vision standpoint, we would like to firstly envision ourselves as about 20%, 25% of the industry. That is our aspiration to become 25% of the industry, both organically and inorganically. The key lever to get to that number would be inorganic growth further in the future. So let's see how that plays out. Definitely, we would not be at 90,000. I can assure you on that.

I mean, fair enough. I think that -- I mean you inspire a lot of confidence about when it comes to the future of this company. The point being you're also talking about you want to kind of manage your debt level at around INR 450 crores, yet you also want to expand beyond 90,000. How is that going to play out? Because I expect in future, if you're going to -- let's say, you find another good acquisition, would that be funded from internal accruals or would you be then considering to add on a little bit more debt?

See, INR 450 crores is actually a number that comes as 1.5x of forward cash generation. That is kind of the benchmarking that we are doing, 1.5x of forward EBITDA is what we are comfortable as a net debt number. So today, that number stands at INR 450 crores; tomorrow, it can increase also. Secondly, we have very strong cash accrual happening in the company, more so once we consolidate the Pitti Castings with Pitti Engineering as well as with the acquisition. We estimate about INR 200-odd crores of PAT plus debt for next financial year on a conservative estimate. And of course, that number will grow in FY '26. So today, if you see our capacities, we are well placed till FY '26 sales targets that the company has set itself. Now beyond that, we would look at investments in FY '26 for FY '27 targets. So by then automatically, the net debt number would have come down due to the cash accrual and also our appetite on net debt would have gone up as a result of increased cash EBITDA per year. So a combination of both of those would kind of enable us to go ahead with further acquisitions as and when the opportunity presents itself.

Next question is from the line of [ Ankit Kothari ], an individual investor.

Am I audible?

You're audible.

Most of my questions have already been answered. I have just one question. You said there will be huge cost -- huge savings in the logistical costs. So is there any number how much the savings would be there in the Pitti's P&L and how much savings would be in the combined P&L?

See, I can tell you the number on a combined basis. If you take the transportation cost between Aurangabad and Bangalore, we should be able to save roughly about INR 3,000 a tonne, and we plan to -- at the gross level, relocate about 10,000 tonnes, so you can kind of get an idea of the logistical cost savings.

Okay. And you said there will be, in your Aurangabad facility, the scrap would be used as the raw material for the Bangalore facility. So any -- how much savings would be there? I mean whatever you will realize from the sale of the scrap and if your Bangalore facility has to buy the same as a raw material. So any number, I mean, if it has been worked out.

See, it's not exactly scrap. It's basically what we classify as a byproduct of our slitting process. So when we take the full coil, which is about 1,200 millimeters in width, we have to utilize that full coil to the most optimum level. So today, if you see, we sell about 1,500 tonnes of byproduct slit coils as we call them. So those byproduct slit coils, instead of being sold in the market at a lower cost, would directly be used as a raw material in our target company, which is the Bagadia Chaitra. And the cost difference there would be about INR 7,000 to INR 8,000 a tonne. So that around gets you about INR 10-odd crores worth of money. So if you see INR 3 crores from the logistical and INR 10-odd crores from this, added to this INR 17 crores of EBITDA, is basically the ballpark INR 30 crores that we had kind of guided to.

Okay. That would be in the combined P&L of both entities.

Yes. So the benefit would obviously incur once you consolidate both the entities. So we are not looking at these as 2 different companies, right? This is going to become a wholly-owned subsidiary. So at the end of the day, all the benefits on a consol basis. Some benefits will accrue on that legal entity's P&L, some would incur on our P&L. And see, eventually, our view would be, again, subject to our Board approvals and members' approvals, consolidate that company into the list-co. You would not want to have multiple legal entities operating. It is much cleaner to have one single corporate structure.

Thank you very much. I would now like to thank on behalf of Pitti Engineering Limited for joining the call. For any further information or visiting the plant, please be in touch with Mr. Rama Naidu from Intellect IR on 9920209623. On behalf of Pitti Engineering Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.