Kirloskar Ferrous August 2024 Concall Highlights: Merged Entity's Performance and Growth Prospects
Kirloskar Ferrous Industries Limited (KFIL) reported a modest 4% year-on-year revenue growth in its first quarter of FY25, ending June 2024. The company successfully integrated ISMT Limited and held its first earnings call as a merged entity. Despite facing some headwinds, including the general market slowdown, ERP implementation challenges, and the impact of India's general elections, KFIL demonstrated sequential improvement in profitability. Management provided an optimistic outlook for the future, highlighting operational efficiencies, capacity expansion plans, and strategic initiatives aimed at driving growth across various business segments.
a. Financial Performance:
The company achieved a 4% year-on-year revenue growth in Q1 FY25, with the topline showing sequential improvement. Although the iron and steel industry faced overall margin pressure, KFIL managed to improve its bottom line sequentially. The blended cooking coal price showed a decline year-on-year, contributing to lower input costs.
b. Operational Updates:
- Merged Entity: KFIL completed the three-stage acquisition, turnaround, and merger of ISMT into KFIL, making this the first quarterly call for the combined entity.
- Solar Power Plant: The company commissioned 35 megawatts of its 70-megawatt solar power plant during the quarter, with the expectation of achieving full capacity by September/October.
- Jalna Solar Expansion: KFIL is working towards expanding solar capacity at Jalna to 100 megawatts by the end of FY25, further reducing carbon emissions and lowering operational costs.
- Oliver Foundry Restart: The company is close to restarting its acquired Oliver Foundry, having recently received the power connection. They anticipate commissioning it in September and initiating regular production in the second half of FY25.
- ERP & Fusion System Implementation: The company implemented Oracle's ERP and latest fusion systems, which initially led to some teething troubles impacting sales and dispatches. The management is confident about overcoming these challenges.
c. Management Insights:
- R.V. Gumaste, Managing Director, expressed optimism about the company's future growth prospects, stating, "We are definitely committed for the growth in all the segments, and we have a focus for that. We have created quality capacity to achieve that." He emphasized the company's operational efficiency initiatives and its ability to manage margins despite pig iron price falls.
- R.S. Srivatsan, Executive Director (Finance) & CFO, clarified the effective tax rate for the merged entity, noting that the consolidated tax rate in Q1 was higher due to disallowances and that the effective tax rate for FY25 is expected to be around 25%.
- Management's Outlook: Management anticipates overall growth returning in Q2 FY25, driven by improved market conditions and the realization of operational improvements across segments. They reiterated their FY25 guidance for pig iron, casting, and tube production.
d. Strategic Initiatives and Future Plans:
- NSE Listing: The company intends to pursue NSE listing soon after the completion of the merger-related processes.
- Capacity Expansion: KFIL is investing in capacity expansions across various segments, including casting, machining, and steel. This includes the addition of 30 new machines for machining and development of large foundry facilities in Solapur and at Oliver.
- Green Initiatives: The company is pursuing a strong focus on green energy solutions through the expansion of its solar and wind energy portfolio. They are also committed to expanding their captive iron ore mining operations.
- Specialty Steel Plant: KFIL successfully completed a public hearing for its specialty steel plant project and expects to receive the environmental clearance within the next two to three months.
e. Q&A Session Highlights:
- NSE Listing and PPT Upload: Management acknowledged the delay in the NSE listing and the request for uploading a presentation with segmental EBITDA, promising to address both promptly.
- Segmental Growth: Management acknowledged that the ramp-up in some segments has been slow and attributed it to various factors, including elections, teething issues with the ERP system, and subdued market demand. They expect segmental growth to pick up pace in the subsequent quarters.
- Iron Ore Sourcing: The company emphasized its commitment to sourcing iron ore domestically, emphasizing the importance of supporting India's steel and job creation initiatives.
- Seamless Tube Market Challenges: Management acknowledged challenges from Chinese and other international dumping of seamless tubes, but expressed confidence in their ability to manage volumes and leverage anti-dumping duties while actively advocating for fair competition.
- Casting Segment: Management expressed strong confidence in the casting business and the demand for heavy casting and machining capabilities. They highlighted the increasing order book and the potential to ramp up capacity.
- Tube Business: Management highlighted its focus on maintaining the bearing quality and precision tube segments as key areas of growth. They are also expanding into premium couplings and oil and gas segments.
Key Takeaways and Company Outlook:
Kirloskar Ferrous' Q1 FY25 performance was marked by a successful merger, modest revenue growth, and a sequential improvement in profitability despite industry-wide margin pressure. Management expressed confidence in the company's ability to overcome operational challenges and capitalize on future growth opportunities. KFIL's strategic initiatives, including capacity expansions, green energy projects, and the commitment to operational excellence, position the company well for future growth. The company's optimistic outlook for the remainder of FY25 and beyond is driven by factors like the expected pick-up in market demand, operational efficiencies, and the completion of ongoing projects. Investors will closely monitor the company's execution of these plans and its ability to achieve the targeted growth rates across its various segments.
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