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Steelcast Ltd
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Ladies and gentlemen, good day, and welcome to Steelcast Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ronak Jain from Orient Capital, their Investor Relations partner. Thank you, and over to you, Mr. Ronak.
Thank you. Good afternoon, everyone. Welcome to the Q3 FY '24 Earnings Conference Call of Steelcast Limited. Today on this call, we have Mr. Rushil Tamboli, Whole-Time Director; along with Mr. Subhash Sharma, Executive Director and Chief Financial Officer; and Mr. Umesh Bhatt, Company Secretary.
Before we begin this call, I would like to give a short disclaimer. This call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations as of today. Actual results may differ materially. These statements are not guarantees of future performance and involve unforeseen risk and uncertainties that are difficult to predict.
Our detailed safe harbor statement is given on Page #2 of the Investor Presentation of the company, which has been uploaded on the stock exchange and the company's website as well.
With this, I now hand over the call to Mr. Rushil Tamboli for his opening remarks. Over to you, sir.
Yes. Thank you. Very good evening to everyone on this call. And on behalf of Steelcast Limited, a very warm welcome to this Q3 FY '24 earnings call. I hope everybody had an opportunity to go through the Q3 results, an Investor Presentation which has been uploaded on the stock exchanges and posted on company's website as well.
As we entered FY '24, the global geopolitical landscape faced challenges with ongoing conflicts and major central banks in the west hesitant to cut interest rates in CY '24 due to persistent inflation and robust economic growth. As communicated earlier, we anticipated softer quarters in FY '24, witnessing a revenue decline both year-on-year and quarter-on-quarter basis sequentially due to the prevailing global turmoil. However, we are optimistic about the turnaround in the global business starting from Q3 FY '25.
Now speaking about the financial performance for the third quarter of FY '23-'24, we achieved revenue of INR 90.3 crores, witnessing a degrowth of 11% in quarter-on-quarter and 25% in year-on-year basis. Our EBITDA stood at INR 27.3 crores with margin of 30.3% compared to INR 28.7 crores and 28.3% in Q-on-Q basis and INR 30.7 crores and 25.6% in year-on-year basis. Likewise, our profit after tax is INR 17.4 crores with a margin of 19.3% compared to INR 18.6 crores and 18.3% in quarter-on-quarter basis and INR 19.3 crores and 16.1% in year-on-year basis.
Further, if you compare PAT of 9 months of FY '23 with PAT of FY '24, there's INR 51 crores and INR 56.3 crores, respectively, witnessing an improvement of 10%. This improvement is attributed to, one, savings in power expenses on account of solar and hybrid power plants, cost-optimization measures, reduced input costs and improved operational efficiency.
In Q3 FY '24, export revenue experienced a degrowth of 24% and domestic revenue an increase of 18% on Q-on-Q basis. Domestic and export share of revenue during the quarter is 40% and 60%, respectively. Looking ahead, we anticipate market stability in the coming quarters, expecting a significant improvement in the global markets within the next 2 to 3 quarters. Despite the current slowdown, we continue to explore growth opportunities by entering new geographies, strengthening existing customer relations, diversifying into new sectors and expanding our product portfolio through new developments.
Our short-term growth outlook envisions a recovery by Q3 FY '25, supported by stable commodity prices and a rebound in the export demand. Strong growth in the mining sector and robust government CapEx are expected to support domestic demand. We are also exploring opportunities in replacement markets.
Addressing our rationalization plans, both our renewable energy plants that is solar and hybrid power plants are operating satisfactorily. Both power plants are generating expected savings. And as all of you are aware that both these power plants are projected to yield an annual cost savings in excess of INR 14 crores.
The serial supply of products within North American railroad industry is on and our conscious and continuous efforts towards development of new customers, new sectors and new parts as a part of our derisking policy. Hence, our order book at present is well diversified across different end-user industries with major momentum in Railways. Improved pricing, savings in power costs, cost-optimization measures, stable input costs, higher productivity and better operating efficiency will further improve our overall performance.
Thank you. And now we can open the floor for the questions and answers.
[Operator Instructions] We have our first question from the line of Ashwini Agarwal from Demeter Advisors.
Congratulations on a very encouraging set of numbers in a difficult operating environment. Two quick questions. One is that if I look at Slide 23, a large part of the savings, as you mentioned, has come because of power and fuel costs as well as material costs. Is the material cost pass-through in your contracts? I mean, how -- or is the saving of almost 600, 700 basis points as a percentage of revenue, is this something which is -- which you can keep if material prices remain subdued, how does one think about it? Because in supply contracts, typically raw material is something that's not a long-term gain or not a sustainable gain.
Okay. Would you like to ask your second question also, then I can answer both of them together?
Yes. The second question is that would you be able to share what your order book looks like at this point? And over what duration do you think the order book covers? And what is the railway component in that order book? That's my second question.
Right. So I believe the first question was with the material prices going down, will we be able to kind of continue these kind of savings. Am I right with that first question?
Yes. Yes. Yes, Rushil. That's right.
Right. So what we have with our customers is on a quarterly basis, we have a price variation formula, which kicks in every quarter. And we have a basket identified with each of our customers based on the pricing movement either upwards or downwards, there is a correction in the sales price. So we may lag by a quarter or we may be profiting in a quarter. But then by the end of the quarter, it kind of is either passed on one way or the other.
So it's not something we sustain for a long period of time. The only thing I'll add is that continuously since March -- 31st March 2023, we've seen a decline in material prices. And so we are seeing this prolonged gain or benefit that we've gotten in our sales price. So I believe I have answered the first question. Second question about the order book, we have about 90 crores worth of orders on hand. And this is something which keeps rolling on a horizon of about 2 to 3 months.
And how much of this is Railways?
How much of this is Railways? Is that what you asked?
Yes.
So I mean I would say anywhere from 7% to 8%, if I'm not mistaken.
Okay. And Rushil, just going back to my first question and going back to this...
Sorry, let me just correct that statement of mine. I would say about 4% to 5% as of now, and we hope to see it increase in the next financial year.
Okay. Got it. So coming back to my first question. So this 20%, 21% of revenue as material cost as opposed to 28%, 29% what you had seen coming last year. I mean if material prices stopped falling, would it be fair for me to assume that you'll have to give back some of this gain?
Right. So I mean, as I said, there is a price variation formula which kicks in every quarter and there is a neutrality band above which if there is an increase in prices, we get an increase in sales price. And then if it goes below that neutrality band, then we have to pass on those discounts to the customer.
We have our next question from the line of Harshil Solanki from Equitree Capital.
I have 3 questions, I'll quickly go through them. So on the domestic industry, the construction equipment sales grew by 30% in Q3. So are we seeing the inventory being cleared up and the order placement picking up for us?
The second question is on the exports front. In Q1 call, we said that we expect Q2 and Q3 to be soft for us. But now we are saying that things will improve from Q3 FY '25. So I wanted to understand what is the situation right now and what is taking so long for things to improve?
And the third one is there is a new tank under development called Zorawar and the field trials are going to happen soon. So are we trying to supply trials for that by leveraging our Arjun tank experience there? And any other visibility on the defense side, if you can provide that will be great.
Right. So as far as the construction industry is concerned, we don't really see any major issues there as far as slowdowns are concerned. Inventories are being liquefied is what we have from our customers. So we will kind of see a repeat performance as far as the construction industry is concerned. In fact, one of our customers is setting up a new plant where we've already started getting inquiries and we'll start serial supplies also there soon enough. So as far as construction is concerned, I don't see too much of an issue for us.
Second question about the visibility. We were expecting things to turn around perhaps in Q4 of this year, but that has perhaps shifted by another couple of quarters and this is completely beyond our control because there are too many external factors playing a role in this, including the geopolitical situation, overall slowdown in European economies, American economies and so on. So that's something beyond our control, and these are the signals we are getting from our customers. And so as of now, we can only say that things look much better from Q3 of FY '25.
And the third question about defense, I'll answer it a little more generically, I'm not too sure about the exact tanks that you are mentioning or the kind of requirements they would have. But as of now, we are supplying -- we have to supply about 4 -- or sorry 5 tracks to the Arjun tank by March of this year. Thereafter, we don't see any visibility at the moment. New tenders will open up perhaps only in the next quarter and going forward. So we are not really incorporating any defense business as of now, until new tenders open up and new visibility comes in front of us. So I guess that answers all 3 questions.
[Operator Instructions] We have our next question from the line of [ Nagabrahma from NB Investment ].
Congratulations on a good set of numbers. I had 2 questions. One is this is with respect to the margins, EBITDA and PAT margins. In the Investor Presentation, Slide #17, it has been mentioned that reduced power costs then your input costs, the raw material, plus the cost optimization and operational efficiency. But if I see the gross margin, thereafter the costs have gone up in the sense the employee cost, other expenditure and everything. So if you see the EBITDA and the net profit margin, they have not grown up or increased compared to the gross margin. So I didn't understand where we have done any improvement on operation and cost optimization.
So a large part of the savings is actually from the power savings that we are generating now with the solar and the hybrid. That has played, I guess, the biggest role in protecting our bottom line. That's one part of it. Of course, operational efficiencies improved, but they are not easily quantifiable. And so we will not be able to give you an exact number of what percentage of the overall margins or addition to those margins have come from particularly operational efficiencies. But we have a very robust continuous improvement plan, which generate good amounts of savings for us.
We have the involvement of our entire employee base who kind of works on cost reduction on various fronts. Cost reductions in terms of improvement in velocity, improvement in quality. And there are so many factors which go on in manufacturing of steel castings. It becomes a little tricky to identify and pinpoint exactly where those improvements are. But as I said, a large chunk of those savings come from the power plant that are both now operational. And in fact, the hybrid also has started generating satisfactorily, which we were hopeful of any way.
No, Rushil, what I meant to say is at the gross margin, that is revenues minus the cost of raw materials and power cost, see the margins compared to last year same quarter, the difference is around 9.5%. But if you see, go down, and net margin level, that difference comes down to 3.2%. So what I meant to say is there is no -- any improvement in the cost optimization or anything as such, it is getting reflected in the revenues.
Right. In fact these numbers, as I said, I mean they are compounded from so many different factors, product mix being a very important factor. What product mix we produced last year may not necessarily be the same -- exact same product mix in this year as well. So that's why it will be a little difficult to kind of answer your question very directly.
Okay. No problem. My second question is regarding the export, it is understandable that the current situation in Europe and U.S., then all these geopolitical issues must be affecting the demand but only thing that I couldn't make out is the drop in sales for the domestic market because it's not only in the construction segment, even the real estate, then road construction, then all the sectors which uses our parts, they're doing extremely well. In spite of that, our domestic sales have come down. If you could enlighten us the reasons for that?
So just to kind of clarify one thing, our domestic customers also sell their equipment overseas. So though we may be selling to our domestic customers, they may still be reliant on the markets worldwide. One of our big customer has a large presence in South Asia. So it's not just India that they supply to, it's the rest of South Asia also, which we have to take into consideration.
Okay. Lastly, as on this Q3, what was the capacity utilization?
Well, Q3 was 39%, 40%.
Okay. Now I think earlier, it was mentioned that we would be utilizing around 53%. So that looks a bit difficult in the current scenario?
Right. I mean at least the next couple of quarters, we can assume that we'll be slightly improving from Q3, from this quarter, but it will be around this ballpark number. We do expect things to kind of move to about 50% and above maybe Q3 and Q4 of FY '25.
So till that time, do you expect the utilization to be around the current level? Or will it go down still further, that's what I'm asking?
No, we don't see it going down. We only see slight improvement. The visibility over the next 2 quarters is slight improvement over this current quarter.
[Operator Instructions] We have our next question from the line of Pranay Gandhi from Green Portfolio.
So I just wanted to understand or probably rather know how many countries is the company currently present today, given that it targets to be present in 15-plus countries? And are there any specific countries you are targeting? And in addition to that, I just wanted to know if the export business is more profitable or lucrative?
Sorry, can you please repeat the last statement, your voice cracked?
Yes, sorry about that. I just wanted to know if the export business is more lucrative than or profitable than the domestic business or it attracts the same margin?
Right. So number of countries is 11. We are currently supplying to 11 countries worldwide. We are mainly focusing -- currently our biggest push is with the American railroads, and we see a huge scope of increasing our tonnage with the American railroad industry. So that has -- that will be our main focus area moving forward.
As far as margins are concerned, we really don't differentiate between a domestic customer and an export customer. I believe we try to maintain an EBITDA margin of, say, 20%, 22%, maybe a few more percentage points depending on the complexity of the casting, risks associated with it, et cetera. So we ourselves don't necessarily differentiate between a domestic customer and an export customer. But sometimes foreign exchange plays a role. It's been favorable more or less for us, the ForEx over the last 1 year. So perhaps we see a slightly improved margin on that account. But having said that, we, as a company and as a policy, do not differentiate between a domestic and an export customer.
Okay. And would it be possible for the company or probably you to share that is there any specific target that the management has in mind in terms of the business share coming from export and the domestic market? Or it depends on the kind of tenders or offers we get?
Right. I mean, no, it's -- we really don't set any internal targets for ourselves. We take any business that comes our way. And in fact, for the longest time, our ratio has been about 50-50. This year, it's slightly improved to 60-40, 60 being exports, 40 being domestic. And we are happy with these ranges. So that there's not much we internally tried to do in terms of balancing this ratio.
And one final question, sir. Considering the current slowdown in the market as of now, is the management confident of achieving the INR 1,000 crores top line in next 4 to 5 years as previously stated?
We are quite confident about this, owing to the fact that there is huge scope in the market we are exploring currently. Three main sectors that we are now pushing to kind of put our foot in are railroads, ground-engaging tools and defense. And I'm sure you would also know that all these 3 sectors have a very large potential for us to achieve that target. So yes, if possible, we do it. If not in 5 years, maybe plus, minus a few quarters here and there, but it's something we can definitely achieve.
And considering the fact that you are mentioning North American railroad and the other business which has scope outside India, so I believe the major part of the business would be coming from with the export market as well?
Sorry, can you please repeat that?
Considering the fact that you are very bullish on the North American railroad business and other segments, is it right to assume that the major part of the business will be coming from outside India?
That's correct. As far as railroads are concerned, we are focusing mostly the North American territory. And so largely, the railway volumes will come from there.
We have our next question from the line of [ Rakesh Vyas ] from Quest Investments.
Am I audible?
Yes.
Yes. So I have one clarification and three questions, if I may. First, given your commentary around [ RM TV ] mechanism, et cetera. I'm just trying to understand better as to when you look at this business essentially, you look at margins in terms of percentage or margin in terms of per tonne? Because as you highlighted, RM price effectively for us on a rolling basis is a pass-through eventually. So I understand the mix, et cetera. But when you look at this business, you look at per tonne or percentage, I just thought I'll get that clarity.
Yes. We look at percentage values. We don't really look at per tonne. And in fact, these numbers are actually more relevant to our investors more than us internally. Our internal metrics are quite different from what we speak about during these calls. So -- but for our investors call sake, we use percentage as a marker.
Sure. No, no, I was just trying to understand more from your business operating perspective, because I understand it is better for us to realize, but when you look at any business to be done or generated, I'm just trying to figure that out as to -- because RM, essentially as I got the understanding now is probably a complete pass-through. So it mostly is the value addition business and therefore I thought maybe per tonne metrics or something like that would be a much better metrics.
Right. I mean yes, there are different ways of looking at this and perhaps due to time constraints and whatnot, we may not be able to go into those details on this call, right? You had other questions about this, sir?
Yes. So the questions are essentially around 3. One is these new segments that you talked about potentially, I just want to receive more clarity on the current status, specifically with respect to the railroad and [ GT ] business as to where we are today and what is the time frame that we can expect things to get materialize in terms of order inflows for us? So that's question number one.
Question number two is, now that I hear you talking about Q3 FY '25 onwards, things getting better for us. We earlier had a plan of almost INR 300-odd crores of CapEx, which was there in the presentation earlier. So given the better visibility now, can you just talk about as to how you see this CapEx getting commencement, et cetera?
And the last question is around the competitive intensity. There is another large player of South who is looking to expand the Steelcast machining business in North India, and may also be looking at some of our clients, et cetera. Anything that you can talk about in terms of how you are looking at competitive intensity...
I'm sorry, your last question was not very clear, but I believe you have suggested there are some facilities coming up in North India. And how we see that as competition. Is that right? Is that what your question was?
Yes. Yes.
Sure. Okay. So first question was time lines for the railway and the GT business. There has been a slight delay in capturing the railroad business. The development time has exceeded what we had expected, partly due to some changes in requirements from our customers and partly due to our internal challenges. So the whole project of development of these railroad parts has kind of been delayed more than what we had expected. And so we see -- in fact, currently, we have been audited for the American Association of Railroads, and that certification is required for starting bulk supplies for some of our customers. So that process also will take maybe 4 to 6 months of getting that approval, after which this business will start bulk supplies.
So I guess that Q3 FY '25 time frame also matches the pickup in the railroad industry. Similar thing has happened with our GT business, where we had introduced 2 big customers in this field. We have successfully developed parts for one of them. For the other customer, again, there are some delays, again, due to customer requirements changing as well as our internal challenges. So that also we can safely say is pushed by another 1 quarter or 2 quarters. So again, with both these things, we start -- we see business picking up Q3 FY '25. And so this date still holds true for that as well.
Got it. On the CapEx, sir?
Sorry?
On the CapEx, the second question?
Right. So again, the question of Q3 FY '25, I guess I sort of answered that question as well. And as far as the foundry competition is concerned, we cater to very huge kind of industry segments and we make parts which are very difficult to make. In some cases, we are the only foundry in India who makes them. In some cases, we are maybe 1 or 2 foundries in the world who make these parts. So these are highly complex engineered parts, not one of the main product. And so competition is -- there always is a chance that somebody else may be able to develop these parts, but it's not going to be an easy task for them.
We have more than 60 years of experience with our engineering, with our quality assurance, and we have a very robust team which our customers are extremely happy with. As you can see all the certification in the audit that we get ourselves certified for are not something that anybody can do. And so we only focus on our own internal strength and we keep ensuring customer satisfaction, quality assurance and good pricing. And with that, we are happy to have more competition in the market.
Got it. Just on the potential CapEx that you were considering on INR 320-odd crores because now you are fairly confident on 3Q FY '25 onwards, it's turning better for us, I thought I'll just check where we are on that front in terms of our thought process? When it can start actually?
Right. So again, this question has come up in past calls as well. And the only thing is until we achieve a satisfactory capacity utilization with our current facility, there is no real rush to go and set up or invest in more plants and machinery. So we will wait and hold that decision until we cross that capacity utilization number of maybe, say, 50%, 55%, after which -- and once we have better visibility, we can kick-start these projects. But until then, we'll just wait and watch.
Great. Congrats on good set of numbers.
[Operator Instructions] We have our next question from the line of Shubham Thorat from Perpetual Capital Advisors.
Hope, I'm audible.
Yes, sir, you're audible.
Yes. So sir, a couple of questions from my end. First one is if we can share some thoughts on what kind of products are we planning to supply to North American railroad industry? That's one.
And secondly, which sectors are we catering to in domestic markets? And if you can share some thoughts on what kind of visibility we have on domestic demand? Yes, these are the questions from my end.
Sure. Thank you for the questions. As far as products are concerned, we focus on structural parts, high-integrity parts, parts which require -- which gives structural strength to the equipment we supply to. So those are the kind of parts we are also looking at. We are also looking at replacement parts, which -- we are looking at some replacement parts also with ground-engaging tools. That's where we are focusing, which is part of the mining sector, but then these are replacement parts. So that's what we are currently focusing on.
As far as domestic sectors are concerned, construction is one of our biggest focuses, construction and mining also -- mining, earth moving and construction. These are our focus areas. These have been our base segments for quite some time. As far as new segments that we are looking into are mainly defense as far as domestic sales are concerned.
If you can share some thoughts on what kind of visibility we have on demand on domestic front?
Visibility in terms of next financial year or new business development? Are you specifically asking for a particular projection?
No, no, I just wanted to know what kind of long-term view we do have on the domestic front?
Well, I mean, as far as numbers are concerned, we definitely hope to see a turnaround sometime next financial year. These numbers will only grow from here. We don't see things going further down from where we are currently. And we see a robust growth even with the domestic mining equipment market or construction equipment market. There is only an upward trajectory that we see going forward.
We have our next question from the line of [ Chintan Chheda ] from Quest Investments.
Sir, can you give the volume for the quarter along with the domestic and export breakup?
So tonnages are about 2,900 tonnes. Breakup of that is 60% was exported and 40% was domestic.
We have our next question from the line of Harshil Solanki from Equitree Capital.
So currently, our utilization is on the lower side. So are we looking at any other divisions or opportunities just to do some business and increase capacity? For example, Indian Railways also, there is a lot of work happening. Even though the margins maybe less, but we can improve our utilization. Any thoughts on that?
Sure, I will say this -- I'll answer this off-hand, but as far as Indian railroad is concerned, there are some technical challenges also why we are unable to enter that market. Pricing is obviously one big issue. But there is a technical challenge where there are some certain requirements of certain equipment, which we do not use. And because of that, we are ineligible for the Indian railroads. That is -- there are off-hand remarks which I'm making. Again, I'll look into things, if things have changed, the policies have changed. But yes, we are open to any segment moving forward.
Okay. And in the PPT, you have mentioned that you are looking to enter newer geographies and developing new products, so is that the U.S. opportunity you're talking about? Or you are looking at newer other geographies also?
Sorry, which segment are you referring to, sir?
So in the PPT, there is a slide which says potential growth opportunity. In that, you have mentioned that you are looking to enter into newer geographies.
Right. Right.
So can you throw some light on that? Is it U.S. or you are looking at some other geographies also apart from U.S.?
Well, so we've introduced some customers through Japan. That's one area which we have a tremendous focus on in terms of increasing our volumes. America definitely has a very large scope for us to further increase our tonnages. These are the 2 main geographies that we would probably be focusing on moving forward, Japan and North America, but there are other opportunities also which we are exploring and perhaps in future calls, we'll be able to give a better direction on.
Okay. And similarly, there is a new product development part also. So what is that? GT or something else also you're looking at?
And I'm really sorry, your voice cracked again. Could you please ask the question again?
Yes. So in the sales slide, there is a segment which says new product development as a growth driver, so what products are we looking to develop?
So again, the railroad industry, structural parts with the mining industry, railroad industry, I mean, we may -- so we may be making certain parts for customer A. There may be similar parts required by customer B who is a competitor for customer A. So in that sense, it's still a new product, but it's more of the same of what we currently do. Focus is always on structural parts. That's where our strength lies, complex, highly engineered parts, and that's what we keep exploring and looking into, whether it be railroad, mining, construction and industry segments.
Okay. Okay. And this AAR growth you spoke about that you are in the process of receiving approvals. But why don't you guys already approved some AAR, and only you got to do business with them, so is there anything which I'm missing here?
Right. There are certifications, multiple different certifications to AAR. We passed 1 certification, 1 level of it previously. There's second stage and slightly different, I guess. There are different numbers, which you need to be certified for different parts. So depending on which part we make, we need to certify ourselves for those products also. So there's a product-specific audit and then there is a premises audit, audit for premises. So in the past, we've been audited for premises and our technology, et cetera, where we've been certified and now we are going through a product-specific audit at the moment.
So you are saying the full-fledged railroad supply haven't started yet, and it is only in parts?
So some supplies have started. As I said, even in this quarter, we are at about 4% to 5% of our sales came from railroad. So there are certain parts which have been developed, which have been certified, more are in the pipeline, more are yet still in the development stage. So this is going to be an ongoing process because I believe more than 20 parts have been developed over the last 18 months.
Understood. Understood. And just last one thing. If you can give us the volume for Q3 FY '23 also, that will be useful?
The volume for Q3, that's about 2,900 tonnes.
No. That is for Q3 '24, right, this quarter. For last year same quarter?
Sorry, FY '23 was 3,787, about 3,800 tonnes.
Due to time constraint, that was the last question for today. I would now like to hand the conference over to Mr. Rushil Tamboli sir for closing comments. Thank you, and over to you, sir.
Thank you. On behalf of Steelcast, I, Rushil Tamboli, along with our Executive Director and CFO, Mr. Sharma, and our Company Secretary, Mr. Umesh Bhatt, we thank you for attending this call and taking out time to interact with us. We look forward for the next quarter investor call. We also want to thank our IR partners, Orient Capital, for organizing this. Thank you once again.
On behalf of Steelcast Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.