Pitti Engineering Limited (513519) Earnings Call Transcript & Summary

Ladies and gentlemen, we welcome you all to the Q1 FY '27 Earnings Conference Call of Pitti Engineering Limited. This conference call may contain forward looking statements about the company which are based on the beliefs, opinions and expectation of the company as on date of this call. These statements do not guarantee the future performance of the company and it may involve risk 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. Thank you. And over to you sir.

Thank you. Good afternoon everyone and thank you for joining the Q1FY'27 earnings call of Pitti Engineering Limited. Along with me are members of Senior Management team and our Investor Relations partners from SGA. Our financial results, investor presentation and related disclosures are available on the stock exchanges as well as the company's website. I hope you have had an opportunity to go through the same. Let me begin with a brief overview of the broader operating environment and growth drivers. The first is localization in China per opportunity. Historically, China has been the largest capacities across industrial areas such as electrical, steel laminations, casting and machining. We are seeing customers increasingly look at India as an alternate manufacturing and sourcing base. This is particularly visible in mining equipment, data center generators as well as specialized industrial applications. Second important trend is a shift of manufacturing from Europe to India. The sharp increase in energy, labor and material costs in Europe has impacted the competitiveness of European manufacturing in motors and generators as well as casting and machining. Customers are increasingly evaluating India for sourcing and manufacturing. Importantly, this opportunity is not limited to direct exports as an increasing portion of what we supply to the Indian operations of our global customers are eventually getting exported, creating an indirect export opportunity for us as well. The third driver is electrification. Electrification is creating structural demand for electrical steel laminations at both sides of the consumption spectrum, that is the energy generation as well as consumption. We believe this is a long term trend that will support our growth of lamination business in the future. Within this environment, we are particularly well positioned because of the breadth of our capabilities. We have progressively expanded from lamination into casting, machining, shaft manufacturing and integrated assembly. What differentiates us is our ability to provide multiple components and processes under one group. This becomes particularly valuable in complex applications such as railways, wind power, specialty motors, off-highway equipment where customers increasingly prefer integrated solutions rather than a smaller supply base. Importantly, our capacity expansion has historically been gradual and closely linked to customer demand. However, the level of demand and opportunities that we are seeing today require us to undertake larger capacity additions. We have recently commenced operations of the previously announced INR 150 crore CapEx which was announced last year increasing our sheet metal capacity to 108,000 tons and augmenting our casting and machining capacity. We are now progressing with the INR 290 crore investment for our greenfield casting facility in Hyderabad. This facility will help consolidate our foundry operations and provide the infrastructure required for the next phase of growth. Our objective is to build capacity ahead of the demand curve. Speaking of sectoral demand and growth, opportunity is broad based. Our data centers have emerged as a strong near-term opportunity giving the significant power requirements for both primary and backup power generation. We are seeing strong demand from customers such as Cummins, Marathon, Nidec and are also developing opportunities with a couple of more marquee customers. At the same time, we remain mindful that the pace of AI data center investments may not be sustainable indefinitely. Therefore, we are confident about the underlying growth in regular data centers driven by the cloud adoption and data localization. We remain measured in our approach to the overall data center opportunity. Beyond data centers, we are seeing strong visibility in railways, metros, mining and off highway equipment and specialty end use applications in industrial sector. Modernization of North American Railways and increasing mining activity are all supporting demand for our products. Over the longer term we are also seeing automotive and electric mobility as an important opportunity. While our presence in automotive is currently limited, we are actively looking to participate more meaningfully as India's automotive manufacturing ecosystem expands and electrification creates new opportunities. Overall, we believe Pitti has an important stage in its evolution. The combination of global supply chain realignment, India's manufacturing competitiveness, electrification and expanding capacities and capabilities across lamination, casting, machining and integrated SMDs provide us with a strong platform for sustained growth. Coming to the operational and financial performance for the quarter, our revenue mix, a revenue mix of traction, motor and railway components remain the largest contributors accounting for 28% of revenue. This was followed by power generation at 15%, industrial and commercial applications at 12%, mining, oil and gas at 10%, special application motors at 9% and data centers at 5%, renewable energy at 3%, other segments at 17%. This diversified revenue profile reflects the broad based nature of our business and presence across several structural growth segments. Moving to volumes, total lamination and assembly volumes stood at approximately 19,200 tons adjusting a healthy 18% year on year growth. Importantly, within lamination, higher value added assembly including integrated rotor shaft and stator assemblies grew faster than loose lamination. This reflects a continued improvement in the product mix and increasing contribution from value added offerings. Total casting and machine components volume stood at 13,191 tons during the quarter. A growth of 4.2% Y-o-Y basis on capacity utilization, we witnessed meaningful improvement across our operations during the quarter. Sheet metal utilization increased to 73% in Q1FY '27 compared to 70%. Machining utilization also improved to 86% compared to 82%. Casting and Fabrication utilization stood at 72%. Turning to the financial performance, revenue from operations for Q1FY '27 stood at INR 529 crores compared to INR 457 crores in Q1FY '26. A growth of 16% Y-o-Y. Adjusted EBITDA stood at INR 89 crores compared to INR 78 crores for Q1 representing a growth of 14%. Adjusted EBITDA margin was 16.8% for the quarter. Adjusted PAT was INR 32 crores compared to INR 26 crores in Q1FY '26. As a recently concluded CapEx comes on stream, we are confident of achieving significant growth in the remaining year and therefore we are devising our annual target to 82,000 tons for lamination from 78,000 tons as previously stated in Q4 conference call. Overall, we remain focused on executing our expansion plan and deepening our relationships with existing customers and capturing new opportunities across both domestic and global markets. With that, I will now open the floor for Q&A session. Thank you.

[Operator Instructions] We take the first question from the line of Bala Subramaniam from Arihant Capital.

I'm looking at high value stator and rotor assembly. The volume growth is nearly 37% which is outpacing loose lamination growth of 16%. So which are the applications as factors we have supplied especially for high value stator and rotor assemblies. And secondly earlier call mentioned about raw castings EBITDA per turn it's around 30,000 to 35,000 while machine castings around 80,000 to 1,00,000. So if you could mention about high value added assemblies and integrated assemblies EBITDA per ton also?

The growth in high value added lamination SMD is primarily driven from data centers. It's driven from special industrial use, mining off-highway and railways. So these are the areas where these higher value added SMDs are typically used and that is the sectors as you can see which have grown in the recent past. As to the EBITDA per ton of the integrated assembly, it's very difficult to say because it depends on the kind of casting and machining which has been integrated into the lamination SMD. So the margin you cannot literally go in a EBITDA per ton basis there. It's a mix of all three verticals which is machining, casting and lamination.

Okay. Sir, data center side you mentioned our revenue share is around 5%. Like if you look at most of that demand is coming from US and Europe market especially for data centers. So whether majorly we are supplying to domestically or we are also getting lot of traction from exports markets side, so we could share like is there any new customer additions across the geographies and whether it's primarily for high value stator rotor assemblies for cooling and power package systems or any other components we are supplying?

So what we currently classify as data centers in our revenue mix is primarily the power generation side of data centers. Anything that we may be supplying for cooling application we would not have that distinction given by the customer to us. So it would still be classified under industrial use. As far as the data center that is classified in the PPT which is for the power generation side is concerned, we have direct exports to us for one customer and for a couple of other customers we are supplying this product in India which is both used for local market as well as re-export to other countries.

Okay sir, so my third question, the plan the CapEx of INR 290 crore. If you could share the breakup between machined components, facilities and like castings or assemblies and if you could share the roadmap I think it's planned to commission by Q1FY '29. So how much CapEx by FY '27 and '28, we can expect?

We've already incurred about INR 60 crores of CapEx from that INR 290 crore CapEx announcement. It's a greenfield and expansion. So we have started with the land acquisition. I would say that as you can see in the PPT slide 5 of Q4, we have given the breakup between machining and machinery and infrastructure investment. Infrastructure investment is about 30% and 70% is going towards plant and equipment. I will not have a quarter or year by year expenditure plan but the capacity is expected for commissioning by Q1FY '30 as we had mentioned in the previous call.

[Operator Instructions] We take the next question from the line of Mohit Jain from Devain Choksey, PMS.

Sir, I have just this question on exports. So in absolute terms exports were roughly flat. You know, last year we did about INR 137 crore. This year INR 139 crore or vice versa. And we have been highlighting this China plus one and you know, tariff driven sourcing ships as a tailwind for you. So. And on the other hand, domestic grew 23%. So is this export, export flatness just, you know, the order season within the year or you are really seeing customer delays?

So see, exports will again pick up in Q3, Q4 and the direct exports are remaining, you know, kind of steady, registering nominal growth. What's a bigger opportunity for us is the indirect exports. Like I said in my speech, we are seeing increasingly a situation where we are supplying to the local operations of our global customers and those products are getting made in India and then exported all over the world.

Okay, so you think in the, in the second half you see surge in exports?

Yes, I think Q2, Q3, Q4, quarter on quarter, you should be seeing improvement in direct exports as we ramp up the new capacity.

Got it. And lastly, we checked that we had some LPG issues. Not only we, the entire industries because of the war. So has that issue subside -- subsided? And you know, we were also planning to do some electrification there. So what's the status there?

So we are currently doing the electrification. A lot of it is already done and right now there's no LPG issue. So we have steady supplies of LPG coming in. Whatever is the incremental cost obviously is being incurred by the company and it's being compensated by the customers as well.

We take the next question from the line of Rahul Kumar from Vaikarya Fund.

Yes. Actually just one question on this margin. Actually if you see the, you know, the value Added product mix has actually improved for the lamination as well as the machine component also have improved as a share of overall business. But if I look at the margins actually they are more or less flat. So what would have driven that?

So if you look at the cost in the P&L, manpower cost is slightly higher when compared to the previous time. And that primarily because for the CapEx that we have incurred, we have put in all the manpower and expenses in place. As we start using the capacity and the operating leverage kicks in, the margin will improve.

Okay, okay, okay. Is there also a case that, you know, the traction motors which you supply are of higher margin versus the company average and given the fact that I think this quarter there is some more softness in the traction motors, does that also lead to some margin softness?

No, I would not say that would be the case. Because if you see the other three segments which have really grown very well this quarter, namely your mining and oil and gas segment as well as the special purpose applications, these typically have a superior margin when compared to even railway products in certain cases.

Okay, okay.

It's just that the operating leverage needs to kick in because we have finished the CapEx of INR 150 crores and obviously the staffing and variable costs have all come in and the leverage has not come in in terms of the operating leverage.

Understood. Got it, got it, got it. So I think you have, I think you mentioned in the opening remarks of you know, the upgrading the volume guidance for this year for -- to 82,000 tons. So just extending this let's say to FY '28 and '29. What are the targets for that and do we have the capacity or you will decide to expand, let's say at the end of FY '28 or something like that?

So if I have to look beyond FY '27 towards '28 and '29 like I had mentioned, I think in one of the previous calls we are strategically look to have a fully owned facility in Bangalore akin to something like a facility that we own in Aurangabad today. So eventually that would be something that we should start working on. If I look at the capacity side with this 82,000 tons being the target for current year and 108,000 tons being the capacity, we only have a headroom to, you know, grow about 8,000 tons with the current facilities assuming a 80% operating efficiency. So definitely for FY '28 there will be some incremental CapEx to increase the capacity. But we will do it closer towards Q3, Q4 time frame because we can still moderately expand in some of the facilities or maybe '28 and '29. We should be looking at doing a CapEx in Bangalore for that facility which I mentioned.

Okay, understood, understood.

But we'll be tracking it very closely with the market trends and how the demand is shaping up because we don't want to be exposed on, you know, making the investment and not having the business.

Okay. Okay. But in terms of volume growth, let's say if we are looking at 17%, 18% growth for this year, for next 2 years, do you also want to look at similar kind of a growth or because of all these?

If I just look at the outlook and the demand forecast from the customers we do see that kind of a growth over the next 3 years. But you know it's coming from segments which are, I would say can change very quickly. So you know like mining and oil and gas are segments which go up very fast and can correct very fast. And data center is you know, obviously very new segment and it's growing very, very fast. So it's something you know, we don't want to invest ahead of time too much for.

Understood, understood, understood. Okay. And I think we had, did we have done the expansion of casting facility also in this, this quarter. I think that is finished. So if I remember right the last time you had mentioned that the volumes for the casting target would be somewhere around 16,000 for this, this fiscal.

Right.

And I think the currently the share of your machine components is I think 50%, 50% plus. So do you want to, I mean do we want to maintain a -- that's a pretty sharp jump actually almost 60% kind of a jump over the last year. So do we have the demand visibility for that? And two, I think what will be the share of you know, machine component in that?

Yes, I would say that both the product categories are growing casting and machine components. Obviously, the growth in machine components is higher as more and more customer wants machine components rather than just a raw casting as a supply chain solution for them. We have very strong visibility and in the machining space. So part of the CapEx that we've announced INR 290 crores taking the machining capacity to 10,80,000 machine hours will be progressively implemented over the next few quarters. I mean every quarter on quarter we'll be having capacity addition. So you should see machining volume increase. Casting capacity has gone to 24,000 tons. We would be upward guiding the casting numbers to about 17,000 tons as well. And out of that what will be the share of machining would depend on how Quickly our machines come in and we are able to put them to use because the current capacity utilization on machining is almost 86.33%. And that is the biggest bottleneck for us in terms of ability to grow the machine components. It's not the order book, the ability to get machines fast enough.

Understood, understood. So in summary, I think we can see a casting volume sharp jump over this year and depending upon the machining capacity we can also ramp up the higher value add machine component as well?

Yes,

Okay, okay, that's great. Just last question on the debt plans. I think last time when we had discussed the debt was a bit elevated because of the higher inventory situation. So what is the situation now? And you know, where do we want to, where would the debt settle over let's say next 1 year or 2 years.

So right now the net debt is somewhere on INR 491crores as of last quarter end and we have already incurred, like I said, about INR 60 odd crores of expenditure out of the INR 290 crores. So despite that we've been able to meaningfully reduce the net debt and I think there is still potential to further, you know, rationalize our working capital to the tune of what, INR 25 crores, INR 30 crores. Okay,

Okay, okay. Okay. But actually our interest cost hasn't actually gone down. I think it's even though the debt has actually reduced.

Yes, so that's the finance cost actually this quarter if you see the dollar has moved quite sharply due to the West Asia crisis and there's a ForEx impact of about INR 2 odd crores which is, you know, accounted in the finance cost. The interest and bank charges are about INR 19.6 crores and the ForEx impact is about INR 3 crores, not INR 2 crores by mistake.

Okay, okay, understood, understood. Okay. So that is more related to the currency translation rather than actual interest.

Yes.

Okay, understood. Understood.

If you have to take a comparative number for Q1FY '26 it was I think about one odd crores which was a ForEx impact. So the rationalization of interest and cost and bank charges have taken place but the ForEx is not, you know, allowing it to be visible on the P&L.

Understood. Understood. Understood. And just the last question, I think on the other income part, if I remember we had done I think INR 400 crore of kind of CapEx and every year we used, we are getting this incentive from the state government and you were having some shift of this 7-year plan to 9 years. And just can you help us understand how would it pan out in terms of impact on P&L? For this year and next year.

So we had done a INR 220 crore CapEx which was giving us the incentive in the previous years. From this year we are supposed to move to the expansion plan which we had done of INR 400 crores which would have typically yielded us some around INR 40 crores a year. However, the eligibility certificate that we had received is for a 7-year reclamation period. So the run rate for us to recover the money is much higher than what the current sales are. So we are evaluating whether to start claiming the incentive from current year or next year so as to maximize the net cash flow. We are more or less coming to a conclusion that this year would not be taking the incentive income because we would not be able to recover a large chunk of the money that we can recover next year.

Okay. Okay. So Last year I think we had some INR 20 odd crores in the quarter 2 that was basis the previous CapEx which will not reoccur this year. This INR 400 crores you are actually discussing with the government for a 9-year plan. So possibly the next year onwards you will start accruing that. Is that correct?

If you are able to successfully get the 9-year plan then you take it this year because then the required run rate to claim would be much lower. Otherwise, you try to defer it to next year so that the sales increase and then the opportunity to reclaim the money is higher.

Okay, Understood.

Dependent on the government's decision. so we may or may not do it this year but definitely for next year we shall be getting it.

Okay. Okay. Okay. Understood. And that previous incentive is already exhausted?

The previous one is already exhausted. In terms of cash flow we get to receive roughly about INR 70 odd crores from the government which is expected to come in the next 9months to 12 months.

[Operator Instructions] We take the next question from the line of Srikanth from PinPoint X Capital.

As we have capabilities in making the starter, floater and shaft whether we are supplying our motors to industrial robo-making companies presently?