© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to Pitti Engineering's Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference call will be recorded. Joining us today on this call is Mr. Akshay S. Pitti, Vice Chairman and Managing Director. 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 risk and uncertainties. For a list of such considerations, please refer to the earnings presentation.
I would now like to hand the call over to Mr. Akshay Pitti. Over to you, sir.
Thank you, and a warm welcome to our Q3 earnings call. I will start by giving you an overview of our operational and financial performance before opening the floor for the Q&A session. Revenue for quarter 3 FY '24 was INR 296.92 crores, registering a year-over-year growth of 24.19%. Sales volumes stood at 10,572 metric ton as compared to 9,150 metric ton in Q3 FY '23, an increase of 15.54%. Sales realization and EBITDA per tonne for the quarter were INR 2,77,751 and INR 41,700, respectively.
EBITDA for the quarter was INR 44.09 crores, registering a 13.58% growth on a Y-o-Y basis. PAT was INR 13.32 crores, up by 9.81%. I'm pleased to note that both sales volume and EBITDA for the quarter were the highest ever recorded in the company's history.
For 9 months of FY '24, total revenue was INR 890 crores, EBITDA was INR 129.07 crores and PAT was INR 49.84 crores. During the year, we have accounted INR 13.09 crores of incentive income from our Aurangabad facility. We expect to further account INR 32.42 crores in Q4 FY '24, subject to requisite approvals.
Sales volume for 9 months was 30,870 metric tons, putting us well on track of achieving our annual target of 42,000 tonnes. Net debt as on 31/12/23 stood at INR 317.60 crores. So far in the financial year, we have spent about INR 85 crores towards capital expenditure. The remaining approved CapEx will be spent by H1 FY '25.
With this, we are on track for our expansion of Aurangabad facility. As you are aware, the company has filed the scheme of amalgamation with Pitti Engineering and Pitti Rail with stock exchanges on 26th June, '23. We have received a no objection on 26th October, '23. Currently, the scheme is awaiting approval from NCLT. We anticipate completing the merger in H1 FY '25. We are seeing strong growth in order book and projections from our clients, driven primarily by rail, wind energy and power generation sectors. Further, we have significant new customer acquisitions in automotive, power generation and railway segments. The order book as of 31st December, '23, was INR 898 crores.
For FY '25, we are targeting 50,000 metric tons as sales volume. With the expanded capacity in Aurangabad, increase in machine components business, further augmented by the merger of Pitti Castings, we expect significant improvement in margin profile of the company in the coming year. I now open the floor for Q&A session.
[Operator Instructions] The first question is from the line of Naysar Parikh with Native Capital.
I just want to understand from a steel price perspective, if tomorrow, we were to see sharp correction in steel price or something like that, how are we placed both in terms of what kind of impact do you foresee on margins, realization, et cetera?
See, on a gross margin basis, there will be no decline as we have a price variation clause with the customer. If there is a sharp correction downward or an increase in steel price, on both sides we are protected.
Okay. So there will be -- so you will be able to revise the prices basically, right?
Yes. We have already done that. If you see in the past 6 quarters there is the continuous trend of decline in raw material pricing and that has not affected our margins. And prior to that, when the steel prices were on upward trend, there was a similar story. There was no impact to our margins.
Okay. Got it. And from a capacity perspective, can you just talk about the expansion that we are doing? And then how -- and when will that start kicking in? We are at 90% on the machining side. So what will -- when will that kick in?
So the capacity augmentation will be completed fully by H1 '25. Right now, in terms of sheet metal, we have 50,000 tonne capacity, which will be enhanced to about 72,000 metric tons. And on the machine hour side, we have about 4,60,000 machine hour capacity, which will increase to 6,15,000 machine hours.
Okay. Got it. Understood. And you did give some brief highlights of the sectors that you're seeing demand in. Can you elaborate a bit in terms of your order book or order inflow, what is the order inflow like and what is the order book and what is the growth year-on-year?
See, overall, I would say -- if you see the consumer motor for the industrial motor side of the business, that is not growing as fast as the other segments. The growth is primarily driven by railways and renewable energy and power generation segments.
Okay. And what would be your order book or order intake growth if besides the revenue, if we can look at some of that metrics? Do you -- can you share those metrics?
If you see the order book and you adjust it for the price -- selling price for the quarter, we are seeing about a 25% to 30% increase in the order book adjusted basis. Q2 FY '23, we had a closing order book of INR 716 crores, and for Q3, it is about INR 898 crores.
The next question is from the line of Prathamesh Dahake from Motilal Oswal.
Sir, am I audible?
Yes, you are audible. Please go ahead.
Sir, my first question is regarding gross margins in this quarter. So we can see that our contribution from exports has also increased by 5% year-on-year as well as our, I would say, value addition from -- the contribution of value-added products has also increased by 2 percentage points. What is the reason our gross margin only increased by 1 percentage point? That is my first question. Second is regarding our overheads. Our employee expenses have increased in line with our year-on-year revenue growth. Any reason for the same? And our other expenses have also increased by, let's say, 2 percentage points. What is the reason behind the same?
Yes. So see, the gross margin and export correlation that you're trying to do does not work. As you know, the selling price or the value addition that we do for the product, whether it's in the domestic market or the export market is same. So you will not see a margin improvement just because exports are more or export are less. It's got to do with the product mix.
And if you see the increase in 1% gross margin, I think that is fair keeping in line with the kind of product mix that we've had. In terms of overhead and employee costs, it is the normal increment that are there. Plus, in addition to that, we're obviously going to start the staffing of our various departments ahead of the CapEx. So that would be the reason probably why you're seeing a marginal increase in employee cost and other expenses would be the same reason.
Okay. So what...
It's not going to track perfectly as per your sales. Obviously, all those expenses and other things had to happen prior to the CapEx that you start doing.
Agreed. So what are the products that currently we are exporting as of now?
We are exporting products for all the other segments that we cater to, like the railway segment, wind energy segment, power generation segment, mainly the motor and generator components and some machine components.
So is it mostly loose lamination or something like that because even if that contribution -- if realization is not same for both exports and domestic, still I'm unable to understand, if it should have been a better product, our GM should have improved, right?
It's not a better product. It's the same product. So if you take the customer, we supply to the same customer in India and in the U.S. market, so the product does not change or the profile of the product does not change. It's a similar product. It's just that the consumption point is in India or it's in U.S. That's the only difference in our product.
Aren't realizations better in exports on a like-to-like basis?
No, there's no difference in realization in exports. See, the packaging cost, the interest cost or the credit costs related to export would be added. So there's additional cost also when the export is there. So whatever increase in the realization you see has a corresponding cost, which is why you're seeing the other expense is also increasing.
That is where you would account for those additional packaging, trade, et cetera, warehousing, all of those costs. The product that we make is same for the Indian market and the export market. And the client also is the same. So we have Westinghouse Air Brake Technologies, Wabtec as the client in India and the same client in Europe -- sorry, in U.S.
Understood. My one last question would be you have mentioned that there will be significant margin improvement on account of merger of PCPL. Can you please explain us how this thing would pan out?
So it's not only on account of PCPL, if you see, I mentioned due to the increased volume, firstly, we are going from 42,000 tonnes to 50,000 tonnes next year. So obviously, the economies of scale will kick in and your overhead cost on a per tonne basis would be further distributed. In addition to that, the increase in machine component business is going to add value. And when you merge Pitti Castings, obviously, the EBITDA that, that company is doing will get added to our EBITDA.
And if you see the sales profile of that company, approximately 70% of its revenue is derived from procurements from Pitti Engineering. So when we consolidate the two companies' balance sheets, the sales would kind of be -- the common sale would be removed and the EBITDA margin would get added. So that itself if you see would yield significant margin improvement, all these 3 measures put together.
The next question is from the line of Karan Kamdar from DRChoksey Finserv Pvt Ltd.
So what I wanted to understand is other expenses. Can you throw some color? I think you already explained due to the new CapEx. If you could throw some a little more of color that when can we expect to stabilize as a percent of revenue, that would be helpful.
See, other expense will not typically be linked to percentage of revenue. It also has to do with -- other expenses where we account for the packaging cost, the forwarding cost, carriage outward. So depending on the location, like if you see the exports are slightly higher in the current -- last quarter, therefore, the corresponding expenditure related to those would be higher. There won't be a linear transition from revenue to other expense.
Okay. So can you give like a rough base on a variable basis of other expenses, so that would give more clarity as in how much could be fixed and how much of it could be variable?
See, out of the -- let me just -- hold on for one second thing. Out of the INR 30 crores of other expenses in last quarter, about INR 15-odd crores would be fixed and the other would be variable in nature.
And do you see any increases in freight costs because of geopolitical disruptions and are the costs increasing currently?
As of now, we have not seen any significant increase in cost. But see, again, as far as any cost increase is concerned, we are able to pass that through to our clients.
The next question is from the line of Umesh Jain from Kotak Life.
Congrats on a very good set of numbers as well as the guidance. My question is on Pitti Castings. If I remember correctly, the company had some unabsorbed losses, and post merger, I assume we will be able to set off with our existing listed operations. So what's the total number of unabsorbed losses that we have, we can utilize in future?
As of 31st March, '23, the unabsorbed losses in that company was approximately INR 80 crores.
Okay. And that the entire INR 80 crores will be available for us to utilize in the listed operations. So I assume tax rate in FY '25 for us should be lower?
Yes.
The next question is from the line of [ Sanjeev Garbade ], an individual investor.
Sir, my first question is regarding how is the business environment in machining business? And how is it panning out in Europe?
So machining business is quite buoyant. If you see today in the China Plus One strategy that lot of the MNCs are using, the biggest opportunity for us to grow our business is in machine components whether it is casting the new machine or fabricated parts. As far as specifically Europe is concerned, it's a good market to enter. Overall, European market is down, but because they are trying to divert some of their sourcing to India, we are seeing a good amount of demand coming from Europe and North America, both.
Okay. And how many new components we would have added in the railways business, sir?
I won't have that number off hand, but it would be at least about 50 different kind of components and assemblies put together.
All right. And sir, one last question on the financial side. Our gross debt has been steadily building up over the last few years. What would be the net debt by the end of this financial year?
See, net debt by the end of this financial year should be within line of what we had guided earlier. We are seeing a peak debt of INR 375 crores, what we have targeted earlier. We have not crossed that.
The next question is from the line of [ Tanish ] from [ Bees Capital ].
Can you give me a trend of raw material prices this quarter versus last quarter?
Sorry, you're not audible.
Can you give me a trend of current raw material prices versus last quarter?
For the last quarter to this quarter, the raw material prices have remained stagnant.
Okay. And how are the margins across different segments? Like railways or other segments, is there higher margins? Or is it similar across the segments?
See, the margin profile depends on the type of product that we supply, the most value add we do obviously have more margin impact. In terms of machining versus lamination, machining would have a higher margin when compared to lamination.
No, I'm talking about the segments, like, say, railways have a higher margin or your power segment and your -- or is it similar across the profile?
It is similar across the profile of end market. It's only differentiated by the level of value add we do and the other differentiation is in lamination versus machine component. Machine components is superior to lamination in terms of margin. And within lamination, the level of assembly and value addition define the margin profile of that particular product. So it is very possible that you supply a very highly assembled and value-added product along with machining to any segment.
We have the next question from the line of [ Mukund ], an individual investor.
Sir, I just wanted to know your CapEx plan for the next 3 years and also the debt profile for the next 3 years, if you can elaborate on that?
So in terms of CapEx for the next 3 years, see, firstly, let me just start by giving the 6-month plan. By September of '24, we will finish the approved CapEx that we had announced in the past. So that amount is about INR 120 crores, if I remember correctly, which will be completely capitalized by September '24. Beyond that, we are not looking at any significant CapEx today. We will have probably INR 30 crores, INR 40 crores worth of CapEx ongoing every year.
The next question is from the line of Prathamesh Dahake from Motilal Oswal.
Am I audible?
Yes, you are audible.
My first question regarding CapEx is, once we are done with all the CapEx that we have decided, how much time will it take to be fully utilized? And what is the top -- I mean highest revenue potential from the same?
My second question would be, globally, all players like EuroGroup, Tempel, et cetera, are very bullish on lamination and cores for auto components while our exposure to auto is miniscule. How do you see demand for auto as well as related sectors shaping in the Indian context?
So see, from the CapEx and the time you asked whether we can utilize the full capacity. So our capacity utilization firstly is about 80% of installed capacity. Based on historic levels, that is what we target to achieve. For FY '25, we have set a target of 50,000 tonnes. For FY '26, we are already on record setting a target for 57,000 tonnes to 58,000 tonnes. So that would be peak utilization.
After we -- or when we come close to achieving that, we will look at adding any additional CapEx looking at the market at that day to further enhance the capacity. In terms of automotive business, you're right, Tempel, EuroGroup, [indiscernible], I mean, these companies are very bullish on automotive, especially EV traction motor-related components. But if you see in India, the manufacturing of those EV motors, especially 4-wheeler, is not happening in country today.
So the opportunity in India for EV motors manufacturing lamination is a potential which can mature in some time. Today, we are trying to get into the automotive segment. If you see we have some of the automotive players already listed as our clients now. And further, we are acquiring more clients, which we'll be announcing in the next quarter.
We are getting into the ICE part of the business. So we are getting into something like generator-related products or starter motor related products to get into that ecosystem and when those companies will start producing products for EV or traction motor, we would be ready to supply those products to them.
On the EV product side, specifically, we are supplying for 2-wheelers already. The numbers and volume in that segment is growing, but the revenue potential is very small. In terms of revenue potential per 2-wheeler, I think our product will not be more than $1,000, $1,500 for one lamination core. In the 4-wheeler it becomes significantly higher.
Understood, sir. And if you were to, let's say, on a very, very broader level, divide our product portfolio into core lamination, only loose laminations, semi assembled and fully value assembled, how do you see the margins or gross margins varying? If you can give us some color as to if everything in our kitty goes into fully value added, how much margin improvement can we expect on a gross margin level?
See on a segment basis, the quantum of fully assembled changes. So if you take an appliance or consumer product, something like a fan, there's not that much value add that you can do on a particular product vis-a-vis something, say, like a data center or renewable energy where the large shaft, different kind of child parts castings, which you can integrate into the product.
If you take in terms of the volume, the loose lamination to semi assembled to the fully assembled lamination. Fully assembled would be about 10% of revenues right now and semi-assembled would be the remaining. We already give you the breakup of assembled and loose. So about the total product mix, I think 75% is assembled, of which about 10% is fully assembled. The stator core and shaft and all those things integrated. 25% are those.
Okay. And in our major end sectors like railways, energy, renewable energy, if I were to see margins, I mean, if I just give loose lamination versus if I give a fully assembling thing, how much extra do we enjoy in terms of gross margin? If you could tell us -- if you could give us some color on that.
See, in terms of revenue, I would be more comfortable giving instead of gross margin. Firstly if you take a loose lamination, the loose lamination would be somewhere around INR 180,000 per tonne in terms of selling price. And in terms of a fully assembled product solution on the stator and rotor both, that would be about close to INR 9 lakh to INR 10 lakh a tonne. So that you can probably kind of get an idea as to the gross margin potential.
The next question is from the line of Mukund, an individual investor.
Sir, a year ago in one of the con calls, your long-term goal was in 10 years, we should be touching a revenue of INR 7,000 crores to INR 8,000 crores, which is like close to $1 billion-plus. And in terms of metric tons, 150,000 metric tons was what was the goal that you wanted to achieve in the next 10 year. Now how far are we -- it's been a year now. So are we on track on it? Or how are we progressing towards it?
Yes. I think 150,000 metric tons of shipment in sales in 10 years is the goal that we are very confident of achieving. We are on track, there are developments which we are undertaking. Shortly, you will see the result. It should kind of give you an idea as to where we are heading.
We have the next question from the line of Pulkit Singhal from Dalmus Capital Management.
Congrats on a good set of numbers. First question is on just the order book pickup that we've seen Q-on-Q is almost 25% -- 25% to 30% on an adjusted price basis. Would you call it some kind of one-off or seasonality? Or is there something to read into from a more longer-term basis that is possibly happening?
On a longer-term basis, if you see we are getting more order inquiries as we had mentioned in the past also from the European markets. So those orders are typically a longer cycle order book. So that is the reason why you're seeing this growth, especially from the marine segment and the wind power segment, we are seeing huge order input from the European markets. In addition to that, the overall wind energy market in India also is picking up significantly. And wind as a segment has a longer visibility in terms of order book.
Okay. So export as a component of order book, how has that possibly changed?
I don't have that number off hand, but if I have to estimate it, I would say that of the 30% growth that you're seeing in adjusted value order book, more than half, maybe 60%, 65% is driven from the export side.
Understood. And this you are seeing continuing into 4Q and forward into FY '25 as well?
Yes. See, on the export side, the value-added product is more prevalent on the export side. So we are seeing a lot of transition from loose to more assembled lamination than from assembled to even more assembled products in the export business going forward over the next 1 year. So the value per tonne on export will keep going up.
Got it. And it ties up with your -- what you talked about exports, I mean, whatever in terms of China Plus One or Europe -- European costs going up. So that structural aspect which was there is finally playing out in orders as you see right now.
Yes.
And secondly, in terms of -- for the non-motor part of the business, that is non-lamination or anything to do with motors, how big is that now FY '24? How are you seeing that shape up over the next 2 years? Because when you talk about targets purely in terms of tonnage, I'm presuming that can be a bit misleading because that just talks about the motor side of the business.
See, non-motor related revenue, we would be targeting INR 500 crores topline by FY '27.
Okay. And where is that right now, FY '24 volume?
See, right now, we don't have a number for pure non-motor because there are so many components that we do machining and castings of -- which go into the motor component that we don't track them separately. But if I were to estimate it, it should be about INR 125 crores, INR 130 crores top line today.
Okay. So this INR 125 crores is what you're saying may go to INR 500 crores effectively?
That is the basic rationale for acquiring the foundry and merging it into the list-co.
Understood. And almost 30% of sales, which is external for almost -- maybe INR 50 crores is added purely from an acquisition perspective.
Yes.
And it's still closer to INR 170 crores going to INR 500 crores. So that's -- to that extent, realization per tonne can significantly go up. I mean the tonnage aspect will not be capturing this part of growth which is kind of...
Yes, exactly. And the EBITDA per tonne also will go up because of this.
It will be good if we can kind of start disclosing this, I mean, annual or quarterly because this is a different vector of growth and has nothing to do with tonnage. And...
We are working on that. So we are trying to work on -- trying to put a metric where we can kind of separate these 2 verticals and kind of give ideas at least on the top line and the gross margin, maybe we'll not be able to distill down to EBITDA basis, but at least on a gross margin basis, to give you a segment. So we are working on that. I think post the integration of the foundry unit, it will become easier for us to kind of do that accounting and share with the team.
The next question is from the line of Naysar Parikh from Native Capital.
In this quarter, around 50% is obviously railways. So INR 150 crores of run rate in the quarter. So I just wanted to understand, one, is this sustainable and are we seeing this kind of an order book. And secondly, just if you could give a rough breakup, Wabtec would be how much, is 60%, 70% Wabtec? Or just some direction, that would be helpful.
Wabtec, out of the overall railways, would be about 55-odd percent in terms of the overall railway business. In terms of railway being sustainable at 50%, I don't think that is sustainable as our revenue will go up. Railways will contribute even going forward in the INR 150 crores, INR 160 crores of top line, but we are expecting our overall business value to increase.
So the incremental growth then will -- because I think the majority of the growth in this quarter would be, say, driven by railways. So...
Looking forward, we are seeing values coming in from wind segment, power generation. If you see the current quarter, all of those segments are down when compared to the past. So those will pick up once again as the revenue goes up.
[Operator Instructions] We have the next question from the line of Bhavani Kumawat from PhillipCapital.
Yes. Am I audible?
Sir, your line is sounding muffled. Could you use the handset to speak, sir, please?
Is it now better?
Slightly better, sir. Please go ahead.
Just wanted to ask one question. Recently, in the budget, government has announced to convert normal bogies to Vande Bharat standard. So is there any kind of opportunity lying for us in this segment?
I can't understand what you're saying. It's very muffled.
Yes, sir, go ahead. Sir, I request you to please move to an area with better network.
Is it audible now?
This is much better, sir. Please go ahead.
Yes. So sir, just wanted to understand that recently, government has announced in its budget to convert normal bogies into the Vande Bharat kind of standard. So is there any opportunity lying for us in this segment? Just wanted to get your view on this.
So in that, we won't have any significant opportunity as they are trying to upgrade the existing train system into the interior standards and the quality of Vande Bharat. Where we have the opportunity is in something like a Vande Bharat where the coaches itself are self-propelled. So on the self-propelled coaches, yes, we have an opportunity. On the new locomotives, we have an opportunity. We don't do any parts which are on the inside of the locomotive, like your berth or toilet or those -- lighting, all of those kind of things, we don't do.
Understood, understood. Also, sir, it will be helpful if you can give 2 or 3 revenue order -- revenue drivers going ahead from some segments or any already in pipeline that will be very helpful for us, sir.
So if you see the railway business has grown significantly in the last quarter, which I see continuing going forward. In addition to this, on the power generation and wind power segment, we are seeing good growth coming over the next couple of quarters. We have some new customer acquisition also in both of those segments apart from regular product development happening.
[Operator Instructions] As there are no further questions, ladies and gentlemen, we have reached the end of the question-and-answer session. And on behalf of Pitti Engineering, that concludes this conference. Thank you for joining the call. For further queries or visiting the plant, please be in touch with Rama Naidu from Intellect PR on 9920209623. Thank you for joining us, and have a wonderful day.