RKFORGE — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
MR. CHAITANYA JALAN – WHOLE-TIME DIRECTOR –
MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND CHIEF FINANCIAL OFFICER – RAMKRISHNA FORGINGS
LIMITED · MODERATOR: MR. PRATIT VAJANI – ICICI SECURITIES
MR. RAJESH MUNDHRA – COMPANY SECRETARY AND VICE PRESIDENT-FINANCE – RAMKRISHNA FORGINGS
Moderator · Conference Operator
MR. PRATIT VAJANI – ICICI SECURITIES
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
October 27, 2022 conversations with customers have been encouraging, which gives us hope for the future.
Our international business has witnessed a sustained traction over the last few quarters with new business order flowing in at a steady pace.
A strong order backlog from Europe and United States and a healthy recovery for new truck orders in the end month works well for us.
And we expect our export revenue to grow by more than 15% in FY '23 as compared to last fiscal year.
I would now like to highlight some business enhancement.
As we are all aware of our long-awaited acquisition of ACIL.
We expect it to be completed this fiscal year if we receive favorable order in the next one month two months from the Supreme Court.
Our business to the electric vehicles has shown good traction, and it will form 3% to 4% of total revenue in the near future.
Our railway business is also showing a good development, and we are confident that it will contribute more than 4% of our total revenue, which is at present 2% only.
Coming to our business operation front, our revenue increased by 32% in Q2 FY '23 over Q2 FY '22 on the back of robust and diverse business.
Our EBITDA margins for the quarter were 22.3% and for H1, we are 22.2%.
During the quarter, we increased our capacity utilization by 300 basis points to 82% in Q2 FY '23 from 79% in Q2 FY '22, while the sequential improvement was 400 basis points.
Such revenue growth and stable margins have been added by improved product mix and managing supply chain cost despite high commodity prices.
We are confident that by improving capacity prices, we will be able to deliver similar results in the second half of the year, resulting a higher operating leverage and margin expenses.
We have received five orders amounting to INR 408.5 crores in the first six months of FY '23, and we are confident that we will receive additional orders in the second half of the year due to strong pipeline and positive business visibility.
We are making concerted efforts to diversify our product portfolio and geography by introducing value-added products across the board.
During the quarter, we received approval for a fund raise via preferential allotment of convertible warrant of INR 94 crores and the majority of which will be used for reduction of debt.
We are at aiming to our capital allocation policy in order to reduce debt and our gross debt position as on 30th September '22 is INR 1,319 crores down from INR 1,577 crores or as on 31st of March 2022.
Our target to become net debt-free company by FY '25 remains intact.
And also, as for the policy on the dividend front, the Board of Directors has declared a second interim dividend of INR 0.50 per equity share of face value of INR 2 each.
That is from my side.
We can now open the floor to question and answer.
Moderator · Conference Operator
Thank you.
We have our next question from the line of Varun Basrur from Julius Baer Wealth Advisors.
Please go ahead.
Thank you.
Reminder to participants to press star and one to ask a question.
We have a next question from the line of Sunny Gosar from MK Ventures.
Please go ahead.
Sunny Gosar
And congratulations on a strong set of numbers.
My first question is relating to the freight cost.
So you mentioned in one of the previous responses that freight costs have started coming down.
And when we -- basically, if you can help us understand what's the freight cost as a percentage of the revenue?
And how much benefit can come in the coming quarters due to the decline in the freight cost?
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Sunny Gosar
And going forward, will this mix further improve away from MHCV or this business mix will broadly remain likeway?
Moderator · Conference Operator
Thank you.
We have our next question from the line of Abhishek Jain from Dolat Capital.
Please go ahead.
Abhishek Jain
Sir, currently rising energy cost in Europe is a big challenge.
Are any shift of business from Europe to India?
And will it benefit to the Indian forging company, for export in the US and Europe?
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Abhishek Jain
So you want to say that the products like the heavy products like axle and all they have gone up?
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022 that whatever we hear right now from our customers across North American geography across all our portfolios, we maintained the same statement that we are running a healthy order book, and we will be sustained to continuously grow on the geographies.
Moderator · Conference Operator
Thank you Reminder to participants to press star and one to ask a question.
We have a next question from the line of Mitul Shah from Reliance Securities.
Please go ahead.
Mitul Shah Sir, first question, again, on average selling price only the realization has improved Sir, can you elaborate something on this product mix change maybe just by one or two example?
Does it mean increasing more machining within a product or a complete change of design or maybe tonnage wise, how you will define better product mix?
Naresh Jalan
It's mostly changed from some products have changed from machining to assemblies and some products from forging to machining.
And some we have -- because of current order book, we have been able to utilize better the press, getting more higher tonnage into the same presses.
All three have been factors contributing to higher realization.
Mitul Shah
The kind of sub-assembly type of model we start having?
Naresh Jalan
Sub-assembly and assemblies, both.
Mitul Shah
Second question, sir, this quarter, geography wise mix, how was this North America, Europe?
We have given half yearly in presentation.
Can you just repeat the quarterly for the quarter also?
Lalit Khetan This is almost similar to that what we have done in the half year.
Same in the quarters.
No major change.
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Mitul Shah
No decrease right.
There is no change.
So going forward, probably, it would be a slightly correction as and we earlier highlighted also, it is a pass-through type of thing.
So it would be reflected in Q3?
Or still there would be some lag effect and may come entirely in Q4?
Naresh Jalan
See, every quarter raw material is increases or decreases.
So if the trend continues or decrease, every quarter, you'll see a decrease.
And if it stops after one quarter, you will not see after one quarter.
Moderator · Conference Operator
Thank you.
We have our next question from the line of Shashank Kanodia from ICICI Securities.
Thank you.
We have our next question from the line of Darshil Pandya from Finterest Capital.
Please go ahead.
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Darshil Pandya
Actually, both of the questions are answered by Shashank’s question as I had the same question for CapEx and inventory level, both of them are answer.
Thank you so much.
No more questions.
Moderator · Conference Operator
Thank you.
We have our next question from the line of Abhishek Jain from Dolat Capital.
Please go ahead.
Abhishek Jain
Sir, you were talking about a 20% CAGR growth for the next two years.
For FY '23, what is your volume growth target?
Naresh Jalan
See, we have already sold around 62,000 tonnes in the first half and we are looking at around 68,000 tonnes in second half so 1,30,000 tonnes is our target for FY '23.
Abhishek Jain
And what would be the mix export versus domestic, likely?
Naresh Jalan
That’s like in the range of 40% to 42% on the side of exports rest is domestic.
Abhishek Jain
And sir, in last two quarter production was slightly higher than the sales.
And as the transit time is now going down for the exports.
So are you looking for some destocking in the coming days?
Lalit Khetan
Could not got you Abhishek, can you repeat?
Abhishek Jain
Sir, as a production in the last two quarters that was slightly higher than the sales.
And transit time is also going down for the exports as you mentioned.
So are you looking further some de-stocking in your export market?
Lalit Khetan
No. See, only issue is the concern of demand from the customers and then what is the consumption is happening.
So it depends upon the entirely the demand supply demand scenario.
And we are not looking at the, we have a feeling that demand will be more and the export will improve from here quarter-on-quarter.
Abhishek Jain
So generally, how much inventory do you maintain for the export market or how many days?
Lalit Khetan
No, we don't maintain the inventory.
We have inventory in Europe a little bit, and that's in the range of INR 50 crores to INR 60 crores, and a little bit in the US, that is INR 30 crores to INR 40 crores.
So that's the inventory we are maintaining in overseas market.
Abhishek Jain
And sir, how much of foreign debt in the balance sheet and how much Forex losses this quarter?
Lalit Khetan
We have gained about INR 12 crores of net foreign exchange on this quarter, that is perceiving the loss on account of debt on the restatement to debt on the Forex, but we have the debt also in the euro where we are gaining also.
So it's a mix of the entire thing.
Net gain is INR 12 crores for the quarter, considering all foreign exchange assets.
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Abhishek Jain
And sir, what was the LCV contributions in this quarter in the first half FY '23 in total revenue?
Naresh Jalan
No, we don't have a breakup of that roughly.
But LCV should be closed down 6% to 6.5%.
Abhishek Jain
Sir, my last question is related with this non-auto segment, what is your plan to ramp up your business already for contribution has increased around 19%?
So what is your target?
Naresh Jalan
It is going to continuously grow.
I think we are looking at making basically non-auto segment at 25%.
So I think our endeavor is to continuously improve on that till we achieve a 25% level in terms of our non-auto business.
Abhishek Jain
So what is your current order book in the Railways segment?
And what is your revenue target for FY ’23?
Naresh Jalan
Railway order book is approximately around INR 100 crores plus, and we are looking at doubling the railway orders in the order book in this year.
And I think we are looking at close to INR 200 crores to INR 250 crores in FY '24 in terms of our Railway sales.
Moderator · Conference Operator
Thank you.
We have a next question from the line of Mitul Shah from Reliance Securities.
Please go ahead.
Mitul Shah
Sir, two-three clarification.
This 56,000 tonnes new capacity coming, and you said it will be fully operational by next year.
So I believe that it will be operational in a phased manner, so what could be the likely capacity by end of current financial year, initial first phase?
Naresh Jalan
I think 50% of the capacity will be ready by March 2023 and balance 50% by September 2023.
Mitul Shah
And as you highlighted, it's a specific purpose type of capacity.
So based on existing order, can you just give broader indication?
Naresh Jalan
I think it is very early.
I think, obviously, we'll wait for another quarter before we give guidance on that.
We would like the capacity shape to shape up before we start giving guidance on that.
Mitul Shah
But we must be having a few orders related to that capacity.
Naresh Jalan
We already have development orders in hand, but in terms of if you want exactly what is going to be the volume and revenue and profitability.
It is very early for us to comment on that.
Mitul Shah
Okay.
Sir, secondly, on the MHCV side, in earlier remarks, you highlighted that MHCV contribution has now come down to 50% of automobile segment.
So that is 80%, 50% means as you would want to say that only 40% of the revenue is MHCV right now?
Naresh Jalan
Yes.
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Mitul Shah
And does this include Class 8 truck or it is only domestic MHCV you are talking?
Naresh Jalan
I am talking about entire MHCV.
Mitul Shah
Okay.
So 60% is all known MHCV, LCVPV, non-auto everything?
Naresh Jalan
We are not into PV in anyway, we are into LCV, any vehicle from 9 tonnes to below, I’m talking about.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen to ask a question please press star and one on your phone.
We have our next question from the line of Vignesh Iyer from Sequent Investments.
Please go ahead.
Vignesh Iyer
Sir, I've got two questions on my side.
One is what is our total order book as on September end?
And second is how much are we spending on 4 megawatts of solar, the solar power actually?
Naresh Jalan
In terms of order book, it is very difficult to mention because we work with OEMs who work on three month schedule or a month schedule.
So order book, it is very difficult to define what is the order book right now?
And in terms of 4-megawatt solar power plant, we are looking at spending somewhere around INR 12 crores to INR 12.5 crores right now to install this 4 megawatt power plant.
Vignesh Iyer
And this is including this INR 12.5 crores is part of the INR 100 crores you intend to spend, or is it over and above that?
Naresh Jalan
Part of the overall Capex spending plan of the company.
Vignesh Iyer
And what was the first six months order we have received, total?
Naresh Jalan
I think first six months is reflected in the topline we have achieved because basically, we don't have an order book as such, basically working with railways, yes, we have an order book of close INR 100 crores, but we work with PSUs, we have order, but when we work with auto OEMs, there is no order book as such, which basically depends on the vehicle plan they produce, and that's on monthly basis on a three months basis.
Moderator · Conference Operator
Thank you.
We have a next question from the line of Dhruv from Edelweiss.
Please go ahead.
Dhruv
Sir, could you please just give the margin bifurcation for all your business segments like in rolling margins and maybe forging and cash margins, if that's possible?
Naresh Jalan
No, that's not possible.
We don't work on individual plants.
We cannot give you margins.
Dhruv
So also, I just wanted to ask you, currently, we are at 65% capacity utilization for your fresh business.
And we are adding 56,000 tonnes of capacity there, but why are we not looking at capacity
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022 expansion in ring rolling and forging segments where we are at 100-plus utilization?
Naresh Jalan
Basically, like I said that it is new capacity with new technology and new components with our capacity is basically need based with the discussions with the customer.
So we don't feel the need of right now adding any capacities in ring rolling or other places as far as customer indication in terms of future demand
Moderator · Conference Operator
Thank you.
Ladies and gentlemen to ask a question please press star and one on your phone, now.
To ask a question please press star and one on your phone.
We have a question from the line of Shaukat Ali from Monarch Networth Capital Ltd Limited.
Please go ahead.
Shaukat Ali
Sir, a small question from my side.
How the effective tax rate is going to fare for the entire year, FY '23?
How effective tax rate will fare from here?
Lalit Khetan
Effective tax rate is in the range of around I think we will move to around in the range of 22% to 24% for the full year.
Moderator · Conference Operator
Reminder to participants to press star and one to ask a question.
Participants are requested to press star one to ask a question.
As there are no further questions, I would now like to hand the conference over to the management team for closing comments.
Over to you, sir.
Questions and answers
10:10:44 +05'30' · Research Analyst
“Ramkrishna Forgings Limited
Moderator · Conference Operator
Thank you, very much.
We will now begin the question-and-answer-session.
Anyone who wishes to ask a question may press star and one on their touchtone telephone.
If you wish to remove yourself from the question queue you may press star and two.
Participants are requested to use handsets while asking a question.
Ladies and gentlemen, we will wait for a moment while the
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022 question queue assembles.
We have a first question from the line of T.
S Vijay Sarathy from Anand Rathi.
Please go ahead.
T. S Vijay Sarathy
So we've seen very strong sequential growth in the revenue to the extent of 17% comparing Q1 FY '23 versus Q2. Now out of this 11% has been by realization.
So we had strong growth.
Why did we experience 300 bps gross margin fall between the same quarters?
Could you please help us understand?
That's my first question.
And I mean, the realization have -- export realizations would have also been very good.
So given this, why margins have fallen sequentially, gross margins?
Lalit Khetan
You're talking about the year-on-year margins.
Correct?
T. S Vijay Sarathy
I'm talking of sequential margin, sir Q1 FY '23 versus Q2 FY '23?
Lalit Khetan
The Q1 FY '23, if you're looking at a consolidated number, it has gone down a little bit.
But if you look at the standalone, it has gone up.
T. S Vijay Sarathy
Yes, I'm referring to the consolidated number.
Lalit Khetan
Yes.
So consolidated number is a little bit down because there has been little lesser profit on the subsidiary front.
There has been a little bit traction on the profitability on account of performance of Subsidiary.
And that's also marginal.
If you look at the half year number is 22.2%, and for the quarter, it's 22.3%. for the standalone and consolidated number is in the range of 21.5% and for the last year, there were very less number of Subsidiary for the console and whatever will be the standalone performance, that was the console performance in terms of turnover,.
And that was also on account of higher export, recalls if you remember, Q1 FY '22, that was due to the second wave of COVID there was very less domestic sales and export percentage was around 60% and that has resulted in the higher margin.
T. S Vijay Sarathy
So what is the steady-state margin that we are looking at, sir?
Whatever you spoke about EBITDA margin, so you could highlight that?
What is the number if you could?
Lalit Khetan
Certainly, current margin levels are here to sustain.
We are going to sustain current margin and endeavor will be to improve upon these margins.
T. S Vijay Sarathy
Sure.
And the other small question is, again, between sequentially, Q1 FY '23 to Q2 FY '23, the power and fuel costs have come down from 45.8% to 43.3%, while the activity has gone up, production activity has gone up, what led to this fall in power because I'm given to understand that the per rate is per unit is fixed, so the activity has gone up, why power cost has come down?
What is that we have done?
And is it sustainable?
This is a second question.
Lalit Khetan
M.
D. sir, are you taking that?
Naresh Jalan
This is basically on account of better utilization, if you see sequentially the there has been a
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022 significant improvement in utilization and power and fuel costs are directly affected with the better utilization.
As you have -- you also said the power cost is fixed.
So if in number of hours we utilize the equipment, the better utilization gives us a better yield in terms of efficiency in the cost.
T. S Vijay Sarathy
You're referring to the per unit cost, per tonne cost, rather, right?
Naresh Jalan
Not per tonne cost.
T. S Vijay Sarathy
Absolute cost also.
Naresh Jalan
Absolute cost of the power vis-a-vis the number of tonnage we produce.
T. S Vijay Sarathy
Does it have a bearing on the kind of press lines that you operate, sir or is it to do with only merely higher utilization?
Naresh Jalan
It is the way our press lines are placed and as well as other utilization, both may take part into it.
T. S Vijay Sarathy
Finally, you had mentioned some order book in your initial remarks for the first half, I mean is that or you did not mention, I don't know.
So could you just help us?
You said five orders, new orders, yes?
Lalit Khetan
Five orders are totaling INR 408 crores in the first six months.
Moderator · Conference Operator
Thank you.
We have a next question from the line of Mumuksh Mandlesha from Emkay Global.
Please go ahead.
Mumuksh Mandlesha
Sir, what led to the 19% volume growth sequentially for the exports market?
And if you look at the North America CV basic body was flattish sequentially.
So what led the strong growth sir, volume growth of exports?
Naresh Jalan
No. Basically, it’s because of past order wins now orders are getting converted into revenue.
And we have been able to convert them faster and all those conversions have helped us in getting the growth in exports.
Mumuksh Mandlesha
Sir, in the commentary you mentioned China-plus-one beneficiary, Ramkrishna been beneficial that move happening.
Sir, can you talk about the opportunity there?
And you mentioned some input duty on Chinese inputs from USA market, just can you share a bit on that?
Naresh Jalan
In terms of import duties, we are not aware of any import duties.
And I don't think Lalit’s opening statement has anything to do with import duties.
China plus basically because of the supply chain and COVID restrictions, lot of supplies, customers are shifting their supply chain from China to other places and one of the biggest beneficiary of that is the Indian industry.
And it is not alone RKFL, it is across the board, pan-India and across all segments, Indian manufacturing sector is
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022 getting legs up due to this shifting?
Mumuksh Mandlesha
Sir, just on the update on ACIL.
Can you just share what kind of opportunities you see for that business…
So, I have two questions.
The first question is, if I look at the other expenses on a quarter-on- quarter basis, between quarter one, '23 and quarter two '23 there’s been a jump -- any commentary there?
Are there any one-off items in these other expenses?
Sir, second question while there was very positive commentary which you gave, especially on your export order book and new businesses flowing in.
I just want to understand in Europe, has there been any deferments on the existing new programs or on the existing order book?
I'm done with my questions.
Lalit Khetan
Yes.
So let me address your question on other expenses, which basically other expenses jump is due to the increase in export expenses, because the export ocean freight, which that was in the Q1 last year.
And now you're looking at certainly that's why the gap, though it is coming down.
But last year, it was quite steep, and it has increased over the quarters.
And that level we have not gone back to those levels right now.
That's why there is gap and slowly, it will go down.
And on the -- I think Europe and this order Nareshji will answer it.
Naresh Jalan
We are not seeing any cancellations or deferment from our European OEMs.
Can I ask one more question?
Yes, I just want to ask one more question, where I'm just going through the Capex guidance and there's some press lines which are being added.
Just what is the incremental Capex in tonnage that has been added in the press line or that will be added in the press line?
Naresh Jalan
I think 56,000 tonnes roughly.
We don't have the exact calculation.
Lalit Khetan
Yes, sir, effective 56,000 tonnes will be added.
Over and above 1,17,000 tonnes?
Lalit Khetan
1,87,000 tonnes.
Total capacity, 1,87,000 tonnes plus 56,000 tonnes.
Okay.
And this is all added in press, which is 117,000 tonnes today?
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
I just wanted to understand on the Capex part.
So we are operating at roughly 65% utilization as of first half.
So was the pressing need for us to do a good amount of Capex at this point of time?
And will it be adhering to a broader capital allocation strategy wherein we intend to spend upto30% to 40% of cash profit for Capex?
Naresh Jalan
I think, first of all, we are not augmenting the same capacity, which we already have.
We are creating new capacities in new-generation press lines with new technologies and specifically going into cold and warm forging.
And in terms of overall utilisation, our capacity utilisationis close to 82%.
So we will need to augment -- and this these are all time taking capacity additions.
These do not happen overnight.
It takes its own time to first plan, put and stabilize the capacity.
So company as a whole is planning way ahead of time so that when capacities are required, we have those.
And sir, so we have outlined a capital allocation strategy a couple of quarters back.
So will this Capex there into that allocation strategy?
Or is it diverting from that front?
Naresh Jalan
We have already committed to it.
And in our presentation also, you can see any Capex, which will happen that will happen from free cash flow generated by the company during the year, and we'll surely adhere to those plans of debt reduction and allocating balance capital for dividend and Capex.
So sir, so what kind of debt reduction we can expect for this year, FY '23?
Naresh Jalan
I think we have already had a net debt reduction of close INR 110 crores and company wishes to repay another INR 100 crores of debt by year-end.
And the target for being debt free by which fiscal year for us?
Naresh Jalan
2025.
Moderator · Conference Operator
Thank you.
We have our next question from the line of CA Garvit Goyal from NVest Research.
Please go ahead.
RAMKRISHNA FORGINGS LIMITED · MR. LALIT KHETAN – WHOLE-TIME DIRECTOR AND
October 27, 2022
Garvit Goyal
So my question is from the cash flow, working capital management side.
I was basically going through your historical numbers.
And I found that in last three years, that is 2020, 2021 and 2022.
There has been a significant increase in the percentage of inventory to your total revenue.
So can you please explain the reasons and how inventory management or basically the working capital management going to shape up in the next one to two years, sir?
RAJESH · Research Analyst
Thank you.
We take this opportunity to thank everyone who has joined our call.
We hope we have been able to answer all the queries that were addresses to our management.
For further information, you can get in touch with us or Strategic Growth Advisors our investment advisor.
Thank you very much, and have a good pleasant evening.
Thank you.
Moderator · Conference Operator
On behalf of ICICI Securities that concludes this conference.
Thank you for joining us.
And ou may now disconnect your lines.