Ramkrishna Forgings Limited (RKFORGE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call of Ramkrishna Forgings Limited hosted by Nuvama Institutional Equities. This call has been scheduled to discuss the outcome of the meeting of the Audit Committee held on April 26, 2025 in relation to the discrepancy observed during the course of annual physical verification of inventory undertaken by the company for the financial year ended 31st March 2025 in certain cases. [Operator Instructions] I now hand the conference over to Mr. Raghunandhan from Nuvama Wealth Management. Thank you, and over to you, sir.

Good morning, everyone. On behalf of Nuvama Institutional Equities, I would like to welcome you all to this conference call of Ramkrishna Forgings to discuss the outcome of Audit Committee meeting held on April 26, 2025. We have with us today Mr. Naresh Jalan, Managing Director; Mr. Lalit Kumar Khetan, Whole-Time Director and Chief Financial Officer; and Mr. Rajesh Mundhra, Vice President, Finance and Company Secretary. Before we begin the call, may I remind that the company is presently in the silent period and will not be able to deal with questions relating to financial statements or give guidance relating to financial statements. I shall now hand over the call to Mr. Lalit Kumar Khetan, Whole-Time Director and Chief Financial Officer, for opening remarks. Over to you, Lalit, sir.

Thank you, Raghu. Good morning, everyone, and thank you for joining this conference call on short notice. As most of you would be aware of the intimation made to stock exchanges by the company on 26th April. During the course of the company's annual fiscal verification of the inventory, it was observed the discrepancy has emerged in certain inventory wherein book stock was found to be higher than the physical inventory. The ongoing preliminary assessment indicates that this discrepancy might primarily be on account of certain irregularity in recording of inventory during the process. It is important to state that this is the first such occurrence in the company's history. Nevertheless, recognizing the seriousness of the matter, we have initiated comprehensive remedial actions to address the aforesaid discrepancy with the utmost urgency and diligence. To ensure an objective and true fact finding study with an objective of following the best governance practices, the Audit Committee has appointed 2 reputed independent external agencies to conduct a joint fact finding study and identify specific reasons for the discrepancy in inventory. This decision to appoint these 2 reputed agencies reflect our commitment to transparency, accountability and adherence to the highest standards of corporate governance while also aiming to mitigate risk of any future recurrence. While the fiscal validation process remains ongoing, our internal estimates suggest the adverse financial impact to be in the range of 4% to 5% of the company's net worth. Once the independent agencies complete their review, we will appropriately account for the impact in our financial statements for the financial year ending 31st March 2025. We will continue to provide you updates and we remain steadfast in our commitment to learning from this event and emerging even more stronger and better prepared for the future. We further reiterate -- as said by Raghu, that the company is presently in the silent period, we will not be able to deal with questions relating to financial statement or forward-looking guidance relating to future. We will provide the same during the -- our earnings call meeting after that, -- our annual financial results are out. Now I hand over the -- the proceeding to Mr. Naresh Jalan, our Managing Director. Thank you. Over to you, sir.

Good morning, everyone, and thank you for taking the time to join the call. I would like to state that our priority at this moment is to ensure correct assessment of the discrepancies and to take appropriate remedial measures. We are fully cognizant that any action discrepancy and to take appropriate remedial measures, we are fully cognizant of any actions and recommendations by the reputed agencies and as approved by the Board may have implications on the net worth of the company. We are committed to safeguarding stakeholders' interest and upholding highest standards of corporate governance. I wish to assure all the stakeholders that the promoter entities, Sumoto intend to fund any resultant shortfall through legally permissible instruments under applicable laws. At the same time, I wish to clarify that any action undertaken by the promoters in relation to infusion of funds as approved by the Board and the shareholders will be in the best interest of the shareholders and will not be detrimental to the interest of the minority shareholders of the company. Fund infusion is being undertaken with a single-minded focus of enhancing the financial position of the company. This infusion will also provide additional liquidity to the company and strengthen its leverage position. With that, I conclude my remarks, and I would now like to open the floor for questions.

[Operator Instructions] The first question is from the line of Mr. Aryan Jain from Lotus Wealth.

Just a small question, [Foreign Language]

Sir -- Aryan, this is question related to inventory holding basically. So you know the company's business model. We have a huge exports. So a lot of inventory remain in the transit -- stock in transit. Lot of inventory remains in the warehouses -- at foreign warehouses. And as we have to -- because all the OEMs as followed just-in time model. So in India also we have to keep inventory for them. So that's why the inventory days are near to 100 or 120 days, and that's being maintained across the history of the company.

The next question is from the line of Chirag Shah from White Pine Investment Management.

And a good part on your side to proactively come out and not wait for the results for it. Sir, 2 clarificatory questions. First, sir, is this just an accounting loss or it is -- there will be a cash flow impact also? Why I'm asking is what is the need for promoter to fund -- our balance sheet is reasonably good with INR 150-odd crores if we assume that is the number ballpark. Is not that big a number that would affect our net worth ratios or any other ratios as such. That's one. I mean, second is -- if Naresh, you can clarify what kind of instruments he is referring to because Street will presume it is equity dilution that is likely to happen in some of the other form. If you could clarify on that it could be helpful.

Chirag, to answer your second question first, I have already said in my opening remarks that we will do what is required to maintain stakeholders' confidence and will not adversely impact any share -- minority shareholders. So basically -- and we will go with Board and shareholders' approval. So there is -- and all legally permissible instruments, which are there. So I think we are amply making it clear that when we say that it is not going to adversely affect any minority shareholders, so there are a lot of options which clearly indicate that it is not going to be impactful in terms of the holdings of the stakeholders in the current form. And to answer your second question, Lalit, I think you can take the question.

So Chirag, coming to your first question about if there is no financial loss to the company and what kind of it. Yes, our assessment right now is that, yes, there is a -- it's a notional loss because it's irregularity in recording of inventory. But certainly, we have to wait for any conclusion. We have to wait for the report of independent agency to come to any final conclusion. And in terms of need for the promoters, putting up the money, it's only just as promoters stand fully committed by the company. That's why -- that's the gesture from the promoter, as they feel, yes, we need to become [indiscernible] under this scenario and infuse the fund.

And Chirag, basically, we morally stand steadfast with the stakeholders of the company, and we would like to give confidence to the stakeholders that promoters understand their responsibility and sentiments of the stakeholder. And to give confidence to the stakeholders, we are committed to providing this money Sumoto basis upfront with approval of the shareholders and the Board.

The next question is from the line of Mr. Kunal Sangoi from Aditya Birla.

My question is, sir, this inventory. Can you just confirm whether this is basically lying with the discrepancy that has been witnessed, it is as far as inventories with us or inventories with third parties? That's question number one. Second is that how is this process different than, say, last year? Because if I were to look at the annual report, auditors have last year where they have mentioned -- in their audit report mentioned that inventory has been physically verified and there is confidence by them that the frequency of verification by management is reasonable in the coverage of procedure as such is appropriate. So just wondering that how has this come to light?

So Kunal, so coming to your first part of the question, the inventory is lying with the company only. So all the inventories were lying with the company, not the books of -- as per book and which has not been found. Number two, so coming to the discrepancy, if there was an digital verification of inventory last year and there were no discrepancy how this change of process has happened. And just -- I can say, yes, we have found this discrepancy, still final assessment is pending, and it will come into the light only once the final report is being concluded. In the meantime, we have said, this is our assessment that this is an irregularity in recording of production of inventory and that's the decision. This is for which period, how the process will change or not change, whatever. All these conclusions only will come out after the fact finding study done by independent internal agency. We should right now not comment on that.

The next question is from the line of Mr. Mitul Shah from DAM Capital.

Sir, first question is its effect on the P&L, of course, there is 4% to 5% of the net worth can be considered as a onetime impairment impact. But on an ongoing basis, sustainable basis, since last 2, 3 years, our EBITDA margin has been at around 22.5% roughly. So what is your internal assessment, how one should look at that margin considering this inventory-related discrepancy?

Mitul, I think one thing which we can say this a one-off incident which has happened. And business is as usual and ongoing. And with the full year result and the guidance which is supposed to come, I think a lot more will be clear in terms of the future of the company. And we are very confident as promoters and as a leader of the company, I am very confident that we will -- this is a onetime issue. And in future, we will ensure that this never happens again.

And sir, second question is on this independent investigation by the independent auditor. So can you give more light on that? What would be the process or who all are we looking at as appointing people? And anything in terms of time frame where we can get something concrete from these people, maybe approximate.

So Mitul, keeping in mind the best governance practices, we have appointed 2 reputed internal -- external agencies. Now we expect them to conclude the study before we can publish the result and everybody knows the 30th May is the last date for publishing the result. So we expect them to conclude and report the results and we can come out with the results, providing for all the impact appropriately in the financial statement.

The next question is from the line of Dhaval Gala from Aditya Birla.

So first, I think earlier my colleague also asked, if you could name who are the independent agencies are going to investigate? That's point number one. And point number two, this inventory discrepancies was for how many fiscal years as per the current management?

So Aditya, we can only say right now, we cannot name the agency, but these are 2 reputed agencies, external agencies, which we can very well say when report will come out in the future that will be also available, you will be able to know at that point, the name of the agencies. So -- and in terms of -- what was your second question? I just forgot.

Sir, this inventory discrepancies amount -- I mean, is resultant to how many years? Or is it 1 year or is it...

So I will say still this needs to be assessed by this agency only. We cannot comment on -- this is related to how much period and how it happened. Only thing is whatever will come out that has to be accounted this period in the financial year, that will be provided in this financial statement only.

The next question is from the line of Mr. Dhaval Shah from Girik Capital.

Sir quickly, 2 questions. So one is that just to clarify, so is this a theft of the inventory? Or is it something some manufacturing-related [Technical Difficulty]

Dhaval, you're done with your question?

Sir, we have Dhaval Shah disconnected. Will reconnect him. Sir, Dhaval Shah is not in the queue. So I will take the next question from Sarvesh Gupta from Maximal Capital.

I think most of the questions have been answered, but pertaining to the previous participants' question, is it a theft which has happened? Or is it something related to the recording of the manufacturing itself that we sort of recorded that this much production has been done by, the actual production was lower and that was reflective in the inventory? So that is question number one. And question number 2 is that in case the promoters decide to infuse the funds, how will that sort of benefit the minority shareholder or at least because they will get further diluted at a time when the prices got corrected also. So unless we are able to infuse funds at a multiple of the stock price or something like that. That is the only way you can safeguard the minority shareholder interest. So what is this fund infusion about and how it will safeguard the interest of the minority shareholders?

To answer your question -- second question first. I think taking into cognizant the fact and interest of the minority shareholders, we understand the concern and we assure the investor community and the minority shareholders that in the best interest of the minority shareholders, promoters intend to fund it through approved legal method, approved by the Board and the stakeholders and the shareholders of the company, which is not adversely impacting the minority shareholders.

Just to complement that, Sarvesh, what Mr. Jalan is communicating that instrument will be designed in a manner so that there will be no loss to the minority shareholder due to this adverse impact. That will be made good. Instrument may be designed in future with the help of our experts or the approval of Board and shareholders. Coming to your first question, there was no -- we can assure you there was no shortage of inventories. It is irregularity in recording of production of inventory.

The next question is from the line of Madhu Kela from MKVentures.

I just wanted to ask you 2 things. One, obviously, it's a great gesture that the promoters have stepped in and are assuring minority shareholders that there will be -- it will be in the best interest of the minority shareholders. So that's a great gesture. But can you assure the minority shareholders that this kind of lapses of any kind will not happen in the future? And what kind of safeguards and systems you are going to build so that this recurrence doesn't happen, and I'm very cognizant of the fact that this has happened for the first time in 25 years. But can you just assure that? And will you have a concurrent auditor over and above whatever you have? Or will you have some kind of a processing system by which we can keep checking on our financial records and the systems overall?

Sir, first of all, promoters are fully cognizant to the responsibility of protecting interest of the minority shareholders, and I can assure you and the entire stakeholder community that the fund infusion is going to happen in a method, which is not adversely going to affect the minority shareholders. And second, sir, being in capital markets for so many years and there has been no single instance of such kind ever. We have also had a learning with what has happened, and we are doing all in our means and consulting the best of exports. And post the reports being submitted by these external agencies, we are going to ensure that this never ever happens and never is getting repeated in future. And I assure the entire investor community that as a leader of the company, I take moral responsibility of what has happened, and we will ensure that we live up to the expectations of the investor community and will ensure the best in corporate governance going future.

[Operator Instructions] And the next question is from the line of Vijay Sarthy from Subhkam Ventures.

I just want to check, is this inventory discrepancy primarily seen in finished goods or raw materials or work in progress, based on your initial findings? If you can help us understand this.

So Vijay, it is mainly the stock in progress, no shortage in raw material and other...

So does it mean that this is pertaining to some outsourcing activities that this discrepancy is related to?

So we cannot conclude on anything right now here. This is the time to the agencies. Only thing is there is no shortage in raw material or stores. It's only relating to WIP of inventory.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Yes. Lalit Ji, the 2 external agencies, which are going to review this. These are appointed in consultation with the current auditors Ernst & Young?

So sir, the agency are with the prerogative of audit committee. This has been appointed by the Audit Committee of the company. Only scope of fact finding is being shared with the auditors, and they will conclude it. And if they find to be scope to be added or deleted anything, they will do that. So they has to be satisfied by the scope of the fact finding.

The next question is from the line of Manish Ostwal from Nirmal Bang Securities.

I have only one question, most of the questions already answered. So in terms of to understand this inventory-related issue, so is there any yield-related gap between what the auditor established versus what the management is calculating? So the difference is the actual sort of quantity of raw material or there is a yield calculation difference between audited and the management. So can you explain the reason of the discrepancies?

So there is no difference on any account established that way. Only thing we can say right now is it's the error of recording or irregularity in recording of production of inventory. And that needs to be again concluded by the fact finding agencies and then only we'll come to the final conclusion of this.

We will take this as the last question for today. And I now hand the conference over to the management for closing comments.

Thank you. I would like to thank all the participants for joining the call on a relatively short notice. On behalf of Ramkrishna Forgings Limited. I wish you all a very wonderful week ahead. Thank you once again for joining -- and sparing your time and joining the call. Thank you.

Thank you. On behalf of Nuvama Institutional Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.